Campos Rueda & Co. vs. Pacific Commercial Co.

A limited partnership, being a juridical entity distinct from its members, may be adjudged involuntarily insolvent when it fails for more than thirty days to pay its obligations to three creditors, regardless of whether its members are insolvent.

Campos Rueda & Co., S. en C. was a limited partnership; Pacific Commercial Co., Asiatic Petroleum Co., and International Banking Corporation were creditors of the partnership. Under Article 116 of the Code of Commerce, Philippine statutes treat a limited partnership as a juridical entity for all intents and purposes, with its personality recognized in all its acts and contracts. Act No. 1956 supplies the acts of insolvency upon which an involuntary insolvency adjudication may be predicated.

Campos Rueda & Co., S. en C. was a limited partnership indebted to Pacific Commercial Co., Asiatic Petroleum Co., and International Banking Corporation in various sums amounting to not less than P1,000, payable in the Philippines. The partnership failed to pay those obligations for more than thirty days prior to the filing by the three creditors of an application for involuntary insolvency. The evidence established these facts.

The CFI Manila found that the members of the firm were not alleged or proven to be insolvent at the time the application was filed. It also considered that because the partners were personally and solidarily liable for the consequences of the partnership’s transactions, the partnership could not be adjudged insolvent so long as the partners were not alleged and proven to be insolvent. Petitioners appealed to the SC on the ground that this finding of the lower court was erroneous.

Subsequent to the decision appealed from, Campos Rueda & Co. voluntarily filed an application for a judicial decree adjudging itself insolvent, which was what the petitioners and appellants had tried to obtain from the lower court in this proceeding. On that basis, the appellants presented a motion praying that the SC consider the case purely a moot question.

The SC denied the motion even under the facts stated by the appellants. It noted that the petition sought an adjudication of insolvency in December 1921, while the motion referred to a declaration of insolvency in July 1922. The SC held that proof of insolvency on a certain day does not justify an inference that the person was insolvent on a prior day, and that a decree of insolvency begins to operate on the date it is issued.

• Involuntary Insolvency of the Partnership: Petitioners argued that the CFI erred in denying the involuntary insolvency petition on the ground that the members of the firm were not alleged and proven insolvent, because the limited partnership itself had failed for more than thirty days to pay its obligations to three creditors.
• Mootness: Petitioners-appellants moved that the case be considered purely a moot question because, subsequent to the decision appealed from, Campos Rueda & Co. voluntarily filed an application for a judicial decree adjudging itself insolvent.

• Mootness: Whether the case became moot after Campos Rueda & Co. voluntarily filed an application for a judicial decree adjudging itself insolvent subsequent to the decision appealed from.
• Involuntary Insolvency of a Limited Partnership: Whether a limited partnership that failed for more than thirty days to pay its obligations to three creditors may be adjudged involuntarily insolvent despite the absence of proof or allegation that its members are insolvent.

• Mootness: No. The fact that the partnership was insolvent in July 1922 does not establish that it was insolvent in December 1921; a decree of insolvency operates from the date it is issued.
• Involuntary Insolvency of a Limited Partnership: Yes. A limited partnership is a juridical entity distinct from its members and may be adjudged insolvent for its own act of insolvency under Act No. 1956, irrespective of its members’ solvency.

• Mootness: The SC denied the motion even under the facts stated by the appellants. It reasoned that proof that a man was insolvent on a certain day does not justify an inference that he was insolvent on a day some time prior thereto, because contingencies such as unwise investments, losing contracts, misfortune, or accident might reduce a person from solvency within a short space of time. A decree of insolvency begins to operate on the date it is issued. The SC distinguished an adjudication of insolvency in December 1921, as prayed for in the case, from a declaration of insolvency in July 1922, as stated in the motion.
• Involuntary Insolvency of a Limited Partnership: The SC held that, unlike the common law, Philippine statutes consider a limited partnership a juridical entity for all intents and purposes, with personality recognized in all its acts and contracts under Article 116 of the Code of Commerce. Because its juridical personality is different from that of its members, it must answer for and suffer the consequences of its acts as an entity capable of being the subject of rights and obligations. If the limited partnership failed to pay its obligations with three creditors for more than thirty days, that failure constitutes an act of bankruptcy under the Insolvency Law upon which involuntary insolvency may be predicated. The SC noted conflicting American decisions on whether a partnership may be adjudged insolvent unless all members are insolvent, but held those decisions inapplicable because American common law did not treat partnerships as having juridical personality independent of their members, and because the United States Act of July 1, 1898, section 5, paragraph (h), had no counterpart in Philippine insolvency law. It added that the liability of limited partners is limited to amounts paid or promised to the common fund except when a limited partner includes his name or consents to its inclusion in the firm name under Articles 147 and 148 of the Code of Commerce. Having proven that Campos Rueda & Co. failed for more than thirty days to pay its obligations to the three petitioners, the SC concluded that the case fell under paragraph 11 of section 20 of Act No. 1956 and that petitioners were entitled to a judicial decree declaring the partnership involuntarily insolvent.

• Limited Partnership as Juridical Entity — Under Article 116 of the Code of Commerce, a limited partnership is considered a juridical entity for all intents and purposes, and its personality is recognized in all its acts and contracts. The SC applied this to hold that the partnership’s juridical personality is distinct from that of its members, so it must answer for and suffer the consequences of its own acts.
• Involuntary Insolvency of a Limited Partnership — A limited partnership may be adjudged involuntarily insolvent when it commits an act of insolvency under Act No. 1956, such as failing for more than thirty days to pay its obligations to three creditors under paragraph 11 of section 20. The SC held that this is so irrespective of the solvency or insolvency of the partnership’s members.
• Date of Insolvency Decree — A decree of insolvency begins to operate on the date it is issued. Proof that a person was insolvent on a certain day does not justify an inference that the person was insolvent on a prior day, because contingencies may reduce a person from solvency within a short space of time.

• “The question raised in this case is not purely moot one; the fact that a man was insolvent on a certain day does not justify an inference that he was some time prior thereto.” — The SC used this to reject the motion to dismiss the appeal as moot after the partnership’s later voluntary insolvency filing.
• “A decree of insolvency begins to operate on the date it is issued.” — The SC distinguished the December 1921 adjudication sought in the petition from the July 1922 insolvency stated in the motion.
• “Unlike the common law, the Philippine statutes consider a limited partnership as a juridical entity for all intents and purposes, which personality is recognized in all its acts and contracts (art. 116, Code of Commerce).” — This is the doctrinal core for treating the partnership as distinct from its members.
• “If, as in the instant case, the limited partnership of Campos Rueda & Co. Failed to pay its obligations with three creditors for a period of more than thirty days, which failure constitutes, under our Insolvency Law, one of the acts of bankruptcy upon which an adjudication of involuntary insolvency can be predicated, this partnership must suffer the consequences of such a failure, and must be adjudged insolvent.” — The SC applied the rule to the proven failure to pay and ordered the partnership adjudged insolvent.

• Kimball vs. Dresser, 98 Me., 519; 57 Atl. Rep., 767 — Relied on for the rule that proof of insolvency on a certain day does not justify an inference of insolvency on a prior day.
• In re Samuels, 215 Fed., 845 — Cited as noting the conflict in American decisions on whether a partnership may be adjudged insolvent unless all members are insolvent.
• In re Bertenshaw, 157 Fed., 363 — Cited as one of the conflicting American doctrines on partnership insolvency.
• Francis vs. McNeal, 186 Fed., 481 — Cited as the other conflicting American doctrine on partnership insolvency.

• Article 116, Code of Commerce — Treats a limited partnership as a juridical entity for all intents and purposes, with personality recognized in all its acts and contracts; applied to hold the partnership distinct from its members and capable of being adjudged insolvent on its own.
• Paragraph 11, Section 20, Act No. 1956 — Defines as an act of bankruptcy the failure to pay obligations with three creditors for more than thirty days; applied because Campos Rueda & Co. failed to pay the three petitioners for more than thirty days.
• Section 24, Act No. 1956 — Governs the proper decrees to be issued after adjudication; the SC remanded to the CFI Manila for issuance of the proper decrees under this section.
• Articles 147 and 148, Code of Commerce — Limit the liability of limited partners to amounts paid or promised to the common fund except when a limited partner includes his name or consents to its inclusion in the firm name; mentioned by the SC in connection with the limited partners’ liability.
• Section 5, Paragraph (h), Act of Congress of July 1, 1898 — United States bankruptcy provision cited to explain the American conflict; the SC noted it has no counterpart in Philippine insolvency law.