NG CHO CIO, ET AL., PLAINTIFFS AND APPELLANTS, VS. NG DIONG, DEFENDANT AND APPELLANT, C. N. HODGES, ET AL., DEFENDANTS AND APPELLEES.

Ng Cho Cio versus Ng Diong

The Case

This is a civil action for recovery of a three-fourths pro-indiviso share in seven parcels of land in the City of Iloilo, brought by Ng Cho Cio and the other partners of the commercial firm Ng Chin Beng Hermanos against Ng Diong, the managing partner who sold the lands, and against the buyers and their successors in interest, C. N. Hodges, Jose C. Tayengco, Julian Go, and the Bank of the Philippine Islands. The plaintiffs say the sale by the manager was void because the lands were then still in the custody of the court in insolvency proceedings, because the price was grossly inadequate, and because the mortgage debt secured by the lands had already prescribed. The case matters because it fixes the moment when property held by an assignee in insolvency returns to the debtor, and it confirms the continuing authority of a managing partner to liquidate partnership affairs after the term of the partnership has expired.

Procedural History

The action began in the Court of First Instance of Iloilo. After trial had begun, the defendant Ng Diong died and his heirs were substituted. The parties submitted a partial stipulation of facts and introduced additional evidence. The trial court, after evaluating the evidence, rendered a decision dismissing the complaint, with costs. The plaintiffs appealed directly to the Supreme Court on purely questions of law. The heirs of Ng Diong also appealed, claiming that the trial court should have adjudicated to the partnership the properties bought by Julian Go from C. N. Hodges.

Facts

On May 23, 1925, Ng Diong and six others entered into a contract of general co-partnership under the name Ng Chin Beng Hermanos, for a term of ten years, with Ng Diong as managing partner. In 1935 the articles were amended to extend the life of the firm to sixteen years from May 23, 1925, or up to May 23, 1941. In January 1938 the partnership obtained two loans from the National Loan and Investment Board, one for 30,000 pesos and one for 50,000 pesos, each secured by a mortgage on several of its lots in Iloilo.

In 1938 the partnership was declared insolvent upon the petition of its creditors, and an assignee was elected. The titles to the seven parcels were issued in the assignee's name in June 1939. The creditors filed claims totalling 192,901 pesos and twelve centavos. In August 1940 a majority of the creditors, holding claims of 139,704 pesos and eighty-one centavos, together with the partners, entered into a composition agreement whereby the creditors would receive twenty percent of their claims in full payment. The insolvency court approved the agreement in October 1940. War then intervened and the records were destroyed, later to be reconstituted.

In January 1941 the bank that had succeeded the National Loan and Investment Board assigned its rights in the two loans, amounting to 80,000 pesos, to C. N. Hodges, together with the mortgages. Hodges obtained permission from the insolvency court to foreclose, and filed a foreclosure complaint in May 1941. In August 1945 the partners and Julian Go, who had acquired most of the creditors' claims, petitioned for the closure of the insolvency proceedings in view of the approved composition. In October 1945 the court ordered the proceedings terminated and directed the assignee to reconvey the properties to the partnership. The assignee executed the deed of reconveyance on April 2, 1946, and new titles were issued in the name of the partnership.

As of that same date, the partnership owed Hodges 103,883 pesos and thirty-four centavos. To pay this and its other obligations, Ng Diong, as manager, sold the seven parcels to Hodges for 124,580 pesos. Of the price, 103,883 pesos and thirty-four centavos went to the Hodges debt and the balance to other creditors. Hodges gave the partnership an option to repurchase three of the lots for 26,000 pesos within three years. In May 1947, the partnership being unable to pay Julian Go its debt of 24,864 pesos and sixty-two centavos under the composition agreement and unable to repurchase, Ng Diong transferred the right of repurchase to Go in full payment of that debt. Go exercised the option, and in January 1948 Hodges sold the three lots to him. In May 1948 Hodges sold the remaining four lots to Jose C. Tayengco, who later mortgaged them to the Bank of the Philippine Islands to secure a loan of 126,000 pesos.

Issues

• Whether or not the sale made by Ng Diong in behalf of the partnership to C. N. Hodges on April 2, 1946 is null and void because the properties were then still in custodia legis, that is, in the custody of the insolvency court.
• Whether or not the same sale is null and void because of the disparity, irrationality, and unreasonableness between the consideration and the real value of the properties when sold.
• Whether or not the action to foreclose the mortgages assigned to C. N. Hodges had already prescribed.
• Whether or not the trial court should have adjudicated to the partnership the properties bought by Julian Go from C. N. Hodges.

Applicable Provisions

Article 228 of the Code of Commerce, which the Court cites as the law in force at the time, provides:

El socio nombrado administrador en el contrato social, mientras no se le separe de su cargo, es el unico que puede usar la firma de la compania y obligarla en cuanto a los terceros que contraten con ella, sin perjuicio de lo dispuesto en el articulo 235.

The Court invokes this provision to hold that Ng Diong, as managing partner, retained the authority to liquidate the partnership's affairs and to execute the sale in favor of Hodges even after the term of the partnership had expired.

Ruling

On the first issue, the Court held that the sale was valid. The composition agreement had been approved in October 1940, and that approval, in contemplation of law, had the effect of putting an end to the insolvency proceedings. The formal closure came in October 1945, when the court ordered the assignee to reconvey the properties, and the actual reconveyance was made on April 2, 1946. For legal and practical purposes, the Court said, the insolvency ended on that date; the partnership was restored to its status quo, reacquired its personality with Ng Diong as general manager, and its properties ceased to be in custodia legis. When Ng Diong sold the lands on that same day, they were already free from the custody of the court. The Court also held that although the life of the partnership had expired, Ng Diong could still act as liquidator, because he remained managing partner with the necessary authority under the articles of co-partnership, and war and receivership had intervened until October 1945.

On the second issue, the Court held that the claim of gross inadequacy of price was unsupported. The appellants introduced no evidence that they could have secured better offers; what they advanced was mere speculation or conjecture, which has no place in the judicial system. Every claim must be substantiated by sufficient evidence.

On the third issue, the Court refused to give the claim of prescription any value, both because it was immaterial and because it was raised for the first time on appeal. The issue had never been raised in the pleadings or in the trial court.

On the appeal of the heirs of Ng Diong, the Court held that the properties bought by Julian Go could not be adjudicated to the partnership, first, because no such claim was made in the pleadings below, and second, because the evidence showed that Go bought them by virtue of the option given to him by the partnership for a valuable consideration, in full payment of the credits assigned to him by a good number of the partnership's creditors. There was no evidence that he promised to reconvey them.

Doctrine

First, the approval of a composition agreement in insolvency has the effect of putting an end to the insolvency proceedings, and once the assignee reconveys the properties to the debtor, the property ceases to be in custodia legis and the debtor is restored to its status quo, free to deal with the property as it deems proper.

Second, a managing partner retains authority to liquidate the affairs of the partnership and to sell its properties even after the term of the partnership has expired, under Article 228 of the Code of Commerce, especially where war and receivership have delayed the winding up.

Third, a claim of gross inadequacy of price must be supported by evidence of better offers; speculation and conjecture cannot sustain an attack on the validity of a sale.

Fourth, an issue not raised in the pleadings or in the trial court cannot be raised for the first time on appeal.

Disposition

The Supreme Court affirmed the decision of the trial court dismissing the complaint, with costs against the appellants.

Remember This

The single line worth memorizing is that upon reconveyance by the assignee, the properties cease to be in custodia legis and the managing partner may still sell them as liquidator even after the partnership term has expired. Examiners like to use this case on the effect of an approved composition agreement in insolvency, on the authority of a liquidating partner under Article 228 of the Code of Commerce, and on the rule that issues and claims not raised below cannot be raised for the first time on appeal.