In the case of Jose C. Cordova v. Reyes Daway Lim Bernardo Lindo Rosales Law Offices, the Supreme Court addressed whether a shareholder whose shares were wrongfully sold by a corporation’s liquidators becomes a preferred creditor in the corporation’s liquidation proceedings. The Court ruled that the shareholder becomes an ordinary creditor, entitled only to a pro-rata share of the corporation’s assets, not a preferred status. This means that in corporate liquidations, even if assets are wrongfully converted, the affected party’s claim is generally treated as an ordinary debt, impacting the extent of potential recovery.

Shares Misappropriated: Unraveling Creditor Rights in Corporate Liquidation

The narrative unfolds with Jose C. Cordova, who acquired shares from Philippine Underwriters Finance Corporation (Philfinance) before its receivership under the Securities and Exchange Commission (SEC). Following the appointment of Reyes Daway Lim Bernardo Lindo Rosales Law Offices as liquidators, these shares were unlawfully withdrawn and sold without Cordova’s consent. Upon discovering this unauthorized sale, Cordova sought recourse, leading to a legal battle over his status as a creditor and the extent of his entitlement in the liquidation proceedings.

The core legal question centered on whether Cordova, by virtue of the unauthorized sale of his shares, should be considered a preferred creditor of Philfinance, thereby entitling him to a full recovery of the value of his shares, or whether he should be treated as an ordinary creditor, subject to the same pro-rata distribution as other claimants. This determination hinged on the interpretation and application of the Civil Code provisions regarding concurrence and preference of credits, particularly in the context of corporate liquidation proceedings. The SEC initially dismissed Cordova’s petition, but later reconsidered, granting his claim but converting his status to that of an ordinary creditor. The Court of Appeals affirmed this decision, leading Cordova to elevate the matter to the Supreme Court.

The Supreme Court affirmed the CA’s decision, holding that Cordova was indeed an ordinary creditor of Philfinance. The Court reasoned that while Cordova had a right to the return of his shares, the unauthorized sale transformed his claim into one for monetary value, which became commingled with the general assets of Philfinance. This commingling made it impossible to identify the specific proceeds from the sale of Cordova’s shares, thus precluding him from asserting a claim over specific movable property, which is a prerequisite for preferred creditor status under Article 2241(2) of the Civil Code. The Court emphasized that the assets of a corporation under liquidation are in custodia legis, and all creditors stand on equal footing, absent specific legal grounds for preference.

The Court cited Finasia Investments and Finance Corporation v. CA to define the term “claim” in the context of liquidation proceedings, stating:

We agree with the public respondent that the word ‘claim’ as used in Sec. 6(c) of P.D. 902-A, as amended, refers to debts or demands of a pecuniary nature. It means ‘the assertion of a right to have money paid. It is used in special proceedings like those before [the administrative court] on insolvency.’

The word ‘claim’ is also defined as:

Right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured; or right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured, unsecured.

Building on this principle, the Court clarified that Cordova’s claim was indeed a “claim” properly litigated in liquidation proceedings. His right to payment was pecuniary in nature, thus making him a creditor of Philfinance in this limited sense. This approach contrasts with scenarios where specific assets can be directly traced and recovered, which might lead to a different outcome.

The discussion extended to the applicability of Article 2241(2) of the Civil Code, which pertains to preferred claims on specific movable property arising from misappropriation or breach of trust. The Court rejected Cordova’s reliance on this provision, explaining that his claim was no longer tied to specific movable property (the shares), but rather to a generic claim for money commingled with other assets. This distinction is crucial because it determines whether a creditor can assert a priority claim over specific assets or must participate in the pro-rata distribution of the debtor’s general assets. In the absence of a specific preference, Article 2245 mandates that all common credits are paid pro rata, ensuring equitable treatment among creditors.

Regarding the matter of legal interest, the Court referenced the guidelines established in Eastern Shipping Lines, Inc. v. CA, which differentiate between obligations involving a loan or forbearance of money and other types of obligations. Since Cordova’s claim did not arise from a loan or forbearance, the Court concluded that he was not entitled to legal interest. This decision underscores the principle that interest is typically awarded as compensation for the use or deprivation of money, which was not applicable in Cordova’s situation. However, the Supreme Court also noted that Cordova had a cause of action against the private respondents for bad faith and unauthorized acts, and the resulting damage caused to him.

FAQs

What was the key issue in this case?	The key issue was whether Jose Cordova, whose shares were wrongfully sold by the liquidators of Philfinance, should be considered a preferred creditor or an ordinary creditor in the liquidation proceedings. The Court ultimately determined he was an ordinary creditor.
What is the significance of being classified as an ordinary creditor?	Being classified as an ordinary creditor means that Cordova was entitled only to a pro-rata share of Philfinance’s assets, along with all other ordinary creditors, rather than having a priority claim over specific assets. This significantly affected the amount he was able to recover from the liquidation.
Why was Cordova not considered a preferred creditor under Article 2241(2) of the Civil Code?	Cordova was not considered a preferred creditor because his claim was no longer for specific movable property (the shares), but for money that had been commingled with the general assets of Philfinance. Article 2241(2) requires a claim to be tied to specific movable property to qualify for preference.
What does “in custodia legis” mean in the context of this case?	“In custodia legis” means that the assets of Philfinance, once placed under receivership, were under the custody of the law. This status protects the assets from individual claims and ensures equitable distribution among all creditors.
What was the basis for denying Cordova’s claim for legal interest?	The Court denied Cordova’s claim for legal interest because his claim did not arise from a loan or forbearance of money, nor was there a delay in the payment of a sum of money. Interest is generally awarded in cases involving loans or delayed payments.
What is the relevance of the Eastern Shipping Lines case to this decision?	The Eastern Shipping Lines case provides the guidelines for awarding interest in various types of obligations. The Court used these guidelines to determine that Cordova’s claim did not fall under the categories that would entitle him to legal interest.
Did the Supreme Court find any wrongdoing on the part of the liquidators?	Yes, the Supreme Court acknowledged that the liquidators acted without authority in selling Cordova’s shares, indicating a potential cause of action against them for damages. This finding highlights the liquidators’ failure to adhere to their fiduciary responsibilities.
How does this case affect other creditors in liquidation proceedings?	This case reinforces the principle of equal footing among creditors in liquidation proceedings, absent specific legal grounds for preference. It clarifies that even wrongful conversion of assets does not automatically elevate a creditor’s status to preferred.
What action did the court suggest Cordova should pursue?	The court suggested Cordova should seek the assistance of the Integrated Bar of the Philippines and the Court’s Office of the Bar Confidant given the unauthorized sale of his shares by the liquidators.

In conclusion, the Supreme Court’s decision in Jose C. Cordova v. Reyes Daway Lim Bernardo Lindo Rosales Law Offices provides valuable clarity on the rights and status of creditors in corporate liquidation proceedings. The ruling underscores the importance of specific legal grounds for claiming preferred status and reinforces the principle of equitable distribution of assets among creditors.

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: JOSE C. CORDOVA VS. REYES DAWAY LIM BERNARDO LINDO ROSALES LAW OFFICES, G.R. NO. 146555, July 03, 2007