Short answer. Yes. Article 1838 gives a partner who was defrauded into joining, and who then paid the partnership's debts, the right to stand in the place of the creditors of the partnership for those payments, once all liabilities to third persons have been satisfied. You are subrogated to the creditors you paid, not left to absorb the loss.
What the law says
To stand, after all liabilities to third persons have been satisfied, in the place of the creditors of the partnership for any payments made by him in respect of the partnership liabilities
Civil Code, Article 1838 — Rescission for Fraud in Formation. Read the full provision →
Paying the firm's creditors subrogates you to them
When you rescind a partnership contract for fraud, the law does not treat money you spent clearing the firm's debts as a gift to the venture. Article 1838 entitles the defrauded party to stand, after all liabilities to third persons have been satisfied, in the place of the creditors of the partnership for any payments made by him in respect of the partnership liabilities. This is subrogation: by paying a partnership creditor, you acquire that creditor's rights against the partnership. Instead of simply losing what you paid, you can enforce the very claims you settled, so the burden ultimately rests where it belongs rather than on the person who was deceived into joining.
The timing condition — outsiders come first
This right does not let you leap ahead of the partnership's genuine creditors. The article makes the subrogation available only after all liabilities to third persons have been satisfied. In other words, the outside creditors of the firm must be paid before you can assert the position you stepped into by paying them. The rule protects innocent third parties who dealt with the partnership, while still ensuring that, once they are made whole, the defrauded partner is not the one left carrying debts he paid. Your recovery is real, but it is subordinate to the claims of everyone outside the partnership.
Subrogation is separate from getting your capital back
Article 1838 draws a line between two different sums. Money you paid to enter the partnership, and capital or advances you contributed, are protected by a lien or right of retention over the surplus of the partnership property. Money you paid to satisfy the partnership's own liabilities is protected by this separate subrogation right. Keeping the two apart matters, because they attach to different things and answer different questions. The lien secures your investment; the subrogation lets you enforce debts you discharged. Together they aim to unwind the fraud fully, returning both what you put in and what you paid out.
What you must establish to use it
The right is not automatic; it rests on a foundation you have to prove. First, the partnership contract must be rescinded on the ground of the fraud or misrepresentation of one of the parties — the remedies in Article 1838 flow from that rescission. Second, you must show that the payments you are claiming were genuinely made in respect of the partnership's liabilities, not simply losses of the business you bore as a partner. Careful records of what you paid, to whom, and on what obligation are therefore essential. Without proof of both the fraud and the qualifying payments, the subrogation right has nothing to attach to.
Cases citing this provision
These Supreme Court decisions cite the provision above. We list them so you can read them yourself; the summaries of what each decided are not ours to give.
- Primelink Properties & Devt. Corp., et al. vs. Ma. Clarita T. Lazatin-Magat, et al, G.R. No. 167379, June 27, 2006 — read the decision on LawPhil →