Legal Insights on Real Estate in Corporate Liquidation

“Besides a happy policy as to civil government, it is necessary to institute a system of law and jurisprudence founded in justice, equity and public right.”

– Ezra Stiles, American Education & Theologian

(Part 3 of 4)

By Realttorney^®

In the previous article, we covered the background and step-by-step procedures for selling real estate registered in the name of a dissolved corporation. We now turn to discussing several key jurisprudences. The Supreme Court has issued multiple rulings that clarify the extent of a “dead” corporation’s authority and the validity of its transactions post-dissolution.

These decisions are binding legal precedents and valuable guidance for real estate service professionals.

⚖️ Rich v. Paloma III (G.R. No. 210538, March 7, 2018)

📚 Facts Leading to the Controversy:

📌 In 1997, Dr. Gil Rich lent ₱1,000,000 to his brother, Estanislao Rich, secured by a real estate mortgage over a 1,000-square-meter parcel of land in Maasin City, Southern Leyte.

📌 When Estanislao failed to pay, Dr. Rich foreclosed on the property in March 2005 and was declared the highest bidder at the auction.

📌 Unknown to Dr. Rich, Estanislao had previously mortgaged the same property to Maasin Traders Lending Corporation (MTLC) in January 2005 for ₱2.6 million.

📌 MTLC, through its president, Ester Servacio, redeemed the property in March 2006, despite being dissolved by the Securities and Exchange Commission in September 2003.

🌐 Main Issue to be Resolved: Was MTLC legally capable of redeeming the property despite its dissolution?

💡 Key Legal Principles Applied

✅ Corporate Dissolution & Liquidation: The Supreme Court ruled that a dissolved corporation retains no juridical personality except for liquidation purposes. Since MTLC had ceased to exist before the mortgage agreement, it could not validly redeem the property.

✅ The Supreme Court reversed the Court of Appeals’ decision and declared the real estate mortgage between Estanislao and MTLC null and void. It also ordered the cancellation of the Deed of Redemption in favor of MTLC.

⚖️ Yu v. Yukayguan (G.R. No. 177549, June 18, 2009)

📚 Facts Leading to the Controversy:

📌 The case involved a dispute between Anthony S. Yu and Joseph S. Yukayguan, who were half-brothers and stockholders of Winchester Industrial Supply, Inc. (Winchester, Inc.).

📌 Joseph and his family filed a derivative suit against Anthony and his family, alleging embezzlement, falsification of corporate records, and misappropriation of corporate funds.

📌 The Regional Trial Court (RTC) of Cebu City dismissed the complaint, ruling that the plaintiffs failed to meet the requirements for a derivative suit.

🌐 Main Issues to be Resolved: (1) Did the plaintiffs properly exhaust all remedies before filing the derivative suit, and (2) Should the case be remanded for further proceedings given the dissolution of Winchester, Inc.

💡 Key Legal Principles Applied

✅ Requirements for a Derivative Suit: The Supreme Court emphasized that a stockholder must exhaust all available remedies within the corporation before filing a derivative suit. The plaintiffs failed to prove they had done so.

✅ Corporate Dissolution & Liquidation: Since Winchester, Inc. had been formally dissolved, the Court of Appeals remanded the case to the RTC to oversee the final settlement of corporate assets.

✅ In the end, the Supreme Court affirmed the RTC’s dismissal of the derivative suit but upheld the remand of the case to the RTC for the proper distribution of corporate assets following the dissolution of Winchester, Inc.

⚖️ Aguirre v. FQB+7 (G.R. No. 170770, Jan. 9, 2013)

📚 Facts Leading to the Controversy:

📌 FQB+7, Inc. was a corporation established in 1985, with its original board of directors and stockholders listed in its Articles of Incorporation.

📌 In 2002, a General Information Sheet (GIS) was filed with the Securities and Exchange Commission (SEC), reflecting changes in the corporation’s directors and stockholders, including the heirs of a deceased stockholder.

📌 Vitaliano Aguirre II, a stockholder, discovered the GIS in 2004 and questioned its validity, alleging that the changes were fraudulent and unauthorized.

📌 Thereafter, Aguirre filed a complaint for intra-corporate dispute, seeking an injunction, inspection of corporate books, and damages.

🌐 Main Issues to be Resolved: (1) Did the trial court have jurisdiction over the intra-corporate dispute despite the corporation’s dissolution, and (2) Was the GIS valid, and did the respondents have the authority to act as corporate officers?

💡 Key Legal Principles Applied

✅ Jurisdiction Over Intra-Corporate Disputes: The Supreme Court ruled that corporate dissolution does not automatically terminate intra-corporate disputes. Under Section 145 of the old Corporation Code, rights and remedies of stockholders and directors remain enforceable even after dissolution.

✅ Corporate Liquidation: A dissolved corporation retains limited juridical personality for the purpose of winding up its affairs, including resolving disputes over stock ownership and corporate governance.

✅ Validity of Corporate Acts: The Court emphasized that corporate records, such as GIS filings, must be properly authenticated and that unauthorized changes to corporate governance can be challenged.

✅ The Supreme Court partially granted the petition, reinstating the intra-corporate case before the trial court while nullifying the writ of preliminary injunction. It clarified that the dispute should proceed to determine the rightful corporate officers and stockholders.

⚖️ Gelano v. Court of Appeals (G.R. No. L-39050, Feb. 24, 1981)

📚 Facts Leading to the Controversy:

📌 Insular Sawmill, Inc., a corporation engaged in the lumber business, leased a property owned by Guillermina Mendoza de Gelano in Manila.

📌 Guillermina’s husband, Carlos Gelano, obtained cash advances from Insular Sawmill amounting to ₱25,950, agreeing that the corporation could deduct the amount from rental payments.

📌 Carlos failed to fully repay the advances, leaving an unpaid balance of ₱20,000.

📌 Additionally, the couple made credit purchases of lumber materials worth ₱946.46 for home improvements, which remained unpaid.

📌 Insular Sawmill also co-signed a promissory note with Carlos for a ₱8,000 loan from China Banking Corporation, which Carlos failed to settle, leaving a balance of ₱4,106.

📌 Guillermina refused liability, arguing that the debts were personal obligations of her husband.

🌐 Main Issue to be Resolved: Could Insular Sawmill, Inc. continue prosecuting the case despite its corporate dissolution?

💡 Key Legal Principles Applied

✅ Corporate Dissolution & Litigation: The Supreme Court ruled that a dissolved corporation may continue prosecuting pending cases beyond the three-year winding-up period, provided there is substantial compliance with liquidation procedures.

✅ Trustee Representation: Even without a formal trustee, the corporation’s legal counsel was deemed to have substantially fulfilled the role of a trustee for litigation purposes.

⚖️ Clemente v. Court of Appeals (G.R. No. 82407, Mar. 27, 1995)

📚 Facts Leading to the Controversy:

📌 The case involved a dispute over ownership of a 5,349-square-meter parcel of land in Calamba, Laguna.

📌 The land was originally acquired by Sociedad Popular Calambeña, an organization that operated as a sociedad anónima (anonymous partnership) from 1909 to 1932.

📌 The petitioners, including Luis C. Clemente, claimed ownership based on their stockholdings in the dissolved entity.

📌 The respondents, Elvira Pandinco-Castro and Victor Castro asserted ownership through acquisitive prescription, arguing that they had possessed the land openly and continuously.

🌐 Main Issues Resolved: (1) Did the petitioners have a valid claim to ownership based on their stockholdings in Sociedad Popular Calambeña, and (2) Could the respondents acquire ownership through acquisitive prescription despite the petitioners’ claims?

💡 Key Legal Principles Applied

✅ Ownership Rights of Dissolved Entities: The Supreme Court ruled that stockholders of a dissolved corporation do not automatically acquire ownership of corporate assets unless proper liquidation procedures are followed.

✅ Acquisitive Prescription: The Court upheld the principle that continuous, open, and adverse possession of property for the required period can lead to ownership, provided there is no legal impediment to prescription.

✅ Burden of Proof in Ownership Claims: The petitioners failed to establish a clear legal basis for their claim, as they did not present sufficient evidence proving their direct ownership of the land.

✅ Hence, the Supreme Court affirmed the Court of Appeals’ decision, rejecting the petitioners’ claim and recognizing the respondents’ ownership through acquisitive prescription.

⚖️ Reburiano v. Court of Appeals (G.R. No. 102965, January 21, 1999)

📚 Facts Leading to the Controversy:

📌 Pepsi Cola Bottling Company of the Philippines, Inc. filed a case against Urbano Reburiano and James Reburiano for unpaid obligations amounting to ₱55,000.

📌 The Regional Trial Court (RTC) of Quezon City ruled in favor of Pepsi, ordering the defendants to pay the amount, with deductions for returned empty cases.

📌 Pepsi appealed to the Court of Appeals, which modified the RTC’s ruling, ordering the defendants to pay ₱55,000 with legal interest from January 1982.

📌 After the case became final and executory, the RTC issued a writ of execution in 1991.

📌 The Reburianos moved to quash the writ, arguing that Pepsi had ceased to exist as a corporation in 1983, thus losing its juridical personality to sue or enforce judgments.

🌐 Main Issues Resolved: Could Pepsi Cola Bottling Company enforce the judgment despite its corporate dissolution?

💡 Key Legal Principles Applied

✅ Corporate Dissolution & Liquidation: The Supreme Court ruled that a dissolved corporation retains limited juridical personality for three years to settle affairs and prosecute pending cases.

✅ Trustee Representation: Even without a formal trustee, the corporation’s legal counsel was deemed to have substantially fulfilled the role of a trustee for litigation purposes.

✅ Finality of Judgments: The Court emphasized that final and executory judgments must be enforced, and procedural objections raised after finality cannot prevent execution.

✅ The Supreme Court affirmed the Court of Appeals’ decision, ruling that Pepsi Cola Bottling Company could still enforce the judgment despite its dissolution. The motion to quash was denied, and the execution of the judgment was upheld.

⚖️ Alhambra Cigar & Cigarette Manufacturing Company, Inc., vs. SEC (G.R. No. L-23606, July 29, 1968)

📚 Facts Leading to the Controversy:

📌 Alhambra Cigar & Cigarette Manufacturing Company, Inc. was incorporated in 1912 with a corporate term of 50 years, set to expire on January 15, 1962.

📌 Upon expiration, Alhambra ceased operations and entered liquidation, appointing Angel S. Gamboa as trustee.

📌 In 1963, Republic Act No. 3531 was enacted, allowing corporations to extend their corporate life beyond the original term.

📌 Alhambra attempted to amend its Articles of Incorporation to extend its corporate existence for another 50 years.

📌 The Securities and Exchange Commission (SEC) rejected the amendment, ruling that Republic Act No. 3531 had no retroactive effect and could not apply to corporations whose term had already expired.

🌐 Main Issues Resolved: Could Alhambra extend its corporate life after its original term had expired?

💡 Key Legal Principles Applied

✅ Corporate Life Extension: The Supreme Court ruled that a corporation cannot extend its existence once its original term has expired. Any amendment must be made before expiration.

✅ Non-Retroactivity of Laws: Republic Act No. 3531 did not apply retroactively, meaning corporations that had already ceased to exist could not revive themselves through an amendment.

✅ SEC’s Authority: The Court upheld the SEC’s decision, affirming its authority to reject amendments that violate corporate law principles.

✅ The Supreme Court affirmed the SEC’s decision, ruling that Alhambra could not extend its corporate life after expiration. The corporation remained in liquidation, and its assets were to be distributed accordingly.

These are some of the decisions promulgated by the Supreme Court that will guide practitioners to understand the process of dissolution and the underlying legal principles behind it. May this review of related jurisprudence be a valuable tool for all practitioners alike.

Now, real estate service practitioners play a vital role in safeguarding the legality and integrity of property transactions involving dissolved corporations. Whether the sale is conducted during or after the 3-year liquidation window, it is essential to:

👉 Identify the correct person or group of persons who is/are authorized to sell the property.

👉 Conduct proper and exhaustive legal due diligence on the entity and the property subject to the purchase.

👉 Ensure full legal transparency to protect all parties to the transaction.

When in doubt, consult a corporate or real estate lawyer familiar with liquidation and estate laws. Ethical practice and legal compliance should always be aligned.

The last part of the series will discuss the path to resurrecting a “dead” corporation in light of the enactment of the Revised Corporation Code (Rep. Act No. 11232).

——-

Atty. Jojo is a real estate attorney, an estate planning attorney, a licensed real estate broker, and a PRC-accredited Lecturer/ Speaker for Training Programs in Real Estate. He is committed to helping new and veteran real estate service practitioners be well-informed of the latest laws, rules, regulations, and information relevant to the real estate service sector.