Lumanlan vs. Cura, et al.

A stock subscriber who, under an agreement with the corporation, pays the corporation's debt to a creditor is subrogated to that creditor and may credit the payment, together with the 25 per cent collection charge, against the corporation's judgment on his unpaid subscription. The corporation may still collect the unpaid subscription for the balance, since subscriptions to capital are a fund for creditors and other creditors remained unpaid.

Dizon & Co., Inc. is a corporation organized under the laws of the Philippine Islands, with its central office in Manila. Under the Corporation Law and established doctrine, a stock subscription is a subsisting liability of the subscriber, and unpaid subscriptions form a fund to which the corporation's creditors may look for payment of their claims.

The dispute is between Bonifacio Lumanlan, a stock subscriber, and Dizon & Co., Inc., the corporation to which his subscription is owed. On July 31, 1922, Lumanlan subscribed for 300 shares of the corporation's stock at a par value of P50 per share, or P15,000 in total. Creditors Julio Valenzuela, Pedro Santos and Francisco Escoto had earlier filed suit against the corporation in the CFI of Manila, case No. 37007, asking that a receiver be appointed because the corporation then had no assets other than credits against subscribers who had not paid in full. The court named Tayag as receiver to collect the subscriptions. Lumanlan had paid only P1,500 of his P15,000, and on August 30, 1930, the receiver sued him in the CFI of Manila, civil case No. 37492, for P15,109, of which P13,500 was unpaid stock and P1,609 was loans and advances the corporation had made to him. The CFI sentenced Lumanlan to pay that sum with legal interest from August 30, 1930, and costs, and Lumanlan appealed.

While the appeal was pending, and with the permission of the court, the creditors, some of the directors and the majority of the stockholders held several meetings. They agreed in substance that subscribers in default should pay the creditors. Lumanlan was designated to pay the corporation's debt to Valenzuela, which stood at P8,000 plus interest at 12 per cent per annum from March 17, 1928. Under the corporation's promissory note to Valenzuela, the corporation would owe 25 per cent of the principal as expenses of collection and judicial costs in case of litigation if it failed to pay when due. Lumanlan agreed to assume the obligation, and the corporation agreed that if he dismissed his appeal in case No. 37492, it would collect only 50 per cent of the amount he had subscribed. Under that arrangement, Lumanlan would pay an additional amount, not exceeding the judgment against him, if the 50 per cent proved insufficient to pay Valenzuela. Lumanlan withdrew his appeal and paid Valenzuela P11,840, including interest, and was thereby subrogated in place of Valenzuela. The petitioning creditors, having been paid what the corporation owed them, asked that the receiver be dismissed, and the court granted the request.

Disregarding that agreement and the payment to Valenzuela, the corporation on May 5, 1932, asked for execution of the sentence in civil case No. 37492. Under an order of execution, the provincial sheriff levied upon two parcels of land belonging to Lumanlan, described in Certificate of Title No. 901 of the Province of Tarlac. Lumanlan then brought this action to collect from Dizon & Co., Inc. and to prevent the sale of the two parcels. The sheriff was enjoined from proceeding with the sale while the case was pending. During the trial, the Bank of the Philippine Islands appeared as assignee in the involuntary insolvency of Dizon & Co., Inc., having been appointed assignee in case No. 43065 of the CFI of the City of Manila on November 28, 1932. The CFI of Tarlac, whose decision Dizon & Co., Inc. appealed, found that Lumanlan had not proved the damages he claimed and declined to award them.

• Creditors' Claim to Unpaid Subscriptions: Whether unpaid stock subscriptions remain available to the corporation for collection, and as a fund for its creditors, where other creditors of the corporation remain unpaid.
• Credit for Payment to Creditor: Whether Lumanlan, having paid the corporation's debt to Valenzuela, is entitled to a credit against the judgment for the amount paid and the 25 per cent collection charge.
• Execution and Injunction: Whether the preliminary injunction against the sheriff's sale should remain in force after the judgment is reduced to the balance owed.

• Creditors' Claim to Unpaid Subscriptions: Yes. Subscriptions to corporate capital are a fund for creditors' claims, and the corporation may collect all unpaid subscriptions and other amounts due it while other creditors remain unpaid.
• Credit for Payment to Creditor: Yes. Lumanlan is entitled to a P13,840 credit against the P15,109 judgment, consisting of the P11,840 he paid Valenzuela and the P2,000 collection charge, because his payment subrogated him to Valenzuela's rights.
• Execution and Injunction: Only in part. The preliminary injunction is dissolved solely to enable Dizon & Co., Inc., to seek a new order of execution in case No. 37492 for the P1,269 balance with interest at 6 per cent per annum.

• Creditors' Claim to Unpaid Subscriptions: The SC held that subscriptions to a corporation's capital constitute a fund to which creditors may look for satisfaction of their claims, and that an assignee in insolvency may sue on an unpaid subscription to realize assets for the payment of the corporation's debts (Philippine Trust Co. vs. Rivera, 44 Phil., 469, 470). The Corporation Law treats a stock subscription as a subsisting liability from the time it is made, because the subscriber must pay interest quarterly from that date unless the by-laws relieve him, and the subscriber is as much bound to pay it as any other debt (Velasco vs. Poizat, 37 Phil., 802, 805). Applied here, the Bank of the Philippine Islands had been appointed assignee in the insolvency of Dizon & Co., Inc. in case No. 43065 of the CFI of Manila on November 28, 1932. From that appointment, the SC concluded that other creditors of the corporation remained unpaid, and therefore the corporation had a right to collect all unpaid stock subscriptions and any other amounts due it.

• Credit for Payment to Creditor: The corporation agreed that if Lumanlan dismissed his appeal in case No. 37492, it would collect only 50 per cent of his subscription, and that he would pay any additional amount needed to satisfy Valenzuela, not exceeding the judgment against him. Lumanlan performed by withdrawing the appeal and paying Valenzuela P11,840, including interest, and was thereby subrogated in place of Valenzuela. The SC held that "By virtue of these facts Lumanlan is entitled to a credit against the judgment in case No. 37492 for P11,840 and an additional sum of P2,000," the latter described as 25 per cent of the principal debt, which he could claim because he had to file the suit to collect. The total credit of P13,840 is applied against the P15,109 judgment, leaving P1,269 owing, with interest at 6 per cent per annum from August 30, 1930.

• Execution and Injunction: The preliminary injunction had been issued pending the case to stop the sheriff from selling Lumanlan's two parcels of land. With the judgment reduced to a P1,269 balance, the SC dissolved the injunction only for the purpose of enabling Dizon & Co., Inc., to ask for a new order of execution in case No. 37492 for that sum with interest. The SC also directed the corporation to issue Lumanlan 300 shares of its capital stock upon his payment of the balance. Having resolved these questions, the SC stated that it was not necessary to discuss the other questions raised by the parties.

• Subscriptions to capital as a fund for creditors — Subscriptions to the capital of a corporation constitute a fund to which creditors may look for satisfaction of their claims, and an assignee in insolvency may maintain an action on an unpaid stock subscription to realize assets for the payment of the corporation's debts. The SC applied this rule to hold that the corporation may collect unpaid subscriptions while other creditors remain unpaid, as shown by the Bank of the Philippine Islands' appointment as assignee in case No. 43065.

• Stock subscription as a subsisting liability — A stock subscription is a subsisting liability from the time it is made, because the subscriber must pay interest quarterly from that date unless the by-laws relieve him, and he is bound to pay it like any other debt. The SC applied this to Lumanlan's unpaid balance, which remained collectible by the corporation after the credit was applied.

• Subrogation of a payer to the creditor's rights — A person who pays another's debt is substituted in the creditor's place. The SC applied this to Lumanlan, who paid Valenzuela P11,840 for and in place of the corporation, and held that the payment entitled him to a credit against the corporation's judgment against him.

• "It is established doctrine that subscriptions to the capital of a corporation constitute a fund to which the creditors have a right to look for satisfaction of their claims and that the assignee in insolvency can maintain an action upon any unpaid stock subscription in order to realize assets for the payment of its debts." — This is the SC's statement of the fund doctrine and the assignee's right to sue, on which the corporation's right to collect unpaid subscriptions rests.

• "the Corporation Law clearly recognizes that a stock subscription is a subsisting liability from the time the subscription is made, since it requires the subscriber to pay interest quarterly from that date unless he is relieved from such liability by the by-laws of the corporation." — This passage states the statutory basis for treating an unpaid subscription as an enforceable debt of the subscriber.

• "By virtue of these facts Lumanlan is entitled to a credit against the judgment in case No. 37492 for P11,840 and an additional sum of P2,000, which is 25 per cent on the principal debt, as he had to file this suit to collect, or receive credit for the sum which he had paid Valenzuela for and in place of the corporation, or a total of P13,840." — This is the SC's operative conclusion on the credit, tying the payment and subrogation to the amount applied against the judgment.

• Philippine Trust Co. vs. Rivera, 44 Phil., 469 — Relied on as established doctrine that subscriptions to corporate capital are a fund for creditors and that an assignee in insolvency may sue on an unpaid stock subscription.

• Velasco vs. Poizat, 37 Phil., 802 — Relied on for the rule that a stock subscription is a subsisting liability from the time it is made and that the subscriber is bound to pay it as any other debt.

• Stock subscription provisions, Corporation Law — The SC applied the statutory recognition that a stock subscription is a subsisting liability from the time it is made, requiring the subscriber to pay interest quarterly unless the by-laws relieve him. Under this provision, the corporation's right to collect Lumanlan's unpaid subscription was enforceable after the credit was applied.