Whether the Assets Distributable to Creditors and/or Stockholders of Closed Corporate Broker-Dealers May Be Escheated in Favor of the Government

DOJ OPINION NO. 04, s. 2022 February 3, 2022 Atty. Romuald C. Padilla General Counsel Securities and Exchange Commission Secretariat Building, PICC Complex Roxas Boulevard, Pasay City 1307 Dear Atty. Padilla : This has reference to your letter dated 15 November 2021 requesting for confirmation by this Department on the position of the Securities and Exchange Commission (SEC) relating to the remaining assets of six (6) closed broker dealers that are in the custody of SEC, which the Commission on Audit (COA) recommended, among others, for evaluation of "idle funds that can warrant for escheat proceedings in favor of the government in accordance with the Rules of Court." 1 In particular, you seek confirmation that while the assets distributable to the creditors and/or stockholders of the closed corporate broker-dealers may be escheated in favor of the government pursuant to Section 139 of the Revised Corporation Code, the remaining assets in cash of a partnership broker-dealer in the custody of the SEC, and which is being requested to be returned to the partnership, cannot be escheated in the absence of a provision in the Civil Code which sanctions the escheat of partnership assets in favor of the government. HTcADC In your letter, you provided the following information relevant to the subject query, as follows: 1. In the 18 March 2021 Audit Observation Memorandum (AOM) issued by COA, in connection with the remaining assets in the custody of the SEC involving six (6) closed broker-dealers, namely: Marino Olondriz y Cia (MOC), Connell Securities, Inc. (CSI), Asian Capital Equities, Inc. (ACEI), Sung Hung Kai Securities (Phils.), Inc. (SHKS), Sapphire Securities, Inc. (SSI), and Guoco Securities Phils., Inc. (GSPI), COA recommended, among others, the evaluation of "idle funds that can warrant for escheat proceedings in favor of the Government in accordance with the Rules of Court"; 2. Of the six (6) broker-dealers subject of the AOM, only MOC, a partnership, came forward and requested that the remaining balance or unreleased funds in connection with the liquidation of its trade-related assets be returned to it, alleging that as a partnership, MOC is entitled to receive and collect the remaining assets. The other five (5) closed broker dealers, all corporations, have not, as of date, filed claims in connection with the proceeds of the liquidation of their respective assets; 3. The SEC views that since the juridical personality of the foregoing closed broker-dealers subject of the COA-AOM are dissimilar, such that MOC is a partnership while all the rest are corporations, then the liquidation of assets of the aforesaid closed broker-dealers and the possible escheat, as recommended by COA, are governed by different laws. MOC is governed by the provisions of the Civil Code on partnership, while the corporate broker-dealers (CSI, ACEI, SHKS, SSI and GSPI) are governed by the Revised Corporation Code; 2 4. It is the position of the SEC that it may validly approve and endorse to the Office of the Solicitor General (OSG) the filing of a Petition praying that the remaining assets of the corporate broker-dealers be escheated in favor of the national government. However, the same cannot be applied with MOC, which is a partnership; 5. The records of SEC show that MOC, a partnership, was engaged in stock brokerage/dealership business. It subsequently underwent on voluntary suspension due to financial difficulty, which resulted in net capital deficiency. The subsequent review and audit of MOC's books and records disclosed that the partnership's trade-related liabilities amounted to Php47,589,228.20 less the value of its inventory of securities in the amount of Php8,021,349.55, or a Net Shortfall of Php39,567,879.20. The SEC subsequently directed MOC to settle its trade-related liabilities within two (2) months from 30 September 1999 under pain of having the partnership liquidated. On 04 June 2004, the SEC issued an Order dated 03 June 2004, which was subsequently amended on 20 July 2004, granting the Petition for Issuance of Take Over Order filed by the Philippine Stock Exchange (PSE), and directed the latter to take over the operations of MOC, in accordance with the provisions of the Securities Regulation Code (SRC). Pursuant to the afore-cited SEC Order, and considering that the assets of MOC were insufficient to satisfy its obligations including the said trade-related claims, the PSE sold in a public bidding the 50,000 PSE shares of MOC, which generated proceeds in the amount of Php33,830,000.00, and prepared a schedule allocating the said amount to MOC's claimants/clients for purposes of ultimately distributing the same. On 07 January 2010, and after the said SEC Order was fully implemented, the SEC issued an Order discharging the PSE from its duties and responsibilities, and directed the turnover of the amount of Php21,281,431.95, allocated for MOC's claimant/clients which were unclaimed, and the remaining assets of MOC in the sum of Php651,711.40 for appropriate disposition. On 28 June 2011, MOC requested from the SEC for the return of the amount of Php18,615,503.02 representing the funds allocated for the claimants/clients of the partnership. The said request, however, was denied by the then Market Regulation Division (MRD), now Markets and Securities Regulation Department (MSRD), on the ground that the cash balance of Php20,629,718.55 that was turned over by PSE to SEC represented the unclaimed stock positions that rightfully belong to MOC's claimants/clients. On 27 July 2020, MOC reiterated its request praying for the return of the amount representing the unreleased funds allocated for its claimants/clients who failed to present their claim within the period prescribed by law. MOC maintained that the said amount should revert to the partnership on the basis that the period to file a claim of said MOC claimants/clients had already prescribed, and thus, barred by laches. The SEC-MSRD agreed with the position of MOC that the period provided for by law for MOC's claimants/clients within which to file their respective claims against the partnership had already prescribed; 6. Per SEC records, only MOC has requested for the return of the remaining balance or unreleased funds in connection with the liquidation of its trade-related assets. 7. The SEC expressed the opinion that the amount representing the unreleased funds are assets of MOC, and thus, considered as partnership assets, which cannot be escheated in favor of the government after its dissolution and liquidation since there is no law specifically authorizing such process; 8. The SEC further maintained that the failure of MOC's claimants/clients to present their claims within the prescribed period resulted in treating MOC's unreleased funds as partnership assets since none of the modes of acquiring ownership under Article 712 of the Civil Code was present to support a transfer of ownership of said amount in their favor. The SEC further declared that ownership, therefore, of said unreleased funds remains with MOC. It is the position of the SEC that the Commission is only holding the amount turned over by PSE in trust for MOC, and thereupon assumed only the obligation to accept, to validate, and to pay the appropriate amounts based on the claims against MOC, as the case may be; 9. No issue has been interposed with regard to the disposal of and/or possible escheat of the unclaimed assets of the closed corporate broker-dealers, to wit: CSI, ACEI, SHKS, SSI, and GSPI; and 10. Finally, the SEC maintains that the escheat in favor of the national government of any asset attributable to any corporate creditor or stockholder or member who is unknown or cannot be found under Section 139 of the Revised Corporation Code cannot be applied by analogy, or carried out by implication, to include partnership property without an express provision of law for such purpose, otherwise, the same would constitute deprivation of property without due process of law. Hence, this request. At the outset, pursuant to established precedents, the Secretary of Justice, as Attorney General, renders opinion and gives legal advice only for and upon request of national government functionaries, such as heads of departments and chiefs of bureaus and offices of equivalent rank, and then only on specific legal questions/issues arising in the performance of their respective powers and functions. Accordingly we have, in practice, consistently declined to render opinion or give legal advice to other government officials and to private individuals and entities, even if coursed through or endorsed by a national government functionary who may, himself, be entitled to seek opinion from this Department. 3 Moreover, the issue raised involves the substantive rights of private parties, i.e. , MOC as a partnership and its partners, who requested from the SEC for the return of the remaining balance or unreleased funds in connection with the liquidation of MOC's trade-related assets. Since the opinion of the Secretary of Justice is merely advisory in nature, such opinion would not be binding upon the private parties who may be adversely affected thereby and who may, in all probability, take issue therewith and contest the same before the courts. As a matter of policy, therefore, the Secretary of Justice has consistently refrained from rendering opinion on questions that are justiciable in nature or can be the subject of litigation before the courts. 4 However, considering that you, as the General Counsel of the SEC, was authorized by the Commission to request for this opinion, and is in the level/rank to provide the complete position of the SEC on the issue inquired upon, this Department issues this opinion for your guidance and information only. We concur with the position of the SEC that the unreleased funds of a partnership supposedly intended for its claimants/clients or creditors, who did not file a claim against the partnership within the prescribed period, are considered as partnership assets, and cannot be escheated in favor of the government without a law authorizing for such purpose. In the case of Republic v. Court of Appeals , 5 the Supreme Court ruled: Escheat is a proceeding, unlike that of succession or assignment, whereby the state, by virtue of its sovereignty, steps in and claims the real or personal property of a person who dies intestate leaving no heir . In the absence of a lawful owner, a property is claimed by the state to forestall an open "invitation to self-service by the first comers." Since escheat is one of the incidents of sovereignty, the state may, and usually does, prescribe the conditions and limits the time within which a claim to such property may be made. The procedure by which the escheated property may be recovered is generally prescribed by statute , and a time limit is imposed within which such action must be brought . 6 (emphasis supplied) Similarly, in Rizal Commercial Banking Corporation v. Hi-Tri Development Corporation , 7 the Supreme Court held: Escheat proceedings refer to the judicial process in which the state, by virtue of its sovereignty, steps in and claims abandoned, left vacant, or unclaimed property, without there being an interested person having a legal claim thereto. In the case of dormant accounts , the state inquires into the status, custody, and ownership of the unclaimed balance to determine whether the inactivity was brought about by the fact of death or absence of or abandonment by the depositor. If after the proceedings the property remains without a lawful owner interested to claim it, the property shall be reverted to the state "to forestall an open invitation to self-service by the first comers." However, if interested parties have come forward and lain claim to the property, the courts shall determine whether the credit or deposit should pass to the claimants or be forfeited in favor of the state. We emphasize that escheat is not a proceeding to penalize depositors for failing to deposit to or withdraw from their accounts . It is a proceeding whereby the state compels the surrender to it of unclaimed deposit balances when there is substantial ground for a belief that they have been abandoned, forgotten, or without an owner. 8 (emphasis supplied) Moreover, Section 1, Rule 91 (Escheats) of the Revised Rules of Court provides: CAIHTE Rule 91 Escheats Section 1. When and by whom petition filed . When a person dies intestate , seized of real property in the Philippines, leaving no heir or person by law entitled to the same , the Solicitor General or his representative in behalf of the Republic of the Philippines, may file a petition in the Court of First Instance of the province where the deceased last resided or in which he had estate, if he resided out of the Philippines, setting forth the facts, and praying that the estate of the deceased be declared escheated. (emphasis supplied) It is clear from the afore-cited legal precepts and provisions of law that the subject of escheat proceedings involve persons who die intestate without an heir, dormant accounts in banks, and distributable corporate assets in favor of a creditor or stockholder or member who is unknown or cannot be found under Section 139 of the Revised Corporation Code, which provides: Section 139. Corporate Liquidation . Except for banks, which shall be covered by the applicable provisions of Republic Act No. 7653, otherwise known as "The New Central Bank Act," as amended, and Republic Act No. 3591, otherwise known as the Philippine Deposit Insurance Corporation Charter, as amended, every corporation whose charter expires pursuant to its article of incorporation is annulled by forfeiture, or whose corporate existence is terminated in any other manner, shall nevertheless remain as a body corporate for three (3) years after the effective date of dissolution, for the purpose of prosecuting and defending suits by or against it and enabling it to settle and close its affairs, dispose of and convey its property, and distribute its assets, but not for the purpose of continuing the business for which it was established. At any time during said three (3) years, the corporation is authorized and empowered to convey all of its property to trustees for the benefit of stockholders, members, creditors, and other persons in interest. After any such conveyance by the corporation of its property in trust for the benefit of its stockholders, members, creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons-in-interest. Except as otherwise provided for in Sections 93 and 94 of this Code, upon the winding up of corporate affairs, any asset distributable to any creditor or stockholder or member who is unknown or cannot be found shall be escheated in favor of the national government . Except by decrease of capital stock and as otherwise allowed by this Code, no corporation shall distribute any of its assets or property except upon lawful dissolution and after payment of all its debts and liabilities. As mentioned, Section 139 of the Revised Corporation Code allows the escheat of corporate assets distributable to a creditor, stockholder or member of a corporation who, upon winding up of corporate affairs, is unknown or cannot be found. Hence, we confirm the position of the SEC that it may validly approve and endorse to OSG the filing of a Petition praying that the remaining assets of the corporate broker-dealers be escheated in favor of the national government, alleging therein the relevant facts required by law which should be substantiated by evidence. In the case at hand, we are confronted with a situation of a partnership that went on a voluntary suspension due to financial difficulty in the settlement of its trade-related liabilities but received no claim within the prescribed period from its claimants/clients or creditors who have been allocated with partnership funds intended for their supposed claims against the partnership. It is settled that the partnership, as a separate and distinct entity, must refund the shares of the partners, the amount to be refunded, however, is necessarily limited to its total resources. In other words, it can only pay out what it has in its coffers, which consists of all its assets. However, before the partners can be paid their shares, the creditors of the partnership must first be compensated. After all the creditors have been paid, whatever is left of the partnership assets becomes available for the payment of the partners' shares. Thus, a share in a partnership can be returned only after the completion of the latter's dissolution, liquidation and winding up of the business. 9 Article 1839 of the Civil Code provides for the rules in the settlement of the accounts between the partners after dissolution of the partnership. Clearly, partnership assets shall be applied to the satisfaction of the liabilities of the partnership in the following order, i.e. , first , to those owing to partnership creditors; second , to those owing to partners other than for capital and profits such as loans given to the partners or advances for business expenses; third , to those owing for the return of the capital contributed by the partners; and finally , that which is due to each of the partner, with regard to the share of the profits, if any. 10 Significantly, Article 1812 of the Civil Code states that a partner's interest in the partnership is his share of the profits and surplus, which consists of his proportionate share in the profits during the life of the partnership, and his share in the surplus after its dissolution. Surplus refers to the assets of the partnership after partnership debts and liabilities are paid and settled, and the rights of the partners among themselves are adjusted. 11 Since no one is filing a claim against the funds intended for the claimants/clients or creditors of a partnership, we postulate that the partners are entitled to claim the subject unclaimed funds, which we considered to be partnership assets, in proportion of their contributions to the partnership, or as may be provided for in their partnership agreement. It should be noted that there is no provision in the Civil Code which sanctions the escheat of partnership assets in favor of the government, primarily because in a partnership, the settlement of partnership liabilities is specifically governed by Article 1839 of the Civil Code which provides for total liquidation of partnership assets. With the partners being granted by law to claim and recover their respective capital and their right to the partnership profits from the remaining assets of the partnership, the law in effect recognizes and mandates that nothing from the partnership assets will remain after liquidation. From the foregoing, if the rule in Section 139 of the Revised Corporation Code which allows the escheat of any asset distributable to any corporate creditor or stockholder or member who is unknown or cannot be found, will be made applicable to partnerships for purposes of including/covering partnerships assets, the same should be embodied in an express provision of law. We, therefore, share the position of SEC that to authorize the escheat of partnership assets without a law authorizing for such purpose, may be violative of the constitutional principle that no person shall be deprived of property without due process of law. 12 Very truly yours, (SGD.) MENARDO I. GUEVARRA Secretary Footnotes 1. COA Audit Observation Memorandum, dated 18 March 2021. 2. Republic Act No. 11232, entitled "AN ACT PROVIDING FOR THE REVISED CORPORATION CODE OF THE PHILIPPINES," approved on 20 February 2019. 3. DOJ Opinion Nos. 28 and 4, series of 2012; Nos. 57, 38, 15, series of 2011; Nos. 44, 23, 6, series of 2010; Nos. 70, 69, 55, 53, 44, 28, series of 2009. 4. DOJ Opinion Nos. 15, 9, 7, 5, 4, and 3, series of 2012; Nos. 57, 56, 42, 39, 22, 5, 1, series of 2011; Nos. 45, 35, 27, 16, series of 2010. 5. G.R. No. 143483, January 31, 2002. 6. Republic v. Court of Appeals , G.R. No. 143483, January 31, 2002. 7. G.R. No. 192413, June 13, 2012. 8. Rizal Commercial Banking Corporation v. Hi-Tri Development Corporation , G.R. No. 192413, June 13, 2012. 9. Villareal v. Ramirez , G.R. No. 144214, July 14, 2003. 10. See, De Leon, The Law on Partnerships and Private Corporations, 2016 Ed., p. 151. 11. See, De Leon, The Law on Partnerships and Private Corporations, 2016 Ed., pp. 86-87. 12. Section 1, Article III of the 1987 Constitution.