Partnership Cases
Partnership Cases
Partnership Cases
CONCEPCION, J.:
This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for
review of a decision of the Court of Tax Appeals, the dispositive part of which reads:
FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, real
estate dealer's tax and the residence tax for the years 1945 to 1949, inclusive, in accordance
with the respondent's assessment for the same in the total amount of P6,878.34, which is
hereby affirmed and the petition for review filed by petitioner is hereby dismissed with costs
against petitioners.
1. That the petitioners borrowed from their father the sum of P59,1400.00 which amount
together with their personal monies was used by them for the purpose of buying real
properties,.
2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an area of
3,713.40 sq. m. including improvements thereon from the sum of P100,000.00; this property
has an assessed value of P57,517.00 as of 1948;
3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an
aggregate area of 3,718.40 sq. m. including improvements thereon for P130,000.00; this
property has an assessed value of P82,255.00 as of 1948;
4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of 4,353 sq.
m. including improvements thereon for P108,825.00. This property has an assessed value of
P4,983.00 as of 1948;
5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq. m.
including improvements thereon for P237,234.34. This property has an assessed value of
P59,140.00 as of 1948;
6. That in a document dated August 16, 1945, they appointed their brother Simeon
Evangelista to 'manage their properties with full power to lease; to collect and receive rents;
to issue receipts therefor; in default of such payment, to bring suits against the defaulting
tenants; to sign all letters, contracts, etc., for and in their behalf, and to endorse and deposit
all notes and checks for them;
7. That after having bought the above-mentioned real properties the petitioners had the
same rented or leases to various tenants;
8. That from the month of March, 1945 up to an including December, 1945, the total amount
collected as rents on their real properties was P9,599.00 while the expenses amounted to
P3,650.00 thereby leaving them a net rental income of P5,948.33;
9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out of
which amount was deducted in the sum of P16,288.27 for expenses thereby leaving them a
net rental income of P7,498.13;
10. That in 1948, they realized a gross rental income of P17,453.00 out of the which amount
was deducted the sum of P4,837.65 as expenses, thereby leaving them a net rental income
of P12,615.35.
It further appears that on September 24, 1954 respondent Collector of Internal Revenue demanded
the payment of income tax on corporations, real estate dealer's fixed tax and corporation residence
tax for the years 1945-1949, computed, according to assessment made by said officer, as follows:
INCOME TAXES
1945 14.84
1946 1,144.71
1947 10.34
1948 1,912.30
1949 1,575.90
1946 P37.50
1947 150.00
1948 150.00
1949 150.00
1945 P38.75
1946 38.75
1947 38.75
1948 38.75
1949 38.75
Said letter of demand and corresponding assessments were delivered to petitioners on December 3,
1954, whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that "the
decision of the respondent contained in his letter of demand dated September 24, 1954" be
reversed, and that they be absolved from the payment of the taxes in question, with costs against
the respondent.
After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for the
respondent, and a petition for reconsideration and new trial having been subsequently denied, the
case is now before Us for review at the instance of the petitioners.
The issue in this case whether petitioners are subject to the tax on corporations provided for in
section 24 of Commonwealth Act. No. 466, otherwise known as the National Internal Revenue Code,
as well as to the residence tax for corporations and the real estate dealers fixed tax. With respect to
the tax on corporations, the issue hinges on the meaning of the terms "corporation" and
"partnership," as used in section 24 and 84 of said Code, the pertinent parts of which read:
SEC. 24. Rate of tax on corporations.—There shall be levied, assessed, collected, and paid
annually upon the total net income received in the preceding taxable year from all sources by
every corporation organized in, or existing under the laws of the Philippines, no matter how
created or organized but not including duly registered general co-partnerships (compañias
colectivas), a tax upon such income equal to the sum of the following: . . .
SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or
organized, joint-stock companies, joint accounts (cuentas en participacion), associations or
insurance companies, but does not include duly registered general copartnerships.
(compañias colectivas).
By the contract of partnership two or more persons bind themselves to contribute money,
properly, or industry to a common fund, with the intention of dividing the profits among
themselves.
Pursuant to the article, the essential elements of a partnership are two, namely: (a) an agreement to
contribute money, property or industry to a common fund; and (b) intent to divide the profits among
the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly,
petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the
issue narrows down to their intent in acting as they did. Upon consideration of all the facts and
circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real
estate transactions for monetary gain and then divide the same among themselves, because:
1. Said common fund was not something they found already in existence. It was not property
inherited by them pro indiviso. They created it purposely. What is more they jointly
borrowed a substantial portion thereof in order to establish said common fund.
2. They invested the same, not merely not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they
purchased 21 lots for P18,000.00. This was soon followed on April 23, 1944, by the
acquisition of another real estate for P108,825.00. Five (5) days later (April 28, 1944), they
got a fourth lot for P237,234.14. The number of lots (24) acquired and transactions
undertaken, as well as the brief interregnum between each, particularly the last three
purchases, is strongly indicative of a pattern or common design that was not limited to the
conservation and preservation of the aforementioned common fund or even of the property
acquired by the petitioners in February, 1943. In other words, one cannot but perceive a
character of habitually peculiar to business transactions engaged in the purpose of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of
petitioners herein. The properties were leased separately to several persons, who, from 1945
to 1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are
still being so let, for petitioners do not even suggest that there has been any change in the
utilization thereof.
4. Since August, 1945, the properties have been under the management of one person,
namely Simeon Evangelista, with full power to lease, to collect rents, to issue receipts, to
bring suits, to sign letters and contracts, and to indorse and deposit notes and checks. Thus,
the affairs relative to said properties have been handled as if the same belonged to a
corporation or business and enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over
fifteen (15) years, since the first property was acquired, and over twelve (12) years, since
Simeon Evangelista became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in
creating the set up already adverted to, or on the causes for its continued existence. They
did not even try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent necessary to constitute a
partnership, the collective effect of these circumstances is such as to leave no room for doubt on the
existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances
were present in the cases cited by petitioners herein, and, hence, those cases are not in point.
Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of the
acts performed by them, a legal entity, with a personality independent of that of its members, did not
come into existence, and some of the characteristics of partnerships are lacking in the case at bar.
This pretense was correctly rejected by the Court of Tax Appeals.
To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are
distinct and different from "partnerships". When our Internal Revenue Code includes "partnerships"
among the entities subject to the tax on "corporations", said Code must allude, therefore, to
organizations which are not necessarily "partnerships", in the technical sense of the term. Thus, for
instance, section 24 of said Code exempts from the aforementioned tax "duly registered general
partnerships which constitute precisely one of the most typical forms of partnerships in this
jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation includes
partnerships, no matter how created or organized." This qualifying expression clearly indicates that a
joint venture need not be undertaken in any of the standard forms, or in conformity with the usual
requirements of the law on partnerships, in order that one could be deemed constituted for purposes
of the tax on corporations. Again, pursuant to said section 84(b), the term "corporation" includes,
among other, joint accounts, (cuentas en participation)" and "associations," none of which has a
legal personality of its own, independent of that of its members. Accordingly, the lawmaker could not
have regarded that personality as a condition essential to the existence of the partnerships therein
referred to. In fact, as above stated, "duly registered general copartnerships" — which are
possessed of the aforementioned personality — have been expressly excluded by law (sections 24
and 84 [b] from the connotation of the term "corporation" It may not be amiss to add that petitioners'
allegation to the effect that their liability in connection with the leasing of the lots above referred to,
under the management of one person — even if true, on which we express no opinion — tends
to increase the similarity between the nature of their venture and that corporations, and is, therefore,
an additional argument in favor of the imposition of said tax on corporations.
Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from
"partnerships". By specific provisions of said laws, such "corporations" include "associations, joint-
stock companies and insurance companies." However, the term "association" is not used in the
aforementioned laws.
. . . in any narrow or technical sense. It includes any organization, created for the transaction
of designed affairs, or the attainment of some object, which like a corporation, continues
notwithstanding that its members or participants change, and the affairs of which, like
corporate affairs, are conducted by a single individual, a committee, a board, or some other
group, acting in a representative capacity. It is immaterial whether such organization is
created by an agreement, a declaration of trust, a statute, or otherwise. It includes a
voluntary association, a joint-stock corporation or company, a 'business' trusts a
'Massachusetts' trust, a 'common law' trust, and 'investment' trust (whether of the fixed or the
management type), an interinsuarance exchange operating through an attorney in fact, a
partnership association, and any other type of organization (by whatever name known) which
is not, within the meaning of the Code, a trust or an estate, or a partnership. (7A Mertens
Law of Federal Income Taxation, p. 788; emphasis supplied.).
. . . provides its own concept of a partnership, under the term 'partnership 'it includes not only
a partnership as known at common law but, as well, a syndicate, group, pool, joint venture or
other unincorporated organizations which carries on any business financial operation, or
venture, and which is not, within the meaning of the Code, a trust, estate, or a corporation. . .
(7A Merten's Law of Federal Income taxation, p. 789; emphasis supplied.)
The term 'partnership' includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial operation,
or venture is carried on, . . .. ( 8 Merten's Law of Federal Income Taxation, p. 562 Note 63;
emphasis supplied.) .
For purposes of the tax on corporations, our National Internal Revenue Code, includes these
partnerships — with the exception only of duly registered general copartnerships — within the
purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute a
partnership, insofar as said Code is concerned and are subject to the income tax for corporations.
As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465 provides
in part:
The term 'corporation' as used in this Act includes joint-stock company, partnership, joint
account (cuentas en participacion), association or insurance company, no matter how
created or organized. (emphasis supplied.)
Considering that the pertinent part of this provision is analogous to that of section 24 and 84 (b) of
our National Internal Revenue Code (commonwealth Act No. 466), and that the latter was approved
on June 15, 1939, the day immediately after the approval of said Commonwealth Act No. 465 (June
14, 1939), it is apparent that the terms "corporation" and "partnership" are used in both statutes with
substantially the same meaning. Consequently, petitioners are subject, also, to the residence tax for
corporations.
Lastly, the records show that petitioners have habitually engaged in leasing the properties above
mentioned for a period of over twelve years, and that the yearly gross rentals of said properties from
June 1945 to 1948 ranged from P9,599 to P17,453. Thus, they are subject to the tax provided in
section 193 (q) of our National Internal Revenue Code, for "real estate dealers," inasmuch as,
pursuant to section 194 (s) thereof:
'Real estate dealer' includes any person engaged in the business of buying, selling,
exchanging, leasing, or renting property or his own account as principal and holding himself
out as a full or part time dealer in real estate or as an owner of rental property or properties
rented or offered to rent for an aggregate amount of three thousand pesos or more a year. . .
(emphasis supplied.)
Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against
the petitioners herein. It is so ordered.
Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L., Endencia and Felix, JJ., concur.
I agree with the opinion that petitioners have actually contributed money to a common fund with
express purpose of engaging in real estate business for profit. The series of transactions which they
had undertaken attest to this. This appears in the following portion of the decision:
2. They invested the same, not merely in one transaction, but in a series of transactions. On
February 2, 1943, they bought a lot for P100,000. On April 3, 1944, they purchase 21 lots for
P18,000. This was soon followed on April 23, 1944, by the acquisition of another real state
for P108,825. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The
number of lots (24) acquired and transactions undertaken, as well as the brief interregnum
between each, particularly the last three purchases, is strongly indicative of a pattern or
common design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by the petitioner in February,
1943, In other words, we cannot but perceive a character of habitually peculiar
to business transactions engaged in for purposes of gain.
Article 1769 of the new Civil Code lays down the rule for determining when a transaction should be
deemed a partnership or a co-ownership. Said article paragraphs 2 and 3, provides:
(2) Co-ownership or co-possession does not of itself establish a partnership, whether such
co-owners or co-possessors do or do not share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish partnership, whether or not the
person sharing them have a joint or common right or interest in any property from which the
returns are derived;
From the above it appears that the fact that those who agree to form a co-ownership shared or do
not share any profits made by the use of property held in common does not convert their venture into
a partnership. Or the sharing of the gross returns does not of itself establish a partnership whether or
not the persons sharing therein have a joint or common right or interest in the property. This only
means that, aside from the circumstance of profit, the presence of other elements constituting
partnership is necessary, such as the clear intent to form a partnership, the existence of a judicial
personality different from that of the individual partners, and the freedom to transfer or assign any
interest in the property by one with the consent of the others (Padilla, Civil Code of the Philippines
Annotated, Vol. I, 1953 ed., pp. 635- 636).
It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain
real estate for profit in the absence of other circumstances showing a contrary intention cannot be
considered a partnership.
Persons who contribute property or funds for a common enterprise and agree to share the
gross returns of that enterprise in proportion to their contribution, but who severally retain the
title to their respective contribution, are not thereby rendered partners. They have no
common stock or capital, and no community of interest as principal proprietors in the
business itself which the proceeds derived. (Elements of the law of Partnership by Floyd R.
Mechem, 2n Ed., section 83, p. 74.)
A joint venture purchase of land, by two, does not constitute a copartnership in respect
thereto; nor does not agreement to share the profits and loses on the sale of land create a
partnership; the parties are only tenants in common. (Clark vs. Sideway, 142 U.S. 682, 12 S
Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a single tract of reality,
holding as tenants in common, and to divide the profits of disposing of it, the brother and the
other not being entitled to share in plaintiff's commissions, no partnership existed as between
the parties, whatever relation may have been as to third parties. (Magee vs. Magee, 123 N.
E. 6763, 233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to form the same;
(b) generally a participating in both profits and losses; (c) and such a community of interest,
as far as third persons are concerned as enables each party to make contract, manage the
business, and dispose of the whole property. (Municipal Paving Co. vs Herring, 150 P. 1067,
50 Ill. 470.)
The common ownership of property does not itself create a partnership between the owners,
though they may use it for purpose of making gains; and they may, without becoming
partners, agree among themselves as to the management and use of such property and the
application of the proceeds therefrom. (Spurlock vs. Wilson, 142 S. W. 363, 160 No. App.
14.)
This is impliedly recognized in the following portion of the decision: "Although, taken singly, they
might not suffice to establish the intent necessary to constitute a partnership, the collective effect of
these circumstances (referring to the series of transactions) such as to leave no room for doubt on
the existence of said intent in petitioners herein."
LADD, J.:
The object of this action is to obtain from the court a declaration that a partnership exists between the
parties, that the plaintiff has a consequent interested in certain cascoes which are alleged to be
partnership property, and that the defendant is bound to render an account of his administration of
the cascoes and the business carried on with them. chan roble s virtual law li bra ry
Judgment was rendered for the defendant in the court below and the plaintiff appealed. chanrob les vi rtua l law lib rary
The respective claims of the parties as to the facts, so far as it is necessary to state them in order to
indicate the point in dispute, may be briefly summarized. The plaintiff alleges that in January, 1900,
he entered into a verbal agreement with the defendant to form a partnership for the purchase of
cascoes and the carrying on of the business of letting the same for hire in Manila, the defendant to
buy the cascoes and each partner to furnish for that purpose such amount of money as he could, the
profits to be divided proportionately; that in the same January the plaintiff furnished the defendant
300 pesos to purchase a casco designated as No. 1515, which the defendant did purchase for 500
pesos of Doña Isabel Vales, taking the title in his own name; that the plaintiff furnished further sums
aggregating about 300 pesos for repairs on this casco; that on the fifth of the following March he
furnished the defendant 825 pesos to purchase another casco designated as No. 2089, which the
defendant did purchase for 1,000 pesos of Luis R. Yangco, taking the title to this casco also in his own
name; that in April the parties undertook to draw up articles of partnership for the purpose of
embodying the same in an authentic document, but that the defendant having proposed a draft of
such articles which differed materially from the terms of the earlier verbal agreement, and being
unwillingly to include casco No. 2089 in the partnership, they were unable to come to any
understanding and no written agreement was executed; that the defendant having in the meantime
had the control and management of the two cascoes, the plaintiff made a demand for an accounting
upon him, which the defendant refused to render, denying the existence of the partnership
altogether.chanrobles v irt ual law l ibra ry
The defendant admits that the project of forming a partnership in the casco business in which he was
already engaged to some extent individually was discussed between himself and the plaintiff in
January, 1900, and earlier, one Marcos Angulo, who was a partner of the plaintiff in a bakery
business, being also a party to the negotiations, but he denies that any agreement was ever
consummated. He denies that the plaintiff furnished any money in January, 1900, for the purchase of
casco No. 1515, or for repairs on the same, but claims that he borrowed 300 pesos on his individual
account in January from the bakery firm, consisting of the plaintiff, Marcos Angulo, and Antonio
Angulo. The 825 pesos, which he admits he received from the plaintiff March 5, he claims was for the
purchase of casco No. 1515, which he alleged was bought March 12, and he alleges that he never
received anything from the defendant toward the purchase of casco No. 2089. He claims to have paid,
exclusive of repairs, 1,200 pesos for the first casco and 2,000 pesos for the second one. chanrobles vi rt ual law li bra ry
The case comes to this court under the old procedure, and it is therefore necessary for us the review
the evidence and pass upon the facts. Our general conclusions may be stated as follows: chanrob les vi rtual law lib rary
(1) Doña Isabel Vales, from whom the defendant bought casco No. 1515, testifies that the sale was
made and the casco delivered in January, although the public document of sale was not executed till
some time afterwards. This witness is apparently disinterested, and we think it is safe to rely upon the
truth of her testimony, especially as the defendant, while asserting that the sale was in March, admits
that he had the casco taken to the ways for repairs in January. cha nrob les vi rtual law lib rary
It is true that the public document of sale was executed March 10, and that the vendor declares
therein that she is the owner of the casco, but such declaration does not exclude proof as to the actual
date of the sale, at least as against the plaintiff, who was not a party to the instrument. (Civil Code,
sec. 1218.) It often happens, of course, in such cases, that the actual sale precedes by a considerable
time the execution of the formal instrument of transfer, and this is what we think occurred here. chan roble s virtual law l ibra ry
(2) The plaintiff presented in evidence the following receipt: "I have this day received from D. Jose
Fernandez eight hundred and twenty-five pesos for the cost of a casco which we are to purchase in
company. Manila, March 5, 1900. Francisco de la Rosa." The authenticity of this receipt is admitted by
the defendant. If casco No. 1515 was bought, as we think it was, in January, the casco referred to in
the receipt which the parties "are to purchase in company" must be casco No. 2089, which was bought
March 22. We find this to be the fact, and that the plaintiff furnished and the defendant received 825
pesos toward the purchase of this casco, with the understanding that it was to be purchased on joint
account.chan roble s virtual law lib rary
(3) Antonio Fernandez testifies that in the early part of January, 1900, he saw Antonio Angulo give the
defendant, in the name of the plaintiff, a sum of money, the amount of which he is unable to state, for
the purchase of a casco to be used in the plaintiff's and defendant's business. Antonio Angulo also
testifies, but the defendant claims that the fact that Angulo was a partner of the plaintiff rendered him
incompetent as a witness under the provisions of article 643 of the then Code of Civil Procedure, and
without deciding whether this point is well taken, we have discarded his testimony altogether in
considering the case. The defendant admits the receipt of 300 pesos from Antonio Angulo in January,
claiming, as has been stated, that it was a loan from the firm. Yet he sets up the claim that the 825
pesos which he received from the plaintiff in March were furnished toward the purchase of casco No.
1515, thereby virtually admitting that casco was purchased in company with the plaintiff. We discover
nothing in the evidence to support the claim that the 300 pesos received in January was a loan, unless
it may be the fact that the defendant had on previous occasions borrowed money from the bakery
firm. We think all the probabilities of the case point to the truth of the evidence of Antonio Fernandez
as to this transaction, and we find the fact to be that the sum in question was furnished by the
plaintiff toward the purchase for joint ownership of casco No. 1515, and that the defendant received it
with the understanding that it was to be used for this purposed. We also find that the plaintiff
furnished some further sums of money for the repair of casco. cha nrob les vi rtua l law lib rary
(4) The balance of the purchase price of each of the two cascoes over and above the amount
contributed by the plaintiff was furnished by the defendant. chan rob les vi rtual law lib rary
(5) We are unable to find upon the evidence before us that there was any specific verbal agreement of
partnership, except such as may be implied from the fact as to the purchase of the casco. chan rob les vi rtual law lib rary
(6) Although the evidence is somewhat unsatisfactory upon this point, we think it more probable than
otherwise that no attempt was made to agree upon articles of partnership till about the middle of the
April following the purchase of the cascoes.chan roble s virtual law l ibra ry
(7) At some time subsequently to the failure of the attempt to agree upon partnership articles and
after the defendant had been operating the cascoes for some time, the defendant returned to the
plaintiff 1,125 pesos, in two different sums, one of 300 and one of 825 pesos. The only evidence in the
record as to the circumstances under which the plaintiff received these sums is contained in his
answer to the interrogatories proposed to him by the defendant, and the whole of his statement on
this point may properly be considered in determining the fact as being in the nature of an indivisible
admission. He states that both sums were received with an express reservation on his part of all his
rights as a partner. We find this to be the fact. chanrob les vi rtua l law lib rary
Two questions of law are raised by the foregoing facts: (1) Did a partnership exist between the
parties? (2) If such partnership existed, was it terminated as a result of the act of the defendant in
receiving back the 1,125 pesos? chanroble s virtual law l ibra ry
(1) "Partnership is a contract by which two or more persons bind themselves to contribute money,
property, or industry to a common fund, with the intention of dividing the profits among themselves."
(Civil Code, art. 1665.) chanroble s virtual law l ibra ry
The essential points upon which the minds of the parties must meet in a contract of partnership are,
therefore, (1) mutual contribution to a common stock, and (2) a joint interest in the profits. If the
contract contains these two elements the partnership relation results, and the law itself fixes the
incidents of this relation if the parties fail to do so. (Civil Code, secs. 1689, 1695.) chanrobles vi rt ual law li bra ry
We have found as a fact that money was furnished by the plaintiff and received by the defendant with
the understanding that it was to be used for the purchase of the cascoes in question. This establishes
the first element of the contract, namely, mutual contribution to a common stock. The second
element, namely, the intention to share profits, appears to be an unavoidable deduction from the fact
of the purchase of the cascoes in common, in the absence of any other explanation of the object of
the parties in making the purchase in that form, and, it may be added, in view of the admitted fact
that prior to the purchase of the first casco the formation of a partnership had been a subject of
negotiation between them. chanrob les vi rtua l law lib rary
Under other circumstances the relation of joint ownership, a relation distinct though perhaps not
essentially different in its practical consequence from that of partnership, might have been the result
of the joint purchase. If, for instance, it were shown that the object of the parties in purchasing in
company had been to make a more favorable bargain for the two cascoes that they could have done
by purchasing them separately, and that they had no ulterior object except to effect a division of the
common property when once they had acquired it, the affectio societatiswould be lacking and the
parties would have become joint tenants only; but, as nothing of this sort appears in the case, we
must assume that the object of the purchase was active use and profit and not mere passive
ownership in common. chan roble s virtual law lib rary
It is thus apparent that a complete and perfect contract of partnership was entered into by the parties.
This contract, it is true, might have been subject to a suspensive condition, postponing its operation
until an agreement was reached as to the respective participation of the partners in the profits, the
character of the partnership as collective or en comandita, and other details, but although it is
asserted by counsel for the defendant that such was the case, there is little or nothing in the record to
support this claim, and that fact that the defendant did actually go on and purchase the boat, as it
would seem, before any attempt had been made to formulate partnership articles, strongly
discountenances the theory. cha nrob les vi rtua l law lib rary
The execution of a written agreement was not necessary in order to give efficacy to the verbal
contract of partnership as a civil contract, the contributions of the partners not having been in the
form of immovables or rights in immovables. (Civil Code, art. 1667.) The special provision cited,
requiring the execution of a public writing in the single case mentioned and dispensing with all formal
requirements in other cases, renders inapplicable to this species of contract the general provisions of
article 1280 of the Civil Code. chanrob les vi rtua l law lib rary
(2) The remaining question is as to the legal effect of the acceptance by the plaintiff of the money
returned to him by the defendant after the definitive failure of the attempt to agree upon partnership
articles. The amount returned fell short, in our view of the facts, of that which the plaintiff had
contributed to the capital of the partnership, since it did not include the sum which he had furnished
for the repairs of casco No. 1515. Moreover, it is quite possible, as claimed by the plaintiff, that a
profit may have been realized from the business during the period in which the defendant have been
administering it prior to the return of the money, and if so he still retained that sum in his hands. For
these reasons the acceptance of the money by the plaintiff did not have the effect of terminating the
legal existence of the partnership by converting it into a societas leonina, as claimed by counsel for
the defendant. chan robles v irt ual law li bra ry
Did the defendant waive his right to such interest as remained to him in the partnership property by
receiving the money? Did he by so doing waive his right to an accounting of the profits already
realized, if any, and a participation in them in proportion to the amount he had originally contributed
to the common fund? Was the partnership dissolved by the "will or withdrawal of one of the partners"
under article 1705 of the Civil Code? We think these questions must be answered in the negative. chanrob les vi rtua l law lib rary
There was no intention on the part of the plaintiff in accepting the money to relinquish his rights as a
partner, nor is there any evidence that by anything that he said or by anything that he omitted to say
he gave the defendant any ground whatever to believe that he intended to relinquish them. On the
contrary he notified the defendant that he waived none of his rights in the partnership. Nor was the
acceptance of the money an act which was in itself inconsistent with the continuance of the
partnership relation, as would have been the case had the plaintiff withdrawn his entire interest in the
partnership. There is, therefore, nothing upon which a waiver, either express or implied, can be
predicated. The defendant might have himself terminated the partnership relation at any time, if he
had chosen to do so, by recognizing the plaintiff's right in the partnership property and in the profits.
Having failed to do this he can not be permitted to force a dissolution upon his co-partner upon terms
which the latter is unwilling to accept. We see nothing in the case which can give the transaction in
question any other aspect than that of the withdrawal by one partner with the consent of the other of
a portion of the common capital. chanrobles vi rtua l law lib ra ry
The result is that we hold and declare that a partnership was formed between the parties in January,
1900, the existence of which the defendant is bound to recognize; that cascoes No. 1515 and 2089
constitute partnership property, and that the plaintiff is entitled to an accounting of the defendant's
administration of such property, and of the profits derived therefrom. This declaration does not involve
an adjudication as to any disputed items of the partnership account. cha nro bles vi rtua l law lib ra ry
The judgment of the court below will be reversed without costs, and the record returned for the
execution of the judgment now rendered. So ordered. chan roble s virtual law l ibra ry
MAPA, J.:
This case has been decided on appeal in favor of the plaintiff, and the defendant has moved for a
rehearing upon the following grounds: cha nrob les vi rtual law lib rary
1. Because that part of the decision which refers to the existence of the partnership which is the
object of the complaint is not based upon clear and decisive legal grounds; and chanrob les vi rtua l law lib rary
2. Because, upon the supposition of the existence of the partnership, the decision does not clearly
determine whether the juridical relation between the partners suffered any modification in
consequence of the withdrawal by the plaintiff of the sum of 1,125 pesos from the funds of the
partnership, or if it continued as before, the parties being thereby deprived, he alleges, of one of the
principal bases for determining with exactness the amount due to each. chan rob les vi rtual law lib rary
With respect to the first point, the appellant cites the fifth conclusion of the decision, which is as
follows: "We are unable to find from the evidence before us that there was any specific verbal
agreement of partnership, except such as may be implied from the facts as to the purchase of the
cascoes."chan roble s virtual law l ibra ry
Discussing this part of the decision, the defendant says that, in the judgment of the court, if on the
one hand there is no direct evidence of a contract, on the other its existence can only be inferred from
certain facts, and the defendant adds that the possibility of an inference is not sufficient ground upon
which to consider as existing what may be inferred to exist, and still less as sufficient ground for
declaring its efficacy to produce legal effects. chanroble s virtual law lib rary
This reasoning rests upon a false basis. We have not taken into consideration the mere possibility of
an inference, as the appellant gratuitously stated, for the purpose of arriving at a conclusion that a
contract of partnership was entered into between him and the plaintiff, but have considered the proof
which is derived from the facts connected with the purchase of the cascoes. It is stated in the decision
that with the exception of this evidence we find no other which shows the making of the contract. But
this does not mean (for it says exactly the contrary) that this fact is not absolutely proven, as the
defendant erroneously appears to think. From this data we infer a fact which to our mind is certain
and positive, and not a mere possibility; we infer not that it is possible that the contract may have
existed, but that it actually did exist. The proofs constituted by the facts referred to, although it is the
only evidence, and in spite of the fact that it is not direct, we consider, however, sufficient to produce
such a conviction, which may certainly be founded upon any of the various classes of evidence which
the law admits. There is all the more reason for its being so in this case, because a civil partnership
may be constituted in any form, according to article 1667 of the Civil Code, unless real property or
real rights are contributed to it - the only case of exception in which it is necessary that the
agreement be recorded in a public instrument. chan robles vi rt ual law li bra ry
It is of no importance that the parties have failed to reach an agreement with respect to the minor
details of contract. These details pertain to the accidental and not to the essential part of the contract.
We have already stated in the opinion what are the essential requisites of a contract of partnership,
according to the definition of article 1665. Considering as a whole the probatory facts which appears
from the record, we have reached the conclusion that the plaintiff and the defendant agreed to the
essential parts of that contract, and did in fact constitute a partnership, with the funds of which were
purchased the cascoes with which this litigation deals, although it is true that they did not take the
precaution to precisely establish and determine from the beginning the conditions with respect to the
participation of each partner in the profits or losses of the partnership. The disagreements
subsequently arising between them, when endeavoring to fix these conditions, should not and can not
produce the effect of destroying that which has been done, to the prejudice of one of the partners, nor
could it divest his rights under the partnership which had accrued by the actual contribution of capital
which followed the agreement to enter into a partnership, together with the transactions effected with
partnership funds. The law has foreseen the possibility of the constitution of a partnership without an
express stipulation by the partners upon those conditions, and has established rules which may serve
as a basis for the distribution of profits and losses among the partners. (Art. 1689 of the Civil Code. )
We consider that the partnership entered into by the plaintiff and the defendant falls within the
provisions of this article. chanroble s virtual law libra ry
With respect to the second point, it is obvious that upon declaring the existence of a partnership and
the right of the plaintiff to demand from the defendant an itemized accounting of his management
thereof, it was impossible at the same time to determine the effects which might have been produced
with respect to the interest of the partnership by the withdrawal by the plaintiff of the sum of 1,125
pesos. This could only be determined after a liquidation of the partnership. Then, and only then, can it
be known if this sum is to be charged to the capital contributed by the plaintiff, or to his share of the
profits, or to both. It might well be that the partnership has earned profits, and that the plaintiff's
participation therein is equivalent to or exceeds the sum mentioned. In this case it is evident that,
notwithstanding that payment, his interest in the partnership would still continue. This is one case. It
would be easy to imagine many others, as the possible results of a liquidation are innumerable. The
liquidation will finally determine the condition of the legal relations of the partners inter se at the time
of the withdrawal of the sum mentioned. It was not, nor is it possible to determine this status a
priori without prejudging the result, as yet unknown, of the litigation. Therefore it is that in the
decision no direct statement has been made upon this point. It is for the same reason that it was
expressly stated in the decision that it "does not involve an adjudication as to any disputed item of the
partnership account." c hanrobles vi rt ual law li bra ry
The contentions advanced by the moving party are so evidently unfounded that we can not see the
necessity or convenience of granting the rehearing prayed for, and the motion is therefore denied. chanrobles vi rt ual law li bra ry
MAPA, J.:
The plaintiff in this action seeks to recover the sum of $437.50, United Stated currency, balance due
on a contract for the sawing of lumber for the lumber yard of Lo-Chim-Lim. the contract relating to
the said work was entered into by the said Lo-Chim-Lim, acting as in his own name with the plaintiff,
and it appears that the said Lo-Chim-Lim personally agreed to pay for the work himself. The plaintiff,
however, has brought this action against Lo-Chim-Lim and his codefendants jointly, alleging that, at
the time the contract was made, they were the joint proprietors and operators of the said lumber yard
engaged in the purchase and sale of lumber under the name and style of Lo-Chim-Lim. Apparently
the plaintiff tries to show by the words above italicized that the other defendants were the partners of
Lo-Chim-Lim in the said lumber-yard business. lawphil.net
The court below dismissed the action as to the defendants D. M. Carman and Fulgencio Tan-Tongco
on the ground that they were not the partners of Lo-Chim-Lim, and rendered judgment against the
other defendants for the amount claimed in the complaint with the costs of proceedings. Vicente
Palanca and Go-Tauco only excepted to the said judgment, moved for a new trial, and have brought
the case to this court by bill of exceptions.
The evidence of record shows, according to the judgment of the court, "That Lo-Chim-Lim had a
certain lumber yard in Calle Lemery of the city of Manila, and that he was the manager of the same,
having ordered the plaintiff to do some work for him at his sawmill in the city of Manila; and that
Vicente Palanca was his partner, and had an interest in the said business as well as in the profits
and losses thereof . . .," and that Go-Tuaco received part of the earnings of the lumber yard in the
management of which he was interested.
The court below accordingly found that "Lo-Chim-Lim, Vicente Palanca, Go-Tuaco had a lumber
yard in Calle Lemmery of the city of Manila in the year 1904, and participated in the profits and
losses of business and that Lo-Chim-Lim was managing partner of the said lumber yard." In other
words, coparticipants with the said Lo-Chim-Lim in the business in question.
Although the evidence upon this point as stated by the by the however, that is plainly and manifestly
in conflict with the above finding of that court. Such finding should therefore be sustained. lawphil.net
The question thus raised is, therefore, purely one of law and reduces itself to determining the real
legal nature of the participation which the appellants had in Lo-Chim-Lim's lumber yard, and
consequently their liability toward the plaintiff, in connection with the transaction which gave rise to
the present suit.
It seems that the alleged partnership between Lo-Chim-Lim and the appellants was formed by verbal
agreement only. At least there is no evidence tending to show that the said agreement was reduced
to writing, or that it was ever recorded in a public instrument.
Moreover, that partnership had no corporate name. The plaintiff himself alleges in his complaint that
the partnership was engaged in business under the name and style of Lo-Chim-Lim only, which
according to the evidence was the name of one of the defendants. On the other hand, and this is
very important, it does not appear that there was any mutual agreement, between the parties, and if
there were any, it has not been shown what the agreement was. As far as the evidence shows it
seems that the business was conducted by Lo-Chim-Lim in his own name, although he gave to the
appellants a share was has been shown with certainty. The contracts made with the plaintiff were
made by Lo-Chim-Lim individually in his own name, and there is no evidence that the partnership
over contracted in any other form. Under such circumstances we find nothing upon which to consider
this partnership other than as a partnership of cuentas en participacion. It may be that, as a matter of
fact, it is something different, but a simple business and scant evidence introduced by the
partnership We see nothing, according to the evidence, but a simple business conducted by Lo-
Chim-Lim exclusively, in his own name, the names of other persons interested in the profits and
losses of the business nowhere appearing. A partnership constituted in such a manner, the
existence of which was only known to those who had an interest in the same, being no mutual
agreements between the partners and without a corporate name indicating to the public in some way
that there were other people besides the one who ostensibly managed and conducted the business,
is exactly the accidental partnership of cuentas en participacion defined in article 239 of the Code of
Commerce.
Those who contract with the person under whose name the business of such partnership of cuentas
en participacion is conducted, shall have only a right of action against such person and not against
the other persons interested, and the latter, on the other hand, shall have no right of action against
the third person who contracted with the manager unless such manager formally transfers his right
to them. (Art 242 of the code Of Commerce.) It follows, therefore that the plaintiff has no right to
demand from the appellants the payment of the amount claimed in the complaint, as Lo-Chim-Lim
was the only one who contracted with him. the action of the plaintiff lacks, therefore, a legal
foundation and should be accordingly dismissed.
The judgment appealed from this hereby reversed and the appellants are absolved of the complaint
without express provisions as to the costs of both instances. After the expiration of twenty days let
judgment be entered in accordance herewith, and ten days thereafter the cause be remanded to the
court below for execution. So ordered.
Arellano, C.J., Torres, Johnson, Carson, Willard and Tracey, JJ., concur.
E. S. LYONS, plaintiff-appellant,
vs.
C. W. ROSENSTOCK, Executor of the Estate of Henry W. Elser, deceased, defendant-appellee.
STREET, J.:
This action was institute in the Court of First Instance of the City of Manila, by E. S. Lyons against C.
W. Rosenstock, as executor of the estate of H. W. Elser, deceased, consequent upon the taking of
an appeal by the executor from the allowance of the claim sued upon by the committee on claims in
said estate. The purpose of the action is to recover four hundred forty-six and two thirds shares of
the stock of J. K. Pickering & Co., Ltd., together with the sum of about P125,000, representing the
dividends which accrued on said stock prior to October 21, 1926, with lawful interest. Upon hearing
the cause the trial court absolved the defendant executor from the complaint, and the plaintiff
appealed.
Prior to his death on June 18, 1923, Henry W. Elser had been a resident of the City of Manila where
he was engaged during the years with which we are here concerned in buying, selling, and
administering real estate. In several ventures which he had made in buying and selling property of
this kind the plaintiff, E. S. Lyons, had joined with him, the profits being shared by the two in equal
parts. In April, 1919, Lyons, whose regular vocation was that of a missionary, or missionary agent, of
the Methodist Episcopal Church, went on leave to the United States and was gone for nearly a year
and a half, returning on September 21, 1920. On the eve of his departure Elser made a written
statements showing that Lyons was, at that time, half owner with Elser of three particular pieces of
real property. Concurrently with this act Lyons execute in favor of Elser a general power of attorney
empowering him to manage and dispose of said properties at will and to represent Lyons fully and
amply, to the mutual advantage of both. During the absence of Lyons two of the pieces of property
above referred to were sold by Elser, leaving in his hands a single piece of property located at 616-
618 Carried Street, in the City of Manila, containing about 282 square meters of land, with the
improvements thereon.
In the spring of 1920 the attention of Elser was drawn to a piece of land, containing about 1,500,000
square meters, near the City of Manila, and he discerned therein a fine opportunity for the promotion
and development of a suburban improvement. This property, which will be herein referred to as the
San Juan Estate, was offered by its owners for P570,000. To afford a little time for maturing his
plans, Elser purchased an option on this property for P5,000, and when this option was about to
expire without his having been able to raise the necessary funds, he paid P15,000 more for an
extension of the option, with the understanding in both cases that, in case the option should be
exercised, the amounts thus paid should be credited as part of the first payment. The amounts paid
for this option and its extension were supplied by Elser entirely from his own funds. In the end he
was able from his own means, and with the assistance which he obtained from others, to acquire
said estate. The amount required for the first payment was P150,000, and as Elser had available
only about P120,000, including the P20,000 advanced upon the option, it was necessary to raise the
remainder by obtaining a loan for P50,000. This amount was finally obtained from a Chinese
merchant of the city named Uy Siuliong. This loan was secured through Uy Cho Yee, a son of the
lender; and in order to get the money it was necessary for Elser not only to give a personal note
signed by himself and his two associates in the projected enterprise, but also by the Fidelity & Surety
Company. The money thus raised was delivered to Elser by Uy Siuliong on June 24, 1920. With this
money and what he already had in bank Elser purchased the San Juan Estate on or about June 28,
1920. For the purpose of the further development of the property a limited partnership had, about
this time, been organized by Elser and three associates, under the name of J. K. Pickering &
Company; and when the transfer of the property was effected the deed was made directly to this
company. As Elser was the principal capitalist in the enterprise he received by far the greater
number of the shares issued, his portion amount in the beginning to 3,290 shares.
While these negotiations were coming to a head, Elser contemplated and hoped that Lyons might be
induced to come in with him and supply part of the means necessary to carry the enterprise through.
In this connection it appears that on May 20, 1920, Elser wrote Lyons a letter, informing him that he
had made an offer for a big subdivision and that, if it should be acquired and Lyons would come in,
the two would be well fixed. (Exhibit M-5.) On June 3, 1920, eight days before the first option
expired, Elser cabled Lyons that he had bought the San Juan Estate and thought it advisable for
Lyons to resign (Exhibit M-13), meaning that he should resign his position with the mission board in
New York. On the same date he wrote Lyons a letter explaining some details of the purchase, and
added "have advised in my cable that you resign and I hope you can do so immediately and will
come and join me on the lines we have so often spoken about. . . . There is plenty of business for us
all now and I believe we have started something that will keep us going for some time." In one or
more communications prior to this, Elser had sought to impress Lyons with the idea that he should
raise all the money he could for the purpose of giving the necessary assistance in future deals in real
estate.
The enthusiasm of Elser did not communicate itself in any marked degree to Lyons, and found him
averse from joining in the purchase of the San Juan Estate. In fact upon this visit of Lyons to the
United States a grave doubt had arisen as to whether he would ever return to Manila, and it was only
in the summer of 1920 that the board of missions of his church prevailed upon him to return to
Manila and resume his position as managing treasurer and one of its trustees. Accordingly, on June
21, 1920, Lyons wrote a letter from New York thanking Elser for his offer to take Lyons into his new
project and adding that from the standpoint of making money, he had passed up a good thing.
One source of embarrassment which had operated on Lyson to bring him to the resolution to stay
out of this venture, was that the board of mission was averse to his engaging in business activities
other than those in which the church was concerned; and some of Lyons' missionary associates had
apparently been criticizing his independent commercial activities. This fact was dwelt upon in the
letter above-mentioned. Upon receipt of this letter Elser was of course informed that it would be out
of the question to expect assistance from Lyons in carrying out the San Juan project. No further
efforts to this end were therefore made by Elser.
When Elser was concluding the transaction for the purchase of the San Juan Estate, his book
showed that he was indebted to Lyons to the extent of, possibly, P11,669.72, which had accrued to
Lyons from profits and earnings derived from other properties; and when the J. K. Pickering &
Company was organized and stock issued, Elser indorsed to Lyons 200 of the shares allocated to
himself, as he then believed that Lyons would be one of his associates in the deal. It will be noted
that the par value of these 200 shares was more than P8,000 in excess of the amount which Elser in
fact owed to Lyons; and when the latter returned to the Philippine Islands, he accepted these shares
and sold them for his own benefit. It seems to be supposed in the appellant's brief that the transfer of
these shares to Lyons by Elser supplies some sort of basis for the present action, or at least
strengthens the considerations involved in a feature of the case to be presently explained. This view
is manifestly untenable, since the ratification of the transaction by Lyons and the appropriation by
him of the shares which were issued to him leaves no ground whatever for treating the transaction
as a source of further equitable rights in Lyons. We should perhaps add that after Lyons' return to
the Philippine Islands he acted for a time as one of the members of the board of directors of the J. K.
Pickering & Company, his qualification for this office being derived precisely from the ownership of
these shares.
We now turn to the incident which supplies the main basis of this action. It will be remembered that,
when Elser obtained the loan of P50,000 to complete the amount needed for the first payment on the
San Juan Estate, the lender, Uy Siuliong, insisted that he should procure the signature of the Fidelity
& Surety Co. on the note to be given for said loan. But before signing the note with Elser and his
associates, the Fidelity & Surety Co. insisted upon having security for the liability thus assumed by it.
To meet this requirements Elser mortgaged to the Fidelity & Surety Co. the equity of redemption in
the property owned by himself and Lyons on Carriedo Street. This mortgage was executed on June
30, 1920, at which time Elser expected that Lyons would come in on the purchase of the San Juan
Estate. But when he learned from the letter from Lyons of July 21, 1920, that the latter had
determined not to come into this deal, Elser began to cast around for means to relieve the Carriedo
property of the encumbrance which he had placed upon it. For this purpose, on September 9, 1920,
he addressed a letter to the Fidelity & Surety Co., asking it to permit him to substitute a property
owned by himself at 644 M. H. del Pilar Street, Manila, and 1,000 shares of the J. K. Pickering &
Company, in lieu of the Carriedo property, as security. The Fidelity & Surety Co. agreed to the
proposition; and on September 15, 1920, Elser executed in favor of the Fidelity & Surety Co. a new
mortgage on the M. H. del Pillar property and delivered the same, with 1,000 shares of J. K.
Pickering & Company, to said company. The latter thereupon in turn executed a cancellation of the
mortgage on the Carriedo property and delivered it to Elser. But notwithstanding the fact that these
documents were executed and delivered, the new mortgage and the release of the old were never
registered; and on September 25, 1920, thereafter, Elser returned the cancellation of the mortgage
on the Carriedo property and took back from the Fidelity & Surety Co. the new mortgage on the M.
H. del Pilar property, together with the 1,000 shares of the J. K. Pickering & Company which he had
delivered to it.
The explanation of this change of purpose is undoubtedly to be found in the fact that Lyons had
arrived in Manila on September 21, 1920, and shortly thereafter, in the course of a conversation with
Elser told him to let the Carriedo mortgage remain on the property ("Let the Carriedo mortgage
ride"). Mrs. Elser testified to the conversation in which Lyons used the words above quoted, and as
that conversation supplies the most reasonable explanation of Elser's recession from his purpose of
relieving the Carriedo property, the trial court was, in our opinion, well justified in accepting as a
proven fact the consent of Lyons for the mortgage to remain on the Carriedo property. This
concession was not only reasonable under the circumstances, in view of the abundant solvency of
Elser, but in view of the further fact that Elser had given to Lyons 200 shares of the stock of the J. K.
Pickering & Co., having a value of nearly P8,000 in excess of the indebtedness which Elser had
owed to Lyons upon statement of account. The trial court found in effect that the excess value of
these shares over Elser's actual indebtedness was conceded by Elser to Lyons in consideration of
the assistance that had been derived from the mortgage placed upon Lyon's interest in the Carriedo
property. Whether the agreement was reached exactly upon this precise line of thought is of little
moment, but the relations of the parties had been such that it was to be expected that Elser would
be generous; and he could scarcely have failed to take account of the use he had made of the joint
property of the two.
As the development of the San Juan Estate was a success from the start, Elser paid the note of
P50,000 to Uy Siuliong on January 18, 1921, although it was not due until more than five months
later. It will thus be seen that the mortgaging of the Carriedo property never resulted in damage to
Lyons to the extent of a single cent; and although the court refused to allow the defendant to prove
the Elser was solvent at this time in an amount much greater than the entire encumbrance placed
upon the property, it is evident that the risk imposed upon Lyons was negligible. It is also plain that
no money actually deriving from this mortgage was ever applied to the purchase of the San Juan
Estate. What really happened was the Elser merely subjected the property to a contingent liability,
and no actual liability ever resulted therefrom. The financing of the purchase of the San Juan Estate,
apart from the modest financial participation of his three associates in the San Juan deal, was the
work of Elser accomplished entirely upon his own account.
The case for the plaintiff supposes that, when Elser placed a mortgage for P50,000 upon the equity
of redemption in the Carriedo property, Lyons, as half owner of said property, became, as it were,
involuntarily the owner of an undivided interest in the property acquired partly by that money; and it
is insisted for him that, in consideration of this fact, he is entitled to the four hundred forty-six and
two-thirds shares of J. K. Pickering & Company, with the earnings thereon, as claimed in his
complaint.
Lyons tells us that he did not know until after Elser's death that the money obtained from Uy Siuliong
in the manner already explained had been used to held finance the purchase of the San Juan
Estate. He seems to have supposed that the Carried property had been mortgaged to aid in putting
through another deal, namely, the purchase of a property referred to in the correspondence as the
"Ronquillo property"; and in this connection a letter of Elser of the latter part of May, 1920, can be
quoted in which he uses this language:
As stated in cablegram I have arranged for P50,000 loan on Carriedo property. Will use part
of the money for Ronquillo buy (P60,000) if the owner comes through.
Other correspondence shows that Elser had apparently been trying to buy the Ronquillo property,
and Lyons leads us to infer that he thought that the money obtained by mortgaging the Carriedo
property had been used in the purchase of this property. It doubtedless appeared so to him in the
retrospect, but certain consideration show that he was inattentive to the contents of the quotation
from the letter above given. He had already been informed that, although Elser was angling for the
Ronquillo property, its price had gone up, thus introducing a doubt as to whether he could get it; and
the quotation above given shows that the intended use of the money obtained by mortgaging the
Carriedo property was that only part of the P50,000 thus obtained would be used in this way, if the
deal went through. Naturally, upon the arrival of Lyons in September, 1920, one of his first inquiries
would have been, if he did not know before, what was the status of the proposed trade for the
Ronquillo property.
Elser's widow and one of his clerks testified that about June 15, 1920, Elser cabled Lyons something
to this effect;: "I have mortgaged the property on Carriedo Street, secured by my personal note. You
are amply protected. I wish you to join me in the San Juan Subdivision. Borrow all money you can."
Lyons says that no such cablegram was received by him, and we consider this point of fact of little
moment, since the proof shows that Lyons knew that the Carriedo mortgage had been executed,
and after his arrival in Manila he consented for the mortgage to remain on the property until it was
paid off, as shortly occurred. It may well be that Lyons did not at first clearly understand all the
ramifications of the situation, but he knew enough, we think, to apprise him of the material factors in
the situation, and we concur in the conclusion of the trial court that Elser did not act in bad faith and
was guilty of no fraud.
In the purely legal aspect of the case, the position of the appellant is, in our opinion, untenable. If
Elser had used any money actually belonging to Lyons in this deal, he would under article 1724 of
the Civil Code and article 264 of the Code of Commerce, be obligated to pay interest upon the
money so applied to his own use. Under the law prevailing in this jurisdiction a trust does not
ordinarily attach with respect to property acquired by a person who uses money belonging to another
(Martinez vs. Martinez, 1 Phil., 647; Enriquez vs. Olaguer, 25 Phil., 641.). Of course, if an actual
relation of partnership had existed in the money used, the case might be difference; and much
emphasis is laid in the appellant's brief upon the relation of partnership which, it is claimed, existed.
But there was clearly no general relation of partnership, under article 1678 of the Civil Code. It is
clear that Elser, in buying the San Juan Estate, was not acting for any partnership composed of
himself and Lyons, and the law cannot be distorted into a proposition which would make Lyons a
participant in this deal contrary to his express determination.
It seems to be supposed that the doctrines of equity worked out in the jurisprudence of England and
the United States with reference to trust supply a basis for this action. The doctrines referred to
operate, however, only where money belonging to one person is used by another for the acquisition
of property which should belong to both; and it takes but little discernment to see that the situation
here involved is not one for the application of that doctrine, for no money belonging to Lyons or any
partnership composed of Elser and Lyons was in fact used by Elser in the purchase of the San Juan
Estate. Of course, if any damage had been caused to Lyons by the placing of the mortgage upon the
equity of redemption in the Carriedo property, Elser's estate would be liable for such damage. But it
is evident that Lyons was not prejudice by that act.
The appellee insist that the trial court committed error in admitting the testimony of Lyons upon
matters that passed between him and Elser while the latter was still alive. While the admission of this
testimony was of questionable propriety, any error made by the trial court on this point was error
without injury, and the determination of the question is not necessary to this decision. We therefore
pass the point without further discussion.
The judgment appealed from will be affirmed, and it is so ordered, with costs against the appellant.
Avanceña, C.J., Johnson, Malcolm, Villamor, Villa-Real and Imperial, JJ., concur.
TORRES, J.:
This is an appeal raised by the plaintiff from the judgment rendered by the Honorable Judge Ramon
Avanceña.
On March, 10, 1908, the plaintiff filed a written complaint, twice amended with the permission of the
court, wherein, after its second amendment, he alleged that the plaintiff and the defendant, while
residents of the municipality of Dapitan, had acquired, in joint tenancy, in or about the month of
January, 1904, a parcel of land from its original owner, Lui Ganong, under a verbal, civil contract of
partnership, for the price of P44; that it was stipulated that each of the said purchasers should pay
one-half of the price, or P22, and that an equal division should be made between them of the land
thus purchased, situate in the place called Tangian, of the barrio of Dohinob, municipality of Dapitan,
sub-district of the same name, Moro Province, and bounded on the north and east by the Tangian
river, on the south and west by government forests, and containing 19.968 square meters,
approximately, planted with 200 abaca plants; that, notwithstanding the demands he had repeatedly
made upon the defendant to divide the said land, the latter, after having promised him on several
occasions that he would make such partition, finally refused, without good reason, and still continued
to refuse to divide the land and, moreover, without the knowledge and consent of the plaintiff,
gathered the abaca crops of the years 1904, 1905 and 1906, produced on the land in question, and
extracted the hemp therefrom in the amount of about 12 arrobas to each crop, he being the sole
beneficiary of the fiber obtained; that the plaintiff, relying upon the several promises made him by the
defendant to divide the said land, took to the latter 1,500 seeds to be planted in the part thereof
which would have fallen to the plaintiff in the division, all of which seeds died, as an indirect result of
the defendant's never having made the partition he offered to make; and, that since the year 1904,
up to the time of the complaint, he alone had been paying the taxes on the land, without the
defendant's having contributed to their payment. There fore the plaintiff petitioned the court render
judgment in his favor by ordering a partition to be made of the said land through the mediation of
commissioners appointed for the purpose, and by sentencing the defendant to pay to the plaintiff, as
damages, the total value of the seed lost, amounting to P50, to restore to him one-half of the abaca
harvested or the value thereof, and to the payment of the costs of the case. Defendant's counsel
received a copy of this amended complaint.
The defendant, Ceferino Tabiliran, having been notified and summoned, in his answer to the
preceding amended complaint denied each and all of the facts alleged in each and all of the
paragraphs thereof and asked that he be absolved from the complaint, with the costs against the
plaintiff.
After the hearing of the case and the production of oral evidence by the parties thereto, the court, on
the 10th of the same month, rendered judgment by absolving the defendant from the complaint, with
the costs against the plaintiff. Counsel for the latter excepted to this judgment and by a written
motion asked for its annulment, and the holding of a new trial on the ground that the findings of the
court were contrary to law. This motion was denied by an order of March 11, 1909, excepted to by
the plaintiff's counsel, and the proper bill of exceptions having been duly filed, the same was certified
and forwarded to the clerk of this court.
This suit concerns the partition of a piece of land held pro indiviso which the plaintiff and the
defendant had acquired in common from its original owner. By the refusal of the defendant to divide
the property, the plaintiff was compelled to bring the proper action for the enforcement of partition,
referred to in section 181 and following of the Code of Civil Procedure.
The record shows it to have been duly proved that Catalino Gallemit and Ceferino Tabiliran by
mutual agreement acquired by purchase the land concerned, situate in Tangian, municipality of
Dapitan, from its original owner, Luis Ganong, for the sum of P44. It was stipulated between the
purchasers that they each should pay one-half of the price and that the property should be divided
equally between them. The vendor testified under oath that the plaintiff Gallemit paid him the sum of
P22, one-half of the price that it was incumbent upon him to pay, and that four months afterwards
the defendant paid his part of the price, although, owing to the refusal of the defendant, who was
then the justice of the peace of the pueblo, to comply with the stipulation made, the deed of sale was
not executed, nor was a partition effected of the land which they had acquired. The defendant,
instead of delivering to the plaintiff the share that belonged to the latter, the proportionate price for
which the plaintiff had already paid, kept all the land which belonged to them in common, in violation
of the stipulations agreed upon, notwithstanding that he paid the vendor only one-half of the price
thereof.
There is community of property when the ownership of a thing belongs to different persons
undividedly. (Art. 392, Civil Code.) No coownership shall be obliged to remain a party to the
community. Each of them may ask at any time the division of the thing owned in common. (Art. 400
of the same code.)
Considering the terms of the claim made by the plaintiff and those of the defendant's answer, and
the relation of facts contained in the judgment appealed from, it does not appear that any contract of
partnership whatever was made between them for the purposes expressed in article 1665 of the
Civil Code, for the sole transaction performed by them was the acquisition jointly by mutual
agreement of the land in question, since it was undivided, under the condition that they each should
pay one-half of the price thereof and that the property so acquired should be divided between the
two purchasers; and as, under this title, the plaintiff and the defendant are the coowners of the said
land, the partition or division of such property held in joint tenancy must of course be allowed, and
the present possessor of the land has no right to deny the plaintiff's claim on grounds or reasons
unsupported by proof.
The circumstance of the plaintiff's to present any document whatever to prove that he and the
defendant did actually purchase jointly the land in litigation can not be a successful defense in the
action for partition, notwithstanding the provision contained in paragraph 5 of section 335 of the
Code of Civil Procedure, inasmuch as the trial record discloses that testimony was adduced,
unobjected to on the part of the defendant, to prove that the purchase was actually made by both
litigants of the land in question from its original owner, Luis Ganong; furthermore, it was proved that
after the contract was made the deed of sale was not drawn up on account of the opposition of the
defendant, Tabiliran, to this being done, with the indubitable purpose, as has been seen, of his
keeping the whole of the land purchased, though he paid but one-half of its price.
In the decision rendered in the case of Conlu et al. vs. Araneta and Guanko (15 Phil. Rep., 387), the
following appears in the syllabus:
The decision in the case of Thunga Chui vs. Que Bentec (1 Phil. Rep., 561) and Couto vs.
Cortes (8 Phil. Rep., 459) followed to the extent of holding that "an oral contract for the sale
of real estate, made prior to the enactment of the Code of Civil Procedure in Civil Actions, is
binding between the parties thereto." The contract exists and is valid though it may not be
clothed with the necessary form, and the effect of a noncompliance with the provisions of the
statute (sec. 335 of the Code of Civil Procedure in Civil Actions) is simply complied with; but
a failure to except to the evidence because it does not conform with the statute, is a waiver
of the provisions of the law. If the parties to the action, during the trial, made no objection to
the admissibility of oral evidence to support the contract of sale of real property, thus
permitting the contract to be proved, it will be just as binding upon the parties as if it had
been reduced to writing.
So that, once it has been proven by the testimony of witnesses that the purchase of a piece of real
estate was made by a verbal contract between the interested parties, if the oral evidence was taken
at the petition of one of them without opposition on the part of the other, such proven verbal contract,
as the one herein concerned, must be held to be valid. On these premises it is, therefore, not
indispensable that a written instrument be presented in order to prove a contract of purchase and
sale of real estate; neither it is necessary that the record show proof of a contract of partnership, in
order that a demand may be made for the division of a real property acquired jointly and undividedly
by two or more interested parties, inasmuch as the land was acquired by the two purchasers, not for
the purpose of undertaking any business, nor for its cultivation in partnership, but solely to divide it
equally between themselves. Therefore, it is sufficient to show proof of the fact that a real property
was actually purchased by them jointly, in order to insure a successful issue of an action brought to
enforce partition, in accordance with the provisions of sections 181 to 196 of the Code of Civil
Procedure in Civil Actions, since the plaintiff is really a coowner of the undivided land.
It is neither just nor permissible for the defendant to violate a contract made, even though verbally,
with the plaintiff, and to keep without good reason, for his exclusive benefit and to the prejudice only
of his coowner, the plaintiff, the whole of the land belonging to both of them in common, because
each paid a half of the value thereof.
"Contracts shall be binding," prescribes article 1278 of the Civil Code, "whatever may be the form in
which they may have been executed, provided the essential conditions required for their validity
exist." These conditions are enumerated in article 1261 of the same code, and they are also
requisite in a verbal contract that has been proved.
As the plaintiff suffered damage through the loss of the seed which could not be planted in the part
of the land belonging to him, on account of the refusal of the defendant to accede to division of the
property, in accordance with the agreement made, it is right and just that the latter be compelled to
make indemnity for the amount of the damage occasioned through his fault.
With respect to the abaca obtained by the defendant, to his exclusive benefit, from the land of joint
ownership: inasmuch as the amount and value of the fiber gathered is not shown in the trial record,
there are no means available in law whereby a proper determination may be reached in the matter.
Therefore, we are of opinion that the judgment appealed from should be, as it is hereby, reversed. It
is held to be proper to effect the partition of the land in question, and the judge of the Court of First
Instance is directed to decree, through the proceedings prescribed by law, the division of the said
land in conformity with the petition made by the plaintiff, and an indemnity, in behalf of the latter, in
the sum of P50, the value of the seed lost. The delivery to the plaintiff of one-half of the abaca
harvested on the land, or the value thereof, can not be ordered, on account of the lack of proof in the
premises. No special finding is made as to costs. So ordered.
This is a petition for review on certiorari of the decision of the respondent Court of Appeals which
ordered petitioner Isabelo Moran, Jr. to pay damages to respondent Mariano E, Pecson.
As found by the respondent Court of Appeals, the undisputed facts indicate that: têñ.£îhqwâ£
Private respondent Pecson filed with the Court of First Instance of Manila an action for the recovery
of a sum of money and alleged in his complaint three (3) causes of action, namely: (1) on the alleged
partnership agreement, the return of his contribution of P10,000.00, payment of his share in the
profits that the partnership would have earned, and, payment of unpaid commission; (2) on the
alleged promissory note, payment of the sum of P20,000.00; and, (3) moral and exemplary damages
and attorney's fees.
After the trial, the Court of First Instance held that: têñ.£îhqw â£
From the evidence presented it is clear in the mind of the court that by virtue of the
partnership agreement entered into by the parties-plaintiff and defendant the plaintiff
did contribute P10,000.00, and another sum of P7,000.00 for the Voice of the
Veteran or Delegate Magazine. Of the expected 95,000 copies of the posters, the
defendant was able to print 2,000 copies only authorized of which, however, were
sold at P5.00 each. Nothing more was done after this and it can be said that the
venture did not really get off the ground. On the other hand, the plaintiff failed to give
his full contribution of P15,000.00. Thus, each party is entitled to rescind the contract
which right is implied in reciprocal obligations under Article 1385 of the Civil Code
whereunder 'rescission creates the obligation to return the things which were the
object of the contract ...
From this decision, both parties appealed to the respondent Court of Appeals. The latter likewise
rendered a decision against the petitioner. The dispositive portion of the decision reads: têñ.£îhqwâ£
PREMISES CONSIDERED, the decision appealed from is hereby SET ASIDE, and a
new one is hereby rendered, ordering defendant-appellant Isabelo C. Moran, Jr. to
pay plaintiff- appellant Mariano E. Pecson:
(a) Forty-seven thousand five hundred (P47,500) (the amount that could have
accrued to Pecson under their agreement);
(d) Legal interest on (a), (b) and (c) from the date the complaint was filed (up to the
time payment is made)
The petitioner contends that the respondent Court of Appeals decided questions of substance in a
way not in accord with law and with Supreme Court decisions when it committed the following errors:
II
III
IV
ASSUMING WITHOUT ADMITTING THAT PETITIONER IS AT ALL LIABLE FOR ANY AMOUNT,
THE HONORABLE COURT OF APPEALS DID NOT EVEN OFFSET PAYMENTS ADMITTEDLY
RECEIVED BY PECSON FROM MORAN.
The first question raised in this petition refers to the award of P47,500.00 as the private respondent's
share in the unrealized profits of the partnership. The petitioner contends that the award is highly
speculative. The petitioner maintains that the respondent court did not take into account the great
risks involved in the business undertaking.
We agree with the petitioner that the award of speculative damages has no basis in fact and law.
There is no dispute over the nature of the agreement between the petitioner and the private
respondent. It is a contract of partnership. The latter in his complaint alleged that he was induced by
the petitioner to enter into a partnership with him under the following terms and conditions: têñ.£îhqwâ£
1. That the partnership will print colored posters of the delegates to the Constitutional
Convention;
2. That they will invest the amount of Fifteen Thousand Pesos (P15,000.00) each;
3. That they will print Ninety Five Thousand (95,000) copies of the said posters;
5. That upon the termination of the partnership on December 15, 1971, a liquidation
of the account pertaining to the distribution and printing of the said 95,000 posters
shall be made.
The petitioner on the other hand admitted in his answer the existence of the partnership.
The rule is, when a partner who has undertaken to contribute a sum of money fails to do so, he
becomes a debtor of the partnership for whatever he may have promised to contribute (Art. 1786,
Civil Code) and for interests and damages from the time he should have complied with his obligation
(Art. 1788, Civil Code). Thus in Uy v. Puzon (79 SCRA 598), which interpreted Art. 2200 of the Civil
Code of the Philippines, we allowed a total of P200,000.00 compensatory damages in favor of the
appellee because the appellant therein was remiss in his obligations as a partner and as prime
contractor of the construction projects in question. This case was decided on a particular set of facts.
We awarded compensatory damages in the Uy case because there was a finding that the
constructing business is a profitable one and that the UP construction company derived some profits
from its contractors in the construction of roads and bridges despite its deficient capital." Besides,
there was evidence to show that the partnership made some profits during the periods from July 2,
1956 to December 31, 1957 and from January 1, 1958 up to September 30, 1959. The profits on two
government contracts worth P2,327,335.76 were not speculative. In the instant case, there is no
evidence whatsoever that the partnership between the petitioner and the private respondent would
have been a profitable venture. In fact, it was a failure doomed from the start. There is therefore no
basis for the award of speculative damages in favor of the private respondent.
Furthermore, in the Uy case, only Puzon failed to give his full contribution while Uy contributed much
more than what was expected of him. In this case, however, there was mutual breach. Private
respondent failed to give his entire contribution in the amount of P15,000.00. He contributed only
P10,000.00. The petitioner likewise failed to give any of the amount expected of him. He further
failed to comply with the agreement to print 95,000 copies of the posters. Instead, he printed only
2,000 copies.
The losses and profits shall be distributed in conformity with the agreement. If only
the share of each partner in the profits has been agreed upon, the share of each in
the losses shall be in the same proportion.
Being a contract of partnership, each partner must share in the profits and losses of the venture.
That is the essence of a partnership. And even with an assurance made by one of the partners that
they would earn a huge amount of profits, in the absence of fraud, the other partner cannot claim a
right to recover the highly speculative profits. It is a rare business venture guaranteed to give 100%
profits. In this case, on an investment of P15,000.00, the respondent was supposed to earn a
guaranteed P1,000.00 a month for eight months and around P142,500.00 on 95,000 posters costing
P2.00 each but 2,000 of which were sold at P5.00 each. The fantastic nature of expected profits is
obvious. We have to take various factors into account. The failure of the Commission on Elections to
proclaim all the 320 candidates of the Constitutional Convention on time was a major factor. The
petitioner undesirable his best business judgment and felt that it would be a losing venture to go on
with the printing of the agreed 95,000 copies of the posters. Hidden risks in any business venture
have to be considered.
It does not follow however that the private respondent is not entitled to recover any amount from the
petitioner. The records show that the private respondent gave P10,000.00 to the petitioner. The
latter used this amount for the printing of 2,000 posters at a cost of P2.00 per poster or a total
printing cost of P4,000.00. The records further show that the 2,000 copies were sold at P5.00 each.
The gross income therefore was P10,000.00. Deducting the printing costs of P4,000.00 from the
gross income of P10,000.00 and with no evidence on the cost of distribution, the net profits amount
to only P6,000.00. This net profit of P6,000.00 should be divided between the petitioner and the
private respondent. And since only P4,000.00 was undesirable by the petitioner in printing the 2,000
copies, the remaining P6,000.00 should therefore be returned to the private respondent.
Relative to the second alleged error, the petitioner submits that the award of P8,000.00 as Pecson's
supposed commission has no justifiable basis in law.
The partnership agreement stipulated that the petitioner would give the private respondent a monthly
commission of Pl,000.00 from April 15, 1971 to December 15, 1971 for a total of eight (8) monthly
commissions. The agreement does not state the basis of the commission. The payment of the
commission could only have been predicated on relatively extravagant profits. The parties could not
have intended the giving of a commission inspite of loss or failure of the venture. Since the venture
was a failure, the private respondent is not entitled to the P8,000.00 commission.
Anent the third assigned error, the petitioner maintains that the respondent Court of Appeals erred in
holding him liable to the private respondent in the sum of P7,000.00 as a supposed return of
investment in a magazine venture.
In awarding P7,000.00 to the private respondent as his supposed return of investment in the "Voice
of the Veterans" magazine venture, the respondent court ruled that: têñ.£îhqw â£
... Moran admittedly signed the promissory note of P20,000 in favor of Pecson.
Moran does not question the due execution of said note. Must Moran therefore pay
the amount of P20,000? The evidence indicates that the P20,000 was assigned by
Moran to cover the following: têñ.£îhqw â£
Of said P20,000 Moran has to pay P7,000 (as a return of Pecson's investment for the
Veterans' project, for this project never left the ground) ...
As a rule, the findings of facts of the Court of Appeals are final and conclusive and cannot be
reviewed on appeal to this Court (Amigo v. Teves, 96 Phil. 252), provided they are borne out by the
record or are based on substantial evidence (Alsua-Betts v. Court of Appeals, 92 SCRA 332).
However, this rule admits of certain exceptions. Thus, in Carolina Industries Inc. v. CMS Stock
Brokerage, Inc., et al., (97 SCRA 734), we held that this Court retains the power to review and rectify
the findings of fact of the Court of Appeals when (1) the conclusion is a finding grounded entirely on
speculation, surmises and conjectures; (2) when the inference made is manifestly mistaken absurd
and impossible; (3) where there is grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; and (5) when the court, in making its findings, went beyond the issues of
the case and the same are contrary to the admissions of both the appellant and the appellee.
In this case, there is misapprehension of facts. The evidence of the private respondent himself
shows that his investment in the "Voice of Veterans" project amounted to only P3,000.00. The
remaining P4,000.00 was the amount of profit that the private respondent expected to receive.
E — Xerox copy of PNB Manager's Check No. 234265 dated March 22, 1971 in favor
of defendant. Defendant admitted the authenticity of this check and of his receipt of
the proceeds thereof (t.s.n., pp. 3-4, Nov. 29, 1972). This exhibit is being offered for
the purpose of showing plaintiff's capital investment in the printing of the "Voice of
the Veterans" for which he was promised a fixed profit of P8,000. This investment of
P6,000.00 and the promised profit of P8,000 are covered by defendant's promissory
note for P14,000 dated March 31, 1971 marked by defendant as Exhibit 2 (t.s.n., pp.
20-21, Nov. 29, 1972), and by plaintiff as Exhibit P. Later, defendant returned
P3,000.00 of the P6,000.00 investment thereby proportionately reducing the
promised profit to P4,000. With the balance of P3,000 (capital) and P4,000 (promised
profit), defendant signed and executed the promissory note for P7,000 marked
Exhibit 3 for the defendant and Exhibit M for plaintiff. Of this P7,000, defendant paid
P4,000 representing full return of the capital investment and P1,000 partial payment
of the promised profit. The P3,000 balance of the promised profit was made part
consideration of the P20,000 promissory note (t.s.n., pp. 22-24, Nov. 29, 1972). It is,
therefore, being presented to show the consideration for the P20,000 promissory
note.
F — Xerox copy of PNB Manager's check dated May 29, 1971 for P7,000 in favor of
defendant. The authenticity of the check and his receipt of the proceeds thereof were
admitted by the defendant (t.s.n., pp. 3-4, Nov. 29, 1972). This P 7,000 is part
consideration, and in cash, of the P20,000 promissory note (t.s.n., p. 25, Nov. 29,
1972), and it is being presented to show the consideration for the P20,000 note and
the existence and validity of the obligation.
L-Book entitled "Voice of the Veterans" which is being offered for the purpose of
showing the subject matter of the other partnership agreement and in which plaintiff
invested the P6,000 (Exhibit E) which, together with the promised profit of P8,000
made up for the consideration of the P14,000 promissory note (Exhibit 2; Exhibit P).
As explained in connection with Exhibit E. the P3,000 balance of the promised profit
was later made part consideration of the P20,000 promissory note.
M-Promissory note for P7,000 dated March 30, 1971. This is also defendant's Exhibit
E. This document is being offered for the purpose of further showing the transaction
as explained in connection with Exhibits E and L.
N-Receipt of plaintiff dated March 30, 1971 for the return of his P3,000 out of his
capital investment of P6,000 (Exh. E) in the P14,000 promissory note (Exh. 2; P).
This is also defendant's Exhibit 4. This document is being offered in support of
plaintiff's explanation in connection with Exhibits E, L, and M to show the transaction
mentioned therein.
A Yes, sir.
A It is a book.
têñ.£îhqw â£
A Yes, sir.
Court têñ.£îhqw â£
Mark it as Exhibit M.
A Yes, sir.
(T.S.N., p. 23, Nov. 29, 1972).
A The balance of P3,000.00 and the rest of the profit was applied as
part of the consideration of the promissory note of P20,000.00.
The respondent court erred when it concluded that the project never left the ground because the
project did take place. Only it failed. It was the private respondent himself who presented a copy of
the book entitled "Voice of the Veterans" in the lower court as Exhibit "L". Therefore, it would be error
to state that the project never took place and on this basis decree the return of the private
respondent's investment.
As already mentioned, there are risks in any business venture and the failure of the undertaking
cannot entirely be blamed on the managing partner alone, specially if the latter exercised his best
business judgment, which seems to be true in this case. In view of the foregoing, there is no reason
to pass upon the fourth and fifth assignments of errors raised by the petitioner. We likewise find no
valid basis for the grant of the counterclaim.
WHEREFORE, the petition is GRANTED. The decision of the respondent Court of Appeals (now
Intermediate Appellate Court) is hereby SET ASIDE and a new one is rendered ordering the
petitioner Isabelo Moran, Jr., to pay private respondent Mariano Pecson SIX THOUSAND
(P6,000.00) PESOS representing the amount of the private respondent's contribution to the
partnership but which remained unused; and THREE THOUSAND (P3,000.00) PESOS representing
one half (1/2) of the net profits gained by the partnership in the sale of the two thousand (2,000)
copies of the posters, with interests at the legal rate on both amounts from the date the complaint
was filed until full payment is made.
This is a petition for review on certiorari of the decision of the respondent Court of Appeals which
ordered petitioner Isabelo Moran, Jr. to pay damages to respondent Mariano E, Pecson.
As found by the respondent Court of Appeals, the undisputed facts indicate that: têñ.£îhqwâ£
... on February 22, 1971 Pecson and Moran entered into an agreement whereby both
would contribute P15,000 each for the purpose of printing 95,000 posters (featuring
the delegates to the 1971 Constitutional Convention), with Moran actually
supervising the work; that Pecson would receive a commission of P l,000 a month
starting on April 15, 1971 up to December 15, 1971; that on December 15, 1971, a
liquidation of the accounts in the distribution and printing of the 95,000 posters would
be made, that Pecson gave Moran P10,000 for which the latter issued a receipt; that
only a few posters were printed; that on or about May 28, 1971, Moran executed in
favor of Pecson a promissory note in the amount of P20,000 payable in two equal
installments (P10,000 payable on or before June 15, 1971 and P10,000 payable on
or before June 30, 1971), the whole sum becoming due upon default in the payment
of the first installment on the date due, complete with the costs of collection.
Private respondent Pecson filed with the Court of First Instance of Manila an action for the recovery
of a sum of money and alleged in his complaint three (3) causes of action, namely: (1) on the alleged
partnership agreement, the return of his contribution of P10,000.00, payment of his share in the
profits that the partnership would have earned, and, payment of unpaid commission; (2) on the
alleged promissory note, payment of the sum of P20,000.00; and, (3) moral and exemplary damages
and attorney's fees.
After the trial, the Court of First Instance held that: têñ.£îhqw â£
From the evidence presented it is clear in the mind of the court that by virtue of the
partnership agreement entered into by the parties-plaintiff and defendant the plaintiff
did contribute P10,000.00, and another sum of P7,000.00 for the Voice of the
Veteran or Delegate Magazine. Of the expected 95,000 copies of the posters, the
defendant was able to print 2,000 copies only authorized of which, however, were
sold at P5.00 each. Nothing more was done after this and it can be said that the
venture did not really get off the ground. On the other hand, the plaintiff failed to give
his full contribution of P15,000.00. Thus, each party is entitled to rescind the contract
which right is implied in reciprocal obligations under Article 1385 of the Civil Code
whereunder 'rescission creates the obligation to return the things which were the
object of the contract ...
From this decision, both parties appealed to the respondent Court of Appeals. The latter likewise
rendered a decision against the petitioner. The dispositive portion of the decision reads: têñ.£îhqwâ£
PREMISES CONSIDERED, the decision appealed from is hereby SET ASIDE, and a
new one is hereby rendered, ordering defendant-appellant Isabelo C. Moran, Jr. to
pay plaintiff- appellant Mariano E. Pecson:
(a) Forty-seven thousand five hundred (P47,500) (the amount that could have
accrued to Pecson under their agreement);
(c) Seven thousand (P7,000) (as a return of Pecson's investment for the Veteran's
Project);
(d) Legal interest on (a), (b) and (c) from the date the complaint was filed (up to the
time payment is made)
The petitioner contends that the respondent Court of Appeals decided questions of substance in a
way not in accord with law and with Supreme Court decisions when it committed the following errors:
II
III
IV
ASSUMING WITHOUT ADMITTING THAT PETITIONER IS AT ALL LIABLE FOR ANY AMOUNT,
THE HONORABLE COURT OF APPEALS DID NOT EVEN OFFSET PAYMENTS ADMITTEDLY
RECEIVED BY PECSON FROM MORAN.
V
The first question raised in this petition refers to the award of P47,500.00 as the private respondent's
share in the unrealized profits of the partnership. The petitioner contends that the award is highly
speculative. The petitioner maintains that the respondent court did not take into account the great
risks involved in the business undertaking.
We agree with the petitioner that the award of speculative damages has no basis in fact and law.
There is no dispute over the nature of the agreement between the petitioner and the private
respondent. It is a contract of partnership. The latter in his complaint alleged that he was induced by
the petitioner to enter into a partnership with him under the following terms and conditions: têñ.£îhqwâ£
1. That the partnership will print colored posters of the delegates to the Constitutional
Convention;
2. That they will invest the amount of Fifteen Thousand Pesos (P15,000.00) each;
3. That they will print Ninety Five Thousand (95,000) copies of the said posters;
5. That upon the termination of the partnership on December 15, 1971, a liquidation
of the account pertaining to the distribution and printing of the said 95,000 posters
shall be made.
The petitioner on the other hand admitted in his answer the existence of the partnership.
The rule is, when a partner who has undertaken to contribute a sum of money fails to do so, he
becomes a debtor of the partnership for whatever he may have promised to contribute (Art. 1786,
Civil Code) and for interests and damages from the time he should have complied with his obligation
(Art. 1788, Civil Code). Thus in Uy v. Puzon (79 SCRA 598), which interpreted Art. 2200 of the Civil
Code of the Philippines, we allowed a total of P200,000.00 compensatory damages in favor of the
appellee because the appellant therein was remiss in his obligations as a partner and as prime
contractor of the construction projects in question. This case was decided on a particular set of facts.
We awarded compensatory damages in the Uy case because there was a finding that the
constructing business is a profitable one and that the UP construction company derived some profits
from its contractors in the construction of roads and bridges despite its deficient capital." Besides,
there was evidence to show that the partnership made some profits during the periods from July 2,
1956 to December 31, 1957 and from January 1, 1958 up to September 30, 1959. The profits on two
government contracts worth P2,327,335.76 were not speculative. In the instant case, there is no
evidence whatsoever that the partnership between the petitioner and the private respondent would
have been a profitable venture. In fact, it was a failure doomed from the start. There is therefore no
basis for the award of speculative damages in favor of the private respondent.
Furthermore, in the Uy case, only Puzon failed to give his full contribution while Uy contributed much
more than what was expected of him. In this case, however, there was mutual breach. Private
respondent failed to give his entire contribution in the amount of P15,000.00. He contributed only
P10,000.00. The petitioner likewise failed to give any of the amount expected of him. He further
failed to comply with the agreement to print 95,000 copies of the posters. Instead, he printed only
2,000 copies.
The losses and profits shall be distributed in conformity with the agreement. If only
the share of each partner in the profits has been agreed upon, the share of each in
the losses shall be in the same proportion.
Being a contract of partnership, each partner must share in the profits and losses of the venture.
That is the essence of a partnership. And even with an assurance made by one of the partners that
they would earn a huge amount of profits, in the absence of fraud, the other partner cannot claim a
right to recover the highly speculative profits. It is a rare business venture guaranteed to give 100%
profits. In this case, on an investment of P15,000.00, the respondent was supposed to earn a
guaranteed P1,000.00 a month for eight months and around P142,500.00 on 95,000 posters costing
P2.00 each but 2,000 of which were sold at P5.00 each. The fantastic nature of expected profits is
obvious. We have to take various factors into account. The failure of the Commission on Elections to
proclaim all the 320 candidates of the Constitutional Convention on time was a major factor. The
petitioner undesirable his best business judgment and felt that it would be a losing venture to go on
with the printing of the agreed 95,000 copies of the posters. Hidden risks in any business venture
have to be considered.
It does not follow however that the private respondent is not entitled to recover any amount from the
petitioner. The records show that the private respondent gave P10,000.00 to the petitioner. The
latter used this amount for the printing of 2,000 posters at a cost of P2.00 per poster or a total
printing cost of P4,000.00. The records further show that the 2,000 copies were sold at P5.00 each.
The gross income therefore was P10,000.00. Deducting the printing costs of P4,000.00 from the
gross income of P10,000.00 and with no evidence on the cost of distribution, the net profits amount
to only P6,000.00. This net profit of P6,000.00 should be divided between the petitioner and the
private respondent. And since only P4,000.00 was undesirable by the petitioner in printing the 2,000
copies, the remaining P6,000.00 should therefore be returned to the private respondent.
Relative to the second alleged error, the petitioner submits that the award of P8,000.00 as Pecson's
supposed commission has no justifiable basis in law.
The partnership agreement stipulated that the petitioner would give the private respondent a monthly
commission of Pl,000.00 from April 15, 1971 to December 15, 1971 for a total of eight (8) monthly
commissions. The agreement does not state the basis of the commission. The payment of the
commission could only have been predicated on relatively extravagant profits. The parties could not
have intended the giving of a commission inspite of loss or failure of the venture. Since the venture
was a failure, the private respondent is not entitled to the P8,000.00 commission.
Anent the third assigned error, the petitioner maintains that the respondent Court of Appeals erred in
holding him liable to the private respondent in the sum of P7,000.00 as a supposed return of
investment in a magazine venture.
In awarding P7,000.00 to the private respondent as his supposed return of investment in the "Voice
of the Veterans" magazine venture, the respondent court ruled that: têñ.£îhqw â£
xxx xxx xxx
... Moran admittedly signed the promissory note of P20,000 in favor of Pecson.
Moran does not question the due execution of said note. Must Moran therefore pay
the amount of P20,000? The evidence indicates that the P20,000 was assigned by
Moran to cover the following: têñ.£îhqw â£
Of said P20,000 Moran has to pay P7,000 (as a return of Pecson's investment for the
Veterans' project, for this project never left the ground) ...
As a rule, the findings of facts of the Court of Appeals are final and conclusive and cannot be
reviewed on appeal to this Court (Amigo v. Teves, 96 Phil. 252), provided they are borne out by the
record or are based on substantial evidence (Alsua-Betts v. Court of Appeals, 92 SCRA 332).
However, this rule admits of certain exceptions. Thus, in Carolina Industries Inc. v. CMS Stock
Brokerage, Inc., et al., (97 SCRA 734), we held that this Court retains the power to review and rectify
the findings of fact of the Court of Appeals when (1) the conclusion is a finding grounded entirely on
speculation, surmises and conjectures; (2) when the inference made is manifestly mistaken absurd
and impossible; (3) where there is grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; and (5) when the court, in making its findings, went beyond the issues of
the case and the same are contrary to the admissions of both the appellant and the appellee.
In this case, there is misapprehension of facts. The evidence of the private respondent himself
shows that his investment in the "Voice of Veterans" project amounted to only P3,000.00. The
remaining P4,000.00 was the amount of profit that the private respondent expected to receive.
E — Xerox copy of PNB Manager's Check No. 234265 dated March 22, 1971 in favor
of defendant. Defendant admitted the authenticity of this check and of his receipt of
the proceeds thereof (t.s.n., pp. 3-4, Nov. 29, 1972). This exhibit is being offered for
the purpose of showing plaintiff's capital investment in the printing of the "Voice of
the Veterans" for which he was promised a fixed profit of P8,000. This investment of
P6,000.00 and the promised profit of P8,000 are covered by defendant's promissory
note for P14,000 dated March 31, 1971 marked by defendant as Exhibit 2 (t.s.n., pp.
20-21, Nov. 29, 1972), and by plaintiff as Exhibit P. Later, defendant returned
P3,000.00 of the P6,000.00 investment thereby proportionately reducing the
promised profit to P4,000. With the balance of P3,000 (capital) and P4,000 (promised
profit), defendant signed and executed the promissory note for P7,000 marked
Exhibit 3 for the defendant and Exhibit M for plaintiff. Of this P7,000, defendant paid
P4,000 representing full return of the capital investment and P1,000 partial payment
of the promised profit. The P3,000 balance of the promised profit was made part
consideration of the P20,000 promissory note (t.s.n., pp. 22-24, Nov. 29, 1972). It is,
therefore, being presented to show the consideration for the P20,000 promissory
note.
F — Xerox copy of PNB Manager's check dated May 29, 1971 for P7,000 in favor of
defendant. The authenticity of the check and his receipt of the proceeds thereof were
admitted by the defendant (t.s.n., pp. 3-4, Nov. 29, 1972). This P 7,000 is part
consideration, and in cash, of the P20,000 promissory note (t.s.n., p. 25, Nov. 29,
1972), and it is being presented to show the consideration for the P20,000 note and
the existence and validity of the obligation.
L-Book entitled "Voice of the Veterans" which is being offered for the purpose of
showing the subject matter of the other partnership agreement and in which plaintiff
invested the P6,000 (Exhibit E) which, together with the promised profit of P8,000
made up for the consideration of the P14,000 promissory note (Exhibit 2; Exhibit P).
As explained in connection with Exhibit E. the P3,000 balance of the promised profit
was later made part consideration of the P20,000 promissory note.
M-Promissory note for P7,000 dated March 30, 1971. This is also defendant's Exhibit
E. This document is being offered for the purpose of further showing the transaction
as explained in connection with Exhibits E and L.
N-Receipt of plaintiff dated March 30, 1971 for the return of his P3,000 out of his
capital investment of P6,000 (Exh. E) in the P14,000 promissory note (Exh. 2; P).
This is also defendant's Exhibit 4. This document is being offered in support of
plaintiff's explanation in connection with Exhibits E, L, and M to show the transaction
mentioned therein.
A Yes, sir.
A Yes, sir.
Court têñ.£îhqw â£
Mark it as Exhibit M.
A Yes, sir.
A The balance of P3,000.00 and the rest of the profit was applied as
part of the consideration of the promissory note of P20,000.00.
The respondent court erred when it concluded that the project never left the ground because the
project did take place. Only it failed. It was the private respondent himself who presented a copy of
the book entitled "Voice of the Veterans" in the lower court as Exhibit "L". Therefore, it would be error
to state that the project never took place and on this basis decree the return of the private
respondent's investment.
As already mentioned, there are risks in any business venture and the failure of the undertaking
cannot entirely be blamed on the managing partner alone, specially if the latter exercised his best
business judgment, which seems to be true in this case. In view of the foregoing, there is no reason
to pass upon the fourth and fifth assignments of errors raised by the petitioner. We likewise find no
valid basis for the grant of the counterclaim.
WHEREFORE, the petition is GRANTED. The decision of the respondent Court of Appeals (now
Intermediate Appellate Court) is hereby SET ASIDE and a new one is rendered ordering the
petitioner Isabelo Moran, Jr., to pay private respondent Mariano Pecson SIX THOUSAND
(P6,000.00) PESOS representing the amount of the private respondent's contribution to the
partnership but which remained unused; and THREE THOUSAND (P3,000.00) PESOS representing
one half (1/2) of the net profits gained by the partnership in the sale of the two thousand (2,000)
copies of the posters, with interests at the legal rate on both amounts from the date the complaint
was filed until full payment is made.
SO ORDERED. 1äwphï1.ñët
DECISION
PANGANIBAN, J.:
As a general rule, the factual findings of the Court of Appeals affirming those of the trial court
are binding on the Supreme Court. However, there are several exceptions to this principle. In the
present case, we find occasion to apply both the rule and one of the exceptions.
The Case
Before us is a Petition for Review on Certiorari assailing the November 28, 1997 Decision,[1] as
well as the August 17, 1998 and the October 9, 1998 Resolutions,[2] issued by the Court of Appeals
(CA) in CA-GR CV No. 34742. The Assailed Decision disposed as follows:
Resolving respondents Motion for Reconsideration, the August 17, 1998 Resolution ruled as
follows:
The October 9, 1998 Resolution denied for lack of merit petitioners Motion for
Reconsideration of the August 17, 1998 Resolution.[5]
The Facts
The events that led to this case are summarized by the CA as follows:
sought short-term loans for members of the corporation. [Petitioner] and Gragera
executed an agreement providing funds for Monte Marias members. Under the
agreement, Monte Maria, represented by Gragera, was entitled to P1.31 commission
per thousand paid daily to [petitioner] (Exh. A). x x x Nieves kept the books as
representative of [petitioner] while [Respondent] Arsenio, husband of Nieves, acted as
credit investigator.
[Petitioner] and [Nieves] later discovered that their partner Zabat engaged in the same
lending business in competition with their partnership[.] Zabat was thereby expelled
from the partnership. The operations with Monte Maria continued.
On June 5, 1987, [petitioner] filed a complaint for recovery of sum of money and
damages. [Petitioner] charged [respondents], allegedly in their capacities as
employees of [petitioner], with having misappropriated funds intended for Gragera for
the period July 8, 1986 up to March 31, 1987. Upon Grageras complaint that his
commissions were inadequately remitted, [petitioner] entrusted P200,000.00 to x x x
Nieves to be given to Gragera. x x x Nieves allegedly failed to account for the
amount. [Petitioner] asserted that after examination of the records, he found that of the
total amount of P4,623,201.90 entrusted to [respondents], only P3,068,133.20 was
remitted to Gragera, thereby leaving the balance of P1,555,065.70 unaccounted for.
In their answer, [respondents] asserted that they were partners and not mere
employees of [petitioner]. The complaint, they alleged, was filed to preempt and
prevent them from claiming their rightful share to the profits of the partnership.
x x x Arsenio alleged that he was enticed by [petitioner] to take the place of Zabat
after [petitioner] learned of Zabats activities. Arsenio resigned from his job at the
Asian Development Bank to join the partnership.
For her part, x x x Nieves claimed that she participated in the business as a partner, as
the lending activity with Monte Maria originated from her initiative. Except for the
limited period of July 8, 1986 through August 20, 1986, she did not handle sums
intended for Gragera. Collections were turned over to Gragera because he guaranteed
100% payment of all sums loaned by Monte Maria. Entries she made on worksheets
were based on this assumptive 100% collection of all loans. The loan releases were
made less Grageras agreed commission. Because of this arrangement, she neither
received payments from borrowers nor remitted any amount to Gragera. Her job was
merely to make worksheets (Exhs. 15 to 15-DDDDDDDDDD) to convey to
[petitioner] how much he would earn if all the sums guaranteed by Gragera were
collected.
[Petitioner] on the other hand insisted that [respondents] were his mere employees and
not partners with respect to the agreement with Gragera. He claimed that after he
discovered Zabats activities, he ceased infusing funds, thereby causing the
extinguishment of the partnership. The agreement with Gragera was a distinct
partnership [from] that of [respondent] and Zabat. [Petitioner] asserted that
[respondents] were hired as salaried employees with respect to the partnership
between [petitioner] and Gragera.
[Petitioner] further asserted that in Nieves capacity as bookkeeper, she received all
payments from which Nieves deducted Grageras commission. The commission would
then be remitted to Gragera. She likewise determined loan releases.
During the pre-trial, the parties narrowed the issues to the following points: whether
[respondents] were employees or partners of [petitioner], whether [petitioner]
entrusted money to [respondents] for delivery to Gragera, whether the P1,555,068.70
claimed under the complaint was actually remitted to Gragera and whether
[respondents] were entitled to their counterclaim for share in the profits. [7]
In its August 13, 1991 Decision, the trial court held that respondents were partners, not mere
employees, of petitioner. It further ruled that Gragera was only a commission agent of petitioner,
not his partner. Petitioner moreover failed to prove that he had entrusted any money to
Nieves. Thus, respondents counterclaim for their share in the partnership and for damages was
granted. The trial court disposed as follows:
39. WHEREFORE, the Court hereby renders judgment as follows:
39.1. THE SECOND AMENDED COMPLAINT dated July 26, 1989 is DISMISSED.
39.2. The [Petitioner] FERNANDO J. SANTOS is ordered to pay the [Respondent] NIEVES S.
REYES, the following:
39.2.1. P3,064,428.00 - The 15 percent share of the [respondent] NIEVES S.
REYES in the profits of her joint
venture with the [petitioner].
39.2.2. Six (6) percent of - As damages from P3,064,428.00 August 3, 1987
until the P3,064,428.00 is fully
paid.
39.2.3. P50,000.00 - As moral damages
39.2.4. P10,000.00 - As exemplary damages
39.3. The [petitioner] FERNANDO J. SANTOS is ordered to pay the [respondent] ARSENIO
REYES, the following:
39.3.1. P2,899,739.50 - The balance of the 15 percent share of the
[respondent] ARSENIO REYES
in the profits of his joint venture
with the [petitioner].
39.3.2. Six (6) percent of - As damages from P2,899,739.50 August 3, 1987
until the P2,899,739.50 is fully
paid.
39.3.3. P25,000.00 - As moral damages
39.3.4. P10,000.00 - As exemplary damages
39.4. The [petitioner] FERNANDO J. SANTOS is ordered to pay the [respondents]:
39.4.1. P50,000.00 - As attorneys fees; and
39.4.2 The cost of the suit.[8]
On appeal, the Decision of the trial court was upheld, and the counterclaim of respondents
was dismissed. Upon the latters Motion for Reconsideration, however, the trial courts Decision
was reinstated in toto. Subsequently, petitioners own Motion for Reconsideration was denied in
the CA Resolution of October 9, 1998.
The CA ruled that the following circumstances indicated the existence of a partnership among
the parties: (1) it was Nieves who broached to petitioner the idea of starting a money-lending
business and introduced him to Gragera; (2) Arsenio received dividends or profit-shares covering
the period July 15 to August 7, 1986 (Exh. 6); and (3) the partnership contract was executed after
the Agreement with Gragera and petitioner and thus showed the parties intention to consider it as
a transaction of the partnership. In their common venture, petitioner invested capital while
respondents contributed industry or services, with the intention of sharing in the profits of the
business.
The CA disbelieved petitioners claim that Nieves had misappropriated a total of P200,000
which was supposed to be delivered to Gragera to cover unpaid commissions. It was his task to
collect the amounts due, while hers was merely to prepare the daily cash flow reports (Exhs. 15-
15DDDDDDDDDD) to keep track of his collections.
Hence, this Petition.[9]
Issue
Whether or not Respondent Court of Appeals acted with grave abuse of discretion
tantamount to excess or lack of jurisdiction in:
1. Holding that private respondents were partners/joint venturers and not employees of Santos in
connection with the agreement between Santos and Monte Maria/Gragera;
2. Affirming the findings of the trial court that the phrase Received by on documents signed by
Nieves Reyes signified receipt of copies of the documents and not of the sums shown thereon;
3. Affirming that the signature of Nieves Reyes on Exhibit E was a forgery;
4. Finding that Exhibit H [did] not establish receipt by Nieves Reyes of P200,000.00 for delivery
to Gragera;
5. Affirming the dismissal of Santos [Second] Amended Complaint;
6. Affirming the decision of the trial court, upholding private respondents counterclaim;
7. Denying Santos motion for reconsideration dated September 11, 1998.
Succinctly put, the following were the issues raised by petitioner: (1) whether the parties
relationship was one of partnership or of employer-employee; (2) whether Nieves misappropriated
the sums of money allegedly entrusted to her for delivery to Gragera as his commissions; and (3)
whether respondents were entitled to the partnership profits as determined by the trial court.
First Issue:
Business Relationship
Petitioner maintains that he employed the services of respondent spouses in the money-
lending venture with Gragera, with Nieves as bookkeeper and Arsenio as credit investigator. That
Nieves introduced Gragera to Santos did not make her a partner. She was only a witness to the
Agreement between the two. Separate from the partnership between petitioner and Gragera was
that which existed among petitioner, Nieves and Zabat, a partnership that was dissolved when
Zabat was expelled.
On the other hand, both the CA and the trial court rejected petitioners contentions and ruled
that the business relationship was one of partnership. We quote from the CA Decision, as follows:
While concededly, the partnership between [petitioner,] Nieves and Zabat was
technically dissolved by the expulsion of Zabat therefrom, the remaining partners
simply continued the business of the partnership without undergoing the procedure
relative to dissolution. Instead, they invited Arsenio to participate as a partner in their
operations. There was therefore, no intent to dissolve the earlier partnership. The
partnership between [petitioner,] Nieves and Arsenio simply took over and continued
the business of the former partnership with Zabat, one of the incidents of which was
the lending operations with Monte Maria.
xxxxxxxxx
Gragera and [petitioner] were not partners. The money-lending activities undertaken with Monte
Maria was done in pursuit of the business for which the partnership between [petitioner], Nieves
and Zabat (later Arsenio) was organized. Gragera who represented Monte Maria was merely paid
commissions in exchange for the collection of loans. The commissions were fixed on gross
returns, regardless of the expenses incurred in the operation of the business. The sharing of gross
returns does not in itself establish a partnership.[11]
We agree with both courts on this point. By the contract of partnership, two or more persons
bind themselves to contribute money, property or industry to a common fund, with the intention
of dividing the profits among themselves.[12] The Articles of Agreement stipulated that the
signatories shall share the profits of the business in a 70-15-15 manner, with petitioner getting the
lions share.[13] This stipulation clearly proved the establishment of a partnership.
We find no cogent reason to disagree with the lower courts that the partnership continued
lending money to the members of the Monte Maria Community Development Group, Inc., which
later on changed its business name to Private Association for Community Development, Inc.
(PACDI). Nieves was not merely petitioners employee. She discharged her bookkeeping duties in
accordance with paragraphs 2 and 3 of the Agreement, which states as follows:
2. That the SECOND PARTY and THIRD PARTY shall handle the solicitation and
screening of prospective borrowers, and shall x x x each be responsible in handling
the collection of the loan payments of the borrowers that they each solicited.
3. That the bookkeeping and daily balancing of account of the business operation shall
be handled by the SECOND PARTY. [14]
The Second Party named in the Agreement was none other than Nieves Reyes. On the other
hand, Arsenios duties as credit investigator are subsumed under the phrase screening of
prospective borrowers. Because of this Agreement and the disbursement of monthly allowances
and profit shares or dividends (Exh. 6) to Arsenio, we uphold the factual finding of both courts
that he replaced Zabat in the partnership.
Indeed, the partnership was established to engage in a money-lending business, despite the
fact that it was formalized only after the Memorandum of Agreement had been signed by petitioner
and Gragera. Contrary to petitioners contention, there is no evidence to show that a different
business venture is referred to in this Agreement, which was executed on August 6, 1986, or about
a month after the Memorandum had been signed by petitioner and Gragera on July 14, 1986. The
Agreement itself attests to this fact:
WHEREAS, the parties have decided to formalize the terms of their business
relationship in order that their respective interests may be properly defined and
established for their mutual benefit and understanding. [15]
Second Issue:
Petitioner faults the CA finding that Nieves did not misappropriate money intended for
Grageras commission. According to him, Gragera remitted his daily collection to Nieves. This is
shown by Exhibit B (the Schedule of Daily Payments), which bears her signature under the words
received by. For the period July 1986 to March 1987, Gragera should have earned a total
commission of P4,282,429.30.However, only P3,068,133.20 was received by him. Thus,
petitioner infers that she misappropriated the difference of P1,214,296.10, which represented the
unpaid commissions. Exhibit H is an untitled tabulation which, according to him, shows that
Gragera was also entitled to a commission of P200,000, an amount that was never delivered by
Nieves.[16]
On this point, the CA ruled that Exhibits B, F, E and H did not show that Nieves received for
delivery to Gragera any amount from which the P1,214,296.10 unpaid commission was supposed
to come, and that such exhibits were insufficient proof that she had embezzled P200,000. Said the
CA:
Sec. 20. Proof of Private Document Before any private document offered as authentic
is received in evidence, its due execution and authenticity must be proved either:
Any other private document need only be identified as that which it is claimed to be.
The court a quo even ruled that the signature thereon was a forgery, as it found that:
x x x. But NIEVES denied that Exh. E-1 is her signature; she claimed that it is a
forgery. The initial stroke of Exh. E-1 starts from up and goes downward. The initial
stroke of the genuine signatures of NIEVES (Exhs. A-3, B-1, F-1, among others)
starts from below and goes upward. This difference in the start of the initial stroke of
the signatures Exhs. E-1 and of the genuine signatures lends credence to Nieves claim
that the signature Exh. E-1 is a forgery.
xxxxxxxxx
Nieves testimony that the schedules of daily payment (Exhs. B and F) were based on
the predetermined 100% collection as guaranteed by Gragera is credible and clearly in
accord with the evidence. A perusal of Exhs. B and F as well as Exhs. 15 to 15-
DDDDDDDDDD reveal that the entries were indeed based on the 100% assumptive
collection guaranteed by Gragera. Thus, the total amount recorded on Exh. B is
exactly the number of borrowers multiplied by the projected collection of P150.00 per
borrower. This holds true for Exh. F.
Corollarily, Nieves explanation that the documents were pro forma and that she
signed them not to signify that she collected the amounts but that she received the
documents themselves is more believable than [petitioners] assertion that she actually
handled the amounts.
Accordingly, we find Nieves testimony that after August 20, 1986, all collections
were made by Gragera believable and worthy of credence. Since Gragera guaranteed a
daily 100% payment of the loans, he took charge of the collections. As [petitioners]
representative, Nieves merely prepared the daily cash flow reports (Exh. 15 to 15
DDDDDDDDDD) to enable [petitioner] to keep track of Grageras operations.Gragera
on the other hand devised the schedule of daily payment (Exhs. B and F) to record the
projected gross daily collections.
26.1. As between the versions of SANTOS and NIEVES on how the commissions of
GRAGERA [were] paid to him[,] that of NIEVES is more logical and practical and
therefore, more believable. SANTOS version would have given rise to this
improbable situation: GRAGERA would collect the daily amortizations and then give
them to NIEVES; NIEVES would get GRAGERAs commissions from the
amortizations and then give such commission to GRAGERA. [17]
These findings are in harmony with the trial courts ruling, which we quote below:
21. Exh. H does not prove that SANTOS gave to NIEVES and the latter
received P200,000.00 for delivery to GRAGERA. Exh. H shows under its sixth
column ADDITIONAL CASH that the additional cash was P240,000.00. If Exh. H
were the liquidation of the P200,000.00 as alleged by SANTOS, then his claim is not
true. This is so because it is a liquidation of the sum of P240,000.00.
21.1. SANTOS claimed that he learned of NIEVES failure to give the P200,000.00 to
GRAGERA when he received the latters letter complaining of its delayed
release. Assuming as true SANTOS claim that he gave P200,000.00 to GRAGERA,
there is no competent evidence that NIEVES did not give it to GRAGERA. The only
proof that NIEVES did not give it is the letter. But SANTOS did not even present the
letter in evidence. He did not explain why he did not.
21.2. The evidence shows that all money transactions of the money-lending business
of SANTOS were covered by petty cash vouchers. It is therefore strange why
SANTOS did not present any voucher or receipt covering the P200,000.00. [18]
In sum, the lower courts found it unbelievable that Nieves had embezzled P1,555,068.70 from
the partnership. She did not remit P1,214,296.10 to Gragera, because he had deducted his
commissions before remitting his collections. Exhibits B and F are merely computations of what
Gragera should collect for the day; they do not show that Nieves received the amounts stated
therein. Neither is there sufficient proof that she misappropriated P200,000, because Exhibit H
does not indicate that such amount was received by her; in fact, it shows a different figure.
Petitioner has utterly failed to demonstrate why a review of these factual findings is
warranted. Well-entrenched is the basic rule that factual findings of the Court of Appeals affirming
those of the trial court are binding and conclusive on the Supreme Court. [19] Although there are
exceptions to this rule, petitioner has not satisfactorily shown that any of them is applicable to this
issue.
Third Issue:
Accounting of Partnership
Petitioner refuses any liability for respondents claims on the profits of the partnership. He
maintains that both business propositions were flops, as his investments were consumed and eaten
up by the commissions orchestrated to be due Gragera a situation that could not have been rendered
possible without complicity between Nieves and Gragera.
Respondent spouses, on the other hand, postulate that petitioner instituted the action below to
avoid payment of the demands of Nieves, because sometime in March 1987, she signified to
petitioner that it was about time to get her share of the profits which had already accumulated to
some P3 million. Respondents add that while the partnership has not declared dividends or
liquidated its earnings, the profits are already reflected on paper. To prove the counterclaim of
Nieves, the spouses show that from June 13, 1986 up to April 19, 1987, the profit
totaled P20,429,520 (Exhs. 10 et seq. and 15 et seq.). Based on that income, her 15 percent share
under the joint venture amounts to P3,064,428 (Exh. 10-I-3); and Arsenios, P2,026,000 minus
the P30,000 which was already advanced to him (Petty Cash Vouchers, Exhs. 6, 6-A to 6-B).
The CA originally held that respondents counterclaim was premature, pending an accounting
of the partnership. However, in its assailed Resolution of August 17, 1998, it turned volte
face. Affirming the trial courts ruling on the counterclaim, it held as follows:
We earlier ruled that there is still need for an accounting of the profits and losses of
the partnership before we can rule with certainty as to the respective shares of the
partners. Upon a further review of the records of this case, however, there appears to
be sufficient basis to determine the amount of shares of the parties and damages
incurred by [respondents]. The fact is that the court a quo already made such a
determination [in its] decision dated August 13, 1991 on the basis of the facts on
record. [20]
27. The defendants counterclaim for the payment of their share in the profits of their
joint venture with SANTOS is supported by the evidence.
27.1. NIEVES testified that: Her claim to a share in the profits is based on the
agreement (Exhs. 5, 5-A and 5-B). The profits are shown in the working papers (Exhs.
10 to 10-I, inclusive) which she prepared.Exhs. 10 to 10-I (inclusive) were based on
the daily cash flow reports of which Exh. 3 is a sample. The originals of the daily cash
flow reports (Exhs. 3 and 15 to 15-D (10) were given to SANTOS. The joint venture
had a net profit of P20,429,520.00 (Exh. 10-I-1), from its operations from June 13,
1986 to April 19, 1987 (Exh. 1-I-4). She had a share of P3,064,428.00 (Exh. 10-I-3)
and ARSENIO, about P2,926,000.00, in the profits.
27.1.1 SANTOS never denied NIEVES testimony that the money-lending business he
was engaged in netted a profit and that the originals of the daily case flow reports
were furnished to him. SANTOS however alleged that the money-lending operation of
his joint venture with NIEVES and ZABAT resulted in a loss of about half a million
pesos to him. But such loss, even if true, does not negate NIEVES claim that overall,
the joint venture among them SANTOS, NIEVES and ARSENIO netted a
profit. There is no reason for the Court to doubt the veracity of [the testimony of]
NIEVES.
27.2 The P26,260.50 which ARSENIO received as part of his share in the profits
(Exhs. 6, 6-A and 6-B) should be deducted from his total share. [21]
After a close examination of respondents exhibits, we find reason to disagree with the
CA. Exhibit 10-I[22] shows that the partnership earned a total income of P20,429,520 for the period
June 13, 1986 until April 19, 1987. This entry is derived from the sum of the amounts under the
following column headings: 2-Day Advance Collection, Service Fee, Notarial Fee, Application
Fee, Net Interest Income and Interest Income on Investment. Such entries represent the collections
of the money-lending business or its gross income.
The total income shown on Exhibit 10-I did not consider the expenses sustained by the
partnership. For instance, it did not factor in the gross loan releases representing the money loaned
to clients. Since the business is money-lending, such releases are comparable with the inventory
or supplies in other business enterprises.
Noticeably missing from the computation of the total income is the deduction of the weekly
allowance disbursed to respondents. Exhibits I et seq. and J et seq.[23] show that Arsenio received
allowances from July 19, 1986 to March 27, 1987 in the aggregate amount of P25,500; and Nieves,
from July 12, 1986 to March 27, 1987 in the total amount of P25,600. These allowances are
different from the profit already received by Arsenio. They represent expenses that should have
been deducted from the business profits. The point is that all expenses incurred by the money-
lending enterprise of the parties must first be deducted from the total income in order to arrive at
the net profit of the partnership. The share of each one of them should be based on this net profit
and not from the gross income or total income reflected in Exhibit 10-I, which the two courts
invariably referred to as cash flow sheets.
Similarly, Exhibits 15 et seq.,[24] which are the Daily Cashflow Reports, do not reflect the
business expenses incurred by the parties, because they show only the daily cash
collections. Contrary to the rulings of both the trial and the appellate courts, respondents exhibits
do not reflect the complete financial condition of the money-lending business. The lower courts
obviously labored over a mistaken notion that Exhibit 10-I-1 represented the net profits earned by
the partnership.
For the purpose of determining the profit that should go to an industrial partner (who shares
in the profits but is not liable for the losses), the gross income from all the transactions carried on
by the firm must be added together, and from this sum must be subtracted the expenses or the
losses sustained in the business. Only in the difference representing the net profits does the
industrial partner share. But if, on the contrary, the losses exceed the income, the industrial partner
does not share in the losses.[25]
When the judgment of the CA is premised on a misapprehension of facts or a failure to notice
certain relevant facts that would otherwise justify a different conclusion, as in this particular issue,
a review of its factual findings may be conducted, as an exception to the general rule applied to
the first two issues.[26]
The trial court has the advantage of observing the witnesses while they are testifying, an
opportunity not available to appellate courts. Thus, its assessment of the credibility of witnesses
and their testimonies are accorded great weight, even finality, when supported by substantial
evidence; more so when such assessment is affirmed by the CA. But when the issue involves the
evaluation of exhibits or documents that are attached to the case records, as in the third issue, the
rule may be relaxed. Under that situation, this Court has a similar opportunity to inspect, examine
and evaluate those records, independently of the lower courts. Hence, we deem the award of the
partnership share, as computed by the trial court and adopted by the CA, to be incomplete and not
binding on this Court.
WHEREFORE, the Petition is partly GRANTED. The assailed November 28, 1997 Decision
is AFFIRMED, but the challenged Resolutions dated August 17, 1998 and October 9, 1998
are REVERSEDand SET ASIDE. No costs.
SO ORDERED.
Melo, (Chairman), and Sandoval-Gutierrez, JJ., concur.
Vitug, J., on official leave.
AQUINO, J.:
This case is about the income tax liability of four brothers and sisters who sold two parcels of land
which they had acquired from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas
of 1,124 and 963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred
his rights to his four children, the petitioners, to enable them to build their residences. The company
sold the two lots to petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo).
Presumably, the Torrens titles issued to them would show that they were co-owners of the two lots.
In 1974, or after having held the two lots for more than a year, the petitioners resold them to the
Walled City Securities Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and
D). They derived from the sale a total profit of P134,341.88 or P33,584 for each of them. They
treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner
of Internal Revenue required the four petitioners to pay corporate income tax on the total profit of
P134,336 in addition to individual income tax on their shares thereof He assessed P37,018 as
corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated
interest, or a total of P71,074.56.
Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a "
taxable in full (not a mere capital gain of which ½ is taxable) and required them to pay deficiency
income taxes aggregating P56,707.20 including the 50% fraud surcharge and the accumulated
interest.
Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling
P127,781.76 on their profit of P134,336, in addition to the tax on capital gains already paid by them.
The Commissioner acted on the theory that the four petitioners had formed an unregistered
partnership or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code
(Collector of Internal Revenue vs. Batangas Trans. Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of the Tax Court sustained the same.
Judge Roaquin dissented. Hence, the instant appeal.
We hold that it is error to consider the petitioners as having formed a partnership under article 1767
of the Civil Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold
the same and divided the profit among themselves.
To regard the petitioners as having formed a taxable unregistered partnership would result in
oppressive taxation and confirm the dictum that the power to tax involves the power to destroy. That
eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple.
To consider them as partners would obliterate the distinction between a co-ownership and a
partnership. The petitioners were not engaged in any joint venture by reason of that isolated
transaction.
Their original purpose was to divide the lots for residential purposes. If later on they found it not
feasible to build their residences on the lots because of the high cost of construction, then they had
no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely
incidental to the dissolution of the co-ownership which was in the nature of things a temporary state.
It had to be terminated sooner or later. Castan Tobeñas says:
Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived". There must be an unmistakable
intention to form a partnership or joint venture.*
Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 persons contributed small amounts to
purchase a two-peso sweepstakes ticket with the agreement that they would divide the prize The ticket won the third prize of P50,000. The
15 persons were held liable for income tax as an unregistered partnership.
The instant case is distinguishable from the cases where the parties engaged in joint ventures for
profit. Thus, in Oña vs.
Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an
extrajudicial settlement the co-heirs used the inheritance or the incomes derived therefrom as a
common fund to produce profits for themselves, it was held that they were taxable as an
unregistered partnership.
It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where
father and son purchased a lot and building, entrusted the administration of the building to an
administrator and divided equally the net income, and from Evangelista vs. Collector of Internal
Revenue, 102 Phil. 140, where the three Evangelista sisters bought four pieces of real property
which they leased to various tenants and derived rentals therefrom. Clearly, the petitioners in these
two cases had formed an unregistered partnership.
In the instant case, what the Commissioner should have investigated was whether the father
donated the two lots to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil
Code). We are not prejudging this matter. It might have already prescribed.
WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are
cancelled. No costs.
SO ORDERED.
LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA, MARIANO B.
OÑA, LUZ B. OÑA, VIRGINIA B. OÑA and LORENZO B. OÑA, JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete, and
Special Attorney Purificacion Ureta for respondent.
BARREDO, J.:p
Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled as above, holding that petitioners have
constituted an unregistered partnership and are, therefore, subject to the payment of the deficiency corporate income taxes assessed against
them by respondent Commissioner of Internal Revenue for the years 1955 and 1956 in the total sum of P21,891.00, plus 5% surcharge and
1% monthly interest from December 15, 1958, subject to the provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended by
Section 8 of Republic Act No. 2343 and the costs of the suit,1 as well as the resolution of said court denying petitioners' motion for
reconsideration of said decision.
The facts are stated in the decision of the Tax Court as follows:
Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse,
Lorenzo T. Oña and her five children. In 1948, Civil Case No. 4519 was instituted in
the Court of First Instance of Manila for the settlement of her estate. Later, Lorenzo
T. Oña the surviving spouse was appointed administrator of the estate of said
deceased (Exhibit 3, pp. 34-41, BIR rec.). On April 14, 1949, the administrator
submitted the project of partition, which was approved by the Court on May 16, 1949
(See Exhibit K). Because three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all
surnamed Oña, were still minors when the project of partition was approved, Lorenzo
T. Oña, their father and administrator of the estate, filed a petition in Civil Case No.
9637 of the Court of First Instance of Manila for appointment as guardian of said
minors. On November 14, 1949, the Court appointed him guardian of the persons
and property of the aforenamed minors (See p. 3, BIR rec.).
The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs
have undivided one-half (1/2) interest in ten parcels of land with a total assessed
value of P87,860.00, six houses with a total assessed value of P17,590.00 and an
undetermined amount to be collected from the War Damage Commission. Later, they
received from said Commission the amount of P50,000.00, more or less. This
amount was not divided among them but was used in the rehabilitation of properties
owned by them in common (t.s.n., p. 46). Of the ten parcels of land aforementioned,
two were acquired after the death of the decedent with money borrowed from the
Philippine Trust Company in the amount of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp.
31-34 BIR rec.).
The project of partition also shows that the estate shares equally with Lorenzo T.
Oña, the administrator thereof, in the obligation of P94,973.00, consisting of loans
contracted by the latter with the approval of the Court (see p. 3 of Exhibit K; or see p.
74, BIR rec.).
Although the project of partition was approved by the Court on May 16, 1949, no
attempt was made to divide the properties therein listed. Instead, the properties
remained under the management of Lorenzo T. Oña who used said properties in
business by leasing or selling them and investing the income derived therefrom and
the proceeds from the sales thereof in real properties and securities. As a result,
petitioners' properties and investments gradually increased from P105,450.00 in
1949 to P480,005.20 in 1956 as can be gleaned from the following year-end
balances:
(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)
From said investments and properties petitioners derived such incomes as profits
from installment sales of subdivided lots, profits from sales of stocks, dividends,
rentals and interests (see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said
incomes are recorded in the books of account kept by Lorenzo T. Oña where the
corresponding shares of the petitioners in the net income for the year are also
known. Every year, petitioners returned for income tax purposes their shares in the
net income derived from said properties and securities and/or from transactions
involving them (Exhibit 3, supra; t.s.n., pp. 25-26). However, petitioners did not
actually receive their shares in the yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The
income was always left in the hands of Lorenzo T. Oña who, as heretofore pointed
out, invested them in real properties and securities. (See Exhibit 3, t.s.n., pp. 50,
102-104).
1955
1956
Upon further consideration of the case, the 25% surcharge was eliminated in line
with the ruling of the Supreme Court in Collector v. Batangas Transportation Co.,
G.R. No. L-9692, Jan. 6, 1958, so that the questioned assessment refers solely to
the income tax proper for the years 1955 and 1956 and the "Compromise for non-
filing," the latter item obviously referring to the compromise in lieu of the criminal
liability for failure of petitioners to file the corporate income tax returns for said years.
(See Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:
I.
II.
III.
IV.
In other words, petitioners pose for our resolution the following questions: (1) Under the facts found
by the Court of Tax Appeals, should petitioners be considered as co-owners of the properties
inherited by them from the deceased Julia Buñales and the profits derived from transactions
involving the same, or, must they be deemed to have formed an unregistered partnership subject to
tax under Sections 24 and 84(b) of the National Internal Revenue Code? (2) Assuming they have
formed an unregistered partnership, should this not be only in the sense that they invested as a
common fund the profits earned by the properties owned by them in common and the loans granted
to them upon the security of the said properties, with the result that as far as their respective shares
in the inheritance are concerned, the total income thereof should be considered as that of co-owners
and not of the unregistered partnership? And (3) assuming again that they are taxable as an
unregistered partnership, should not the various amounts already paid by them for the same years
1955 and 1956 as individual income taxes on their respective shares of the profits accruing from the
properties they owned in common be deducted from the deficiency corporate taxes, herein involved,
assessed against such unregistered partnership by the respondent Commissioner?
Pondering on these questions, the first thing that has struck the Court is that whereas petitioners'
predecessor in interest died way back on March 23, 1944 and the project of partition of her estate
was judicially approved as early as May 16, 1949, and presumably petitioners have been holding
their respective shares in their inheritance since those dates admittedly under the administration or
management of the head of the family, the widower and father Lorenzo T. Oña, the assessment in
question refers to the later years 1955 and 1956. We believe this point to be important because,
apparently, at the start, or in the years 1944 to 1954, the respondent Commissioner of Internal
Revenue did treat petitioners as co-owners, not liable to corporate tax, and it was only from 1955
that he considered them as having formed an unregistered partnership. At least, there is nothing in
the record indicating that an earlier assessment had already been made. Such being the case, and
We see no reason how it could be otherwise, it is easily understandable why petitioners' position that
they are co-owners and not unregistered co-partners, for the purposes of the impugned assessment,
cannot be upheld. Truth to tell, petitioners should find comfort in the fact that they were not similarly
assessed earlier by the Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing the estate of the deceased among
themselves pursuant to the project of partition approved in 1949, "the properties remained under the
management of Lorenzo T. Oña who used said properties in business by leasing or selling them and
investing the income derived therefrom and the proceed from the sales thereof in real properties and
securities," as a result of which said properties and investments steadily increased yearly from
P87,860.00 in "land account" and P17,590.00 in "building account" in 1949 to P175,028.68 in
"investment account," P135.714.68 in "land account" and P169,262.52 in "building account" in 1956.
And all these became possible because, admittedly, petitioners never actually received any share of
the income or profits from Lorenzo T. Oña and instead, they allowed him to continue using said
shares as part of the common fund for their ventures, even as they paid the corresponding income
taxes on the basis of their respective shares of the profits of their common business as reported by
the said Lorenzo T. Oña.
It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves
to holding the properties inherited by them. Indeed, it is admitted that during the material years
herein involved, some of the said properties were sold at considerable profit, and that with said
profit, petitioners engaged, thru Lorenzo T. Oña, in the purchase and sale of corporate securities. It
is likewise admitted that all the profits from these ventures were divided among petitioners
proportionately in accordance with their respective shares in the inheritance. In these circumstances,
it is Our considered view that from the moment petitioners allowed not only the incomes from their
respective shares of the inheritance but even the inherited properties themselves to be used by
Lorenzo T. Oña as a common fund in undertaking several transactions or in business, with the
intention of deriving profit to be shared by them proportionally, such act was tantamonut to actually
contributing such incomes to a common fund and, in effect, they thereby formed an unregistered
partnership within the purview of the above-mentioned provisions of the Tax Code.
It is but logical that in cases of inheritance, there should be a period when the heirs can be
considered as co-owners rather than unregistered co-partners within the contemplation of our
corporate tax laws aforementioned. Before the partition and distribution of the estate of the
deceased, all the income thereof does belong commonly to all the heirs, obviously, without them
becoming thereby unregistered co-partners, but it does not necessarily follow that such status as co-
owners continues until the inheritance is actually and physically distributed among the heirs, for it is
easily conceivable that after knowing their respective shares in the partition, they might decide to
continue holding said shares under the common management of the administrator or executor or of
anyone chosen by them and engage in business on that basis. Withal, if this were to be allowed, it
would be the easiest thing for heirs in any inheritance to circumvent and render meaningless
Sections 24 and 84(b) of the National Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding
the appellants therein to be unregistered co-partners for tax purposes, that their common fund "was
not something they found already in existence" and that "it was not a property inherited by them pro
indiviso," but it is certainly far fetched to argue therefrom, as petitioners are doing here, that ergo, in
all instances where an inheritance is not actually divided, there can be no unregistered co-
partnership. As already indicated, for tax purposes, the co-ownership of inherited properties is
automatically converted into an unregistered partnership the moment the said common properties
and/or the incomes derived therefrom are used as a common fund with intent to produce profits for
the heirs in proportion to their respective shares in the inheritance as determined in a project
partition either duly executed in an extrajudicial settlement or approved by the court in the
corresponding testate or intestate proceeding. The reason for this is simple. From the moment of
such partition, the heirs are entitled already to their respective definite shares of the estate and the
incomes thereof, for each of them to manage and dispose of as exclusively his own without the
intervention of the other heirs, and, accordingly he becomes liable individually for all taxes in
connection therewith. If after such partition, he allows his share to be held in common with his co-
heirs under a single management to be used with the intent of making profit thereby in proportion to
his share, there can be no doubt that, even if no document or instrument were executed for the
purpose, for tax purposes, at least, an unregistered partnership is formed. This is exactly what
happened to petitioners in this case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing
that: "The sharing of gross returns does not of itself establish a partnership, whether or not the
persons sharing them have a joint or common right or interest in any property from which the returns
are derived," and, for that matter, on any other provision of said code on partnerships is unavailing.
In Evangelista, supra, this Court clearly differentiated the concept of partnerships under the Civil
Code from that of unregistered partnerships which are considered as "corporations" under Sections
24 and 84(b) of the National Internal Revenue Code. Mr. Justice Roberto Concepcion, now Chief
Justice, elucidated on this point thus:
To begin with, the tax in question is one imposed upon "corporations", which, strictly
speaking, are distinct and different from "partnerships". When our Internal Revenue
Code includes "partnerships" among the entities subject to the tax on "corporations",
said Code must allude, therefore, to organizations which are not
necessarily "partnerships", in the technical sense of the term. Thus, for instance,
section 24 of said Code exempts from the aforementioned tax "duly registered
general partnerships," which constitute precisely one of the most typical forms of
partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code,
"the term corporation includes partnerships, no matter how created or organized."
This qualifying expression clearly indicates that a joint venture need not be
undertaken in any of the standard forms, or in confirmity with the usual requirements
of the law on partnerships, in order that one could be deemed constituted for
purposes of the tax on corporation. Again, pursuant to said section 84(b),the term
"corporation" includes, among others, "joint accounts,(cuentas en participacion)" and
"associations", none of which has a legal personality of its own, independent of that
of its members. Accordingly, the lawmaker could not have regarded that personality
as a condition essential to the existence of the partnerships therein referred to. In
fact, as above stated, "duly registered general co-partnerships" — which are
possessed of the aforementioned personality — have been expressly excluded by
law (sections 24 and 84[b]) from the connotation of the term "corporation." ....
For purposes of the tax on corporations, our National Internal Revenue Code
includes these partnerships — with the exception only of duly registered general
copartnerships — within the purview of the term "corporation." It is, therefore, clear to
our mind that petitioners herein constitute a partnership, insofar as said Code is
concerned, and are subject to the income tax for corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue,
G. R. Nos. L-24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory of co-
ownership pursued by appellants therein.
As regards the second question raised by petitioners about the segregation, for the purposes of the
corporate taxes in question, of their inherited properties from those acquired by them subsequently,
We consider as justified the following ratiocination of the Tax Court in denying their motion for
reconsideration:
In connection with the second ground, it is alleged that, if there was an unregistered
partnership, the holding should be limited to the business engaged in apart from the
properties inherited by petitioners. In other words, the taxable income of the
partnership should be limited to the income derived from the acquisition and sale of
real properties and corporate securities and should not include the income derived
from the inherited properties. It is admitted that the inherited properties and the
income derived therefrom were used in the business of buying and selling other real
properties and corporate securities. Accordingly, the partnership income must
include not only the income derived from the purchase and sale of other properties
but also the income of the inherited properties.
Besides, as already observed earlier, the income derived from inherited properties may be
considered as individual income of the respective heirs only so long as the inheritance or estate is
not distributed or, at least, partitioned, but the moment their respective known shares are used as
part of the common assets of the heirs to be used in making profits, it is but proper that the income
of such shares should be considered as the part of the taxable income of an unregistered
partnership. This, We hold, is the clear intent of the law.
Likewise, the third question of petitioners appears to have been adequately resolved by the Tax
Court in the aforementioned resolution denying petitioners' motion for reconsideration of the decision
of said court. Pertinently, the court ruled this wise:
In other words, it is the position of petitioners that the taxable income of the
partnership must be reduced by the amounts of income tax paid by each petitioner
on his share of partnership profits. This is not correct; rather, it should be the other
way around. The partnership profits distributable to the partners (petitioners herein)
should be reduced by the amounts of income tax assessed against the partnership.
Consequently, each of the petitioners in his individual capacity overpaid his income
tax for the years in question, but the income tax due from the partnership has been
correctly assessed. Since the individual income tax liabilities of petitioners are not in
issue in this proceeding, it is not proper for the Court to pass upon the same.
Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might have
paid as individual income tax cannot be credited as part payment of the taxes herein in question. It is
argued that to sanction the view of the Tax Court is to oblige petitioners to pay double income tax on
the same income, and, worse, considering the time that has lapsed since they paid their individual
income taxes, they may already be barred by prescription from recovering their overpayments in a
separate action. We do not agree. As We see it, the case of petitioners as regards the point under
discussion is simply that of a taxpayer who has paid the wrong tax, assuming that the failure to pay
the corporate taxes in question was not deliberate. Of course, such taxpayer has the right to be
reimbursed what he has erroneously paid, but the law is very clear that the claim and action for such
reimbursement are subject to the bar of prescription. And since the period for the recovery of the
excess income taxes in the case of herein petitioners has already lapsed, it would not seem right to
virtually disregard prescription merely upon the ground that the reason for the delay is precisely
because the taxpayers failed to make the proper return and payment of the corporate taxes legally
due from them. In principle, it is but proper not to allow any relaxation of the tax laws in favor of
persons who are not exactly above suspicion in their conduct vis-a-vis their tax obligation to the
State.
DECISION
GONZAGA-REYES, J.:
Before us is a petition for review on certiorari under Rule 45 of the Rules of Court of the
Decision[1] of the Court of Appeals dated January 31, 2000 in the case entitled Lamberto T. Chua
vs.
Lilibeth Sunga Chan and Cecilia Sunga and of the Resolution dated May 23, 2000 denying
the motion for reconsideration of herein petitioners Lilibeth Sunga Chan and Cecilia Sunga
(hereafter collectively referred to as petitioners).
The pertinent facts of this case are as follows:
On June 22, 1992, Lamberto T. Chua (hereafter respondent) filed a complaint against Lilibeth
Sunga Chan (hereafter petitioner Lilibeth) and Cecilia Sunga (hereafter petitioner Cecilia),
daughter and wife, respectively of the deceased Jacinto L. Sunga (hereafter Jacinto), for Winding
Up of Partnership Affairs, Accounting, Appraisal and Recovery of Shares and Damages with Writ
of Preliminary Attachment with the Regional Trial Court, Branch 11, Sindangan, Zamboanga del
Norte.
Respondent alleged that in 1977, he verbally entered into a partnership with Jacinto in the
distribution of Shellane Liquefied Petroleum Gas (LPG) in Manila. For business convenience,
respondent and Jacinto allegedly agreed to register the business name of their partnership,
SHELLITE GAS APPLIANCE CENTER (hereafter Shellite), under the name of Jacinto as a sole
proprietorship. Respondent allegedly delivered his initial capital contribution of P100,000.00 to
Jacinto while the latter in turn produced P100,000.00 as his counterpart contribution, with the
intention that the profits would be equally divided between them. The partnership allegedly had
Jacinto as manager, assisted by Josephine Sy (hereafter Josephine), a sister of the wife of
respondent, Erlinda Sy. As compensation, Jacinto would receive a managers fee or remuneration
of 10% of the gross profit and Josephine would receive 10% of the net profits, in addition to her
wages and other remuneration from the business.
Allegedly, from the time that Shellite opened for business on July 8, 1977, its business
operation went quite well and was profitable. Respondent claimed that he could attest to the
success of their business because of the volume of orders and deliveries of filled Shellane cylinder
tanks supplied by Pilipinas Shell Petroleum Corporation. While Jacinto furnished respondent with
the merchandise inventories, balance sheets and net worth of Shellite from 1977 to 1989,
respondent however suspected that the amount indicated in these documents were understated and
undervalued by Jacinto and Josephine for their own selfish reasons and for tax avoidance.
Upon Jacintos death in the later part of 1989, his surviving wife, petitioner Cecilia and
particularly his daughter, petitioner Lilibeth, took over the operations, control, custody, disposition
and management of Shellite without respondents consent.
Despite respondents repeated demands upon petitioners for accounting, inventory, appraisal,
winding up and restitution of his net shares in the partnership, petitioners failed to
comply. Petitioner Lilibeth allegedly continued the operations of Shellite, converting to her own
use and advantage its properties.
On March 31, 1991, respondent claimed that after petitioner Lilibeth ran out of alibis and
reasons to evade respondents demands, she disbursed out of the partnership funds the amount of
P200,000.00 and partially paid the same to respondent. Petitioner Lilibeth allegedly informed
respondent that the P200,000.00 represented partial payment of the latters share in the partnership,
with a promise that the former would make the complete inventory and winding up of the
properties of the business establishment. Despite such commitment, petitioners allegedly failed to
comply with their duty to account, and continued to benefit from the assets and income of Shellite
to the damage and prejudice of respondent.
On December 19, 1992, petitioners filed a Motion to Dismiss on the ground that the Securities
and Exchange Commission (SEC) in Manila, not the Regional Trial Court in Zambaonga del Norte
had jurisdiction over the action. Respondent opposed the motion to dismiss.
On January 12, 1993, the trial court finding the complaint sufficient in form and substance
denied the motion to dismiss.
On January 30, 1993, petitioners filed their Answer with Compulsory Counterclaims,
contending that they are not liable for partnership shares, unreceived income/profits, interests,
damages and attorneys fees, that respondent does not have a cause of action against them, and that
the trial court has no jurisdiction over the nature of the action, the SEC being the agency that has
original and exclusive jurisdiction over the case. As counterclaim, petitioner sought attorneys fees
and expenses of litigation.
On August 2, 1993, petitioner filed a second Motion to Dismiss this time on the ground that
the claim for winding up of partnership affairs, accounting and recovery of shares in partnership
affairs, accounting and recovery of shares in partnership assets /properties should be dismissed
and prosecuted against the estate of deceased Jacinto in a probate or intestate proceeding.
On August 16, 1993, the trial court denied the second motion to dismiss for lack of merit.
On November 26, 1993, petitioners filed their Petition for Certiorari, Prohibition and
Mandamus with the Court of Appeals docketed as CA-G.R. SP No. 32499 questioning the denial
of the motion to dismiss.
On November 29, 1993, petitioners filed with the trial court a Motion to Suspend Pre-trial
Conference.
On December 13, 1993, the trial court granted the motion to suspend pre-trial conference.
On November 15, 1994, the Court of Appeals denied the petition for lack of merit.
On January 16, 1995, this Court denied the petition for review on certiorari filed by petitioner,
as petitioners failed to show that a reversible error was committed by the appellate court."[2]
On February 20, 1995, entry of judgment was made by the Clerk of Court and the case was
remanded to the trial court on April 26, 1995.
On September 25, 1995, the trial court terminated the pre-trial conference and set the hearing
of the case on January 17, 1996. Respondent presented his evidence while petitioners were
considered to have waived their right to present evidence for their failure to attend the scheduled
date for reception of evidence despite notice.
On October 7, 1997, the trial court rendered its Decision ruling for respondent. The dispositive
portion of the Decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendants, as follows:
(2) ORDERING them to return and restitute to the partnership any and all properties,
assets, income and profits they misapplied and converted to their own use and
advantage that legally pertain to the plaintiff and account for the properties mentioned
in pars. A and B on pages 4-5 of this petition as basis;
(3) DIRECTING them to restitute and pay to the plaintiff shares and interest of the
plaintiff in the partnership of the listed properties, assets and good will (sic) in
schedules A, B and C, on pages 4-5 of the petition;
(4) ORDERING them to pay the plaintiff earned but unreceived income and profits
from the partnership from 1988 to may 30, 1992, when the plaintiff learned of the
closure of the store the sum of P35,000.00 per month, with legal rate of interest until
fully paid;
(5) ORDERING them to wind up the affairs of the partnership and terminate its
business activities pursuant to law, after delivering to the plaintiff all the interest,
shares, participation and equity in the partnership, or the value thereof in money or
moneys worth, if the properties are not physically divisible;
(6) FINDING them especially Lilibeth Sunga-Chan guilty of breach of trust and in
bad faith and hold them liable to the plaintiff the sum of P50,000.00 as moral and
exemplary damages; and,
(7) DIRECTING them to reimburse and pay the sum of P25,000.00 as attorneys (sic)
and P25,00.00 as litigation expenses.
SO ORDERED. [3]
On October 28, 1997, petitioners filed a Notice of Appeal with the trial court, appealing the
case to the Court of Appeals.
On January 31, 2000, the Court of Appeals dismissed the appeal. The dispositive portion of
the Decision reads:
On May 23, 2000, the Court of Appeals denied the motion for reconsideration filed by
petitioner.
Hence, this petition wherein petitioner relies upon the following grounds:
1. The Court of Appeals erred in making a legal conclusion that there existed a partnership
between respondent Lamberto T. Chua and the late Jacinto L. Sunga upon the latters invitation
and offer and that upon his death the partnership assets and business were taken over by
petitioners.
2. The Court of Appeals erred in making the legal conclusion that laches and/or prescription did
not apply in the instant case.
3. The Court of Appeals erred in making the legal conclusion that there was competent and
credible evidence to warrant the finding of a partnership, and assuming arguendo that indeed
there was a partnership, the finding of highly exaggerated amounts or values in the partnership
assets and profits.[5]
Petitioners question the correctness of the finding of the trial court and the Court of Appeals
that a partnership existed between respondent and Jacinto from 1977 until Jacintos death. In the
absence of any written document to show such partnership between respondent and Jacinto,
petitioners argue that these courts were proscribed from hearing the testimonies of respondent and
his witness, Josephine, to prove the alleged partnership three years after Jacintos death. To support
this argument, petitioners invoke the Dead Mans Statute or Survivorship Rule under Section 23,
Rule 130 of the Rules of Court that provides:
Petitioners thus implore this Court to rule that the testimonies of respondent and his alter ego,
Josephine, should not have been admitted to prove certain claims against a deceased person
(Jacinto), now represented by petitioners.
We are not persuaded.
A partnership may be constituted in any form, except where immovable property or real rights
are contributed thereto, in which case a public instrument shall be necessary.[6] Hence, based on the
intention of the parties, as gathered from the facts and ascertained from their language and conduct,
a verbal contract of partnership may arise.[7] The essential points that must be proven to show that
a partnership was agreed upon are (1) mutual contribution to a common stock, and (2) a joint
interest in the profits.[8] Understandably so, in view of the absence of a written contract of
partnership between respondent and Jacinto, respondent resorted to the introduction of
documentary and testimonial evidence to prove said partnership. The crucial issue to settle then is
whether or not the Dead Mans Statute applies to this case so as to render inadmissible respondents
testimony and that of his witness, Josephine.
The Dead Mans Statute provides that if one party to the alleged transaction is precluded from
testifying by death, insanity, or other mental disabilities, the surviving party is not entitled to the
undue advantage of giving his own uncontradicted and unexplained account of the
transaction.[9] But before this rule can be successfully invoked to bar the introduction of testimonial
evidence, it is necessary that:
1. The witness is a party or assignor of a party to a case or persons in whose behalf a case is
prosecuted.
2. The action is against an executor or administrator or other representative of a deceased person
or a person of unsound mind;
3. The subject-matter of the action is a claim or demand against the estate of such deceased person
or against person of unsound mind;
4. His testimony refers to any matter of fact which occurred before the death of such deceased
person or before such person became of unsound mind.[10]
Two reasons forestall the application of the Dead Mans Statute to this case.
First, petitioners filed a compulsory counterclaim[11] against respondent in their answer before
the trial court, and with the filing of their counterclaim, petitioners themselves effectively removed
this case from the ambit of the Dead Mans Statute.[12] Well entrenched is the rule that when it is the
executor or administrator or representatives of the estate that sets up the counterclaim, the plaintiff,
herein respondent, may testify to occurrences before the death of the deceased to defeat the
counterclaim.[13] Moreover, as defendant in the counterclaim, respondent is not disqualified from
testifying as to matters of fact occurring before the death of the deceased, said action not having
been brought against but by the estate or representatives of the deceased.[14]
Second, the testimony of Josephine is not covered by the Dead Mans Statute for the simple
reason that she is not a party or assignor of a party to a case or persons in whose behalf a case is
prosecuted.Records show that respondent offered the testimony of Josephine to establish the
existence of the partnership between respondent and Jacinto. Petitioners insistence that Josephine
is the alter ego of respondent does not make her an assignor because the term assignor of a party
means assignor of a cause of action which has arisen, and not the assignor of a right assigned
before any cause of action has arisen.[15] Plainly then, Josephine is merely a witness of respondent,
the latter being the party plaintiff.
We are not convinced by petitioners allegation that Josephines testimony lacks probative value
because she was allegedly coerced by respondent, her brother-in-law, to testify in his favor.
Josephine merely declared in court that she was requested by respondent to testify and that if she
were not requested to do so she would not have testified. We fail to see how we can conclude from
this candid admission that Josephines testimony is involuntary when she did not in any way
categorically say that she was forced to be a witness of respondent. Also, the fact that Josephine is
the sister of the wife of respondent does not diminish the value of her testimony since
relationship per se, without more, does not affect the credibility of witnesses.[16]
Petitioners reliance alone on the Dead Mans Statute to defeat respondents claim cannot prevail
over the factual findings of the trial court and the Court of Appeals that a partnership was
established between respondent and Jacinto. Based not only on the testimonial evidence, but the
documentary evidence as well, the trial court and the Court of Appeals considered the evidence
for respondent as sufficient to prove the formation of a partnership, albeit an informal one.
Notably, petitioners did not present any evidence in their favor during trial. By the weight of
judicial precedents, a factual matter like the finding of the existence of a partnership between
respondent and Jacinto cannot be inquired into by this Court on review.[17] This Court can no longer
be tasked to go over the proofs presented by the parties and analyze, assess and weigh them to
ascertain if the trial court and the appellate court were correct in according superior credit to this
or that piece of evidence of one party or the other.[18] It must be also pointed out that petitioners
failed to attend the presentation of evidence of respondent. Petitioners cannot now turn to this
Court to question the admissibility and authenticity of the documentary evidence of respondent
when petitioners failed to object to the admissibility of the evidence at the time that such evidence
was offered.[19]
With regard to petitioners insistence that laches and/or prescription should have extinguished
respondents claim, we agree with the trial court and the Court of Appeals that the action for
accounting filed by respondent three (3) years after Jacintos death was well within the prescribed
period. The Civil Code provides that an action to enforce an oral contract prescribes in six (6)
years[20] while the right to demand an accounting for a partners interest as against the person
continuing the business accrues at the date of dissolution, in the absence of any contrary
agreement.[21] Considering that the death of a partner results in the dissolution of the partnership[22],
in this case, it was after Jacintos death that respondent as the surviving partner had the right to an
account of his interest as against petitioners. It bears stressing that while Jacintos death dissolved
the partnership, the dissolution did not immediately terminate the partnership. The Civil
Code[23] expressly provides that upon dissolution, the partnership continues and its legal personality
is retained until the complete winding up of its business, culminating in its termination.[24]
In a desperate bid to cast doubt on the validity of the oral partnership between respondent and
Jacinto, petitioners maintain that said partnership that had an initial capital of P200,000.00 should
have been registered with the Securities and Exchange Commission (SEC) since registration is
mandated by the Civil Code. True, Article 1772 of the Civil Code requires that partnerships with
a capital of P3,000.00 or more must register with the SEC, however, this registration requirement
is not mandatory. Article 1768 of the Civil Code[25] explicitly provides that the partnership retains
its juridical personality even if it fails to register. The failure to register the contract of partnership
does not invalidate the same as among the partners, so long as the contract has the essential
requisites, because the main purpose of registration is to give notice to third parties, and it can be
assumed that the members themselves knew of the contents of their contract.[26] In the case at bar,
non-compliance with this directory provision of the law will not invalidate the partnership
considering that the totality of the evidence proves that respondent and Jacinto indeed forged the
partnership in question.
WHEREFORE, in view of the foregoing, the petition is DENIED and the appealed decision
is AFFIRMED.
SO ORDERED.
CONCEPCION, C.J.:
In this appeal, taken by plaintiff Mauricio Agad, from an order of dismissal of the Court of First
Instance of Davao, we are called upon to determine the applicability of Article 1773 of our Civil Code
to the contract of partnership on which the complaint herein is based.
Alleging that he and defendant Severino Mabato are — pursuant to a public instrument dated August
29, 1952, copy of which is attached to the complaint as Annex "A" — partners in a fishpond
business, to the capital of which Agad contributed P1,000, with the right to receive 50% of the
profits; that from 1952 up to and including 1956, Mabato who handled the partnership funds, had
yearly rendered accounts of the operations of the partnership; and that, despite repeated demands,
Mabato had failed and refused to render accounts for the years 1957 to 1963, Agad prayed in his
complaint against Mabato and Mabato & Agad Company, filed on June 9, 1964, that judgment be
rendered sentencing Mabato to pay him (Agad) the sum of P14,000, as his share in the profits of the
partnership for the period from 1957 to 1963, in addition to P1,000 as attorney's fees, and ordering
the dissolution of the partnership, as well as the winding up of its affairs by a receiver to be
appointed therefor.
In his answer, Mabato admitted the formal allegations of the complaint and denied the existence of
said partnership, upon the ground that the contract therefor had not been perfected, despite the
execution of Annex "A", because Agad had allegedly failed to give his P1,000 contribution to the
partnership capital. Mabato prayed, therefore, that the complaint be dismissed; that Annex "A" be
declared void ab initio; and that Agad be sentenced to pay actual, moral and exemplary damages,
as well as attorney's fees.
Subsequently, Mabato filed a motion to dismiss, upon the ground that the complaint states no cause
of action and that the lower court had no jurisdiction over the subject matter of the case, because it
involves principally the determination of rights over public lands. After due hearing, the court issued
the order appealed from, granting the motion to dismiss the complaint for failure to state a cause of
action. This conclusion was predicated upon the theory that the contract of partnership, Annex "A", is
null and void, pursuant to Art. 1773 of our Civil Code, because an inventory of the fishpond referred
in said instrument had not been attached thereto. A reconsideration of this order having been
denied, Agad brought the matter to us for review by record on appeal.
Art. 1771. A partnership may be constituted in any form, except where immovable property
or real rights are contributed thereto, in which case a public instrument shall be necessary.
The issue before us hinges on whether or not "immovable property or real rights" have
been contributed to the partnership under consideration. Mabato alleged and the lower court held
that the answer should be in the affirmative, because "it is really inconceivable how a partnership
engaged in the fishpond business could exist without said fishpond property (being) contributed to
the partnership." It should be noted, however, that, as stated in Annex "A" the partnership was
established "to operate a fishpond", not to "engage in a fishpond business". Moreover, none of the
partners contributed either a fishpond or a real right to any fishpond. Their contributions were limited
to the sum of P1,000 each. Indeed, Paragraph 4 of Annex "A" provides:
That the capital of the said partnership is Two Thousand (P2,000.00) Pesos Philippine
Currency, of which One Thousand (P1,000.00) pesos has been contributed by Severino
Mabato and One Thousand (P1,000.00) Pesos has been contributed by Mauricio Agad.
The operation of the fishpond mentioned in Annex "A" was the purpose of the partnership. Neither
said fishpond nor a real right thereto was contributed to the partnership or became part of the capital
thereof, even if a fishpond or a real right thereto could become part of its assets.
WHEREFORE, we find that said Article 1773 of the Civil Code is not in point and that, the order
appealed from should be, as it is hereby set aside and the case remanded to the lower court for
further proceedings, with the costs of this instance against defendant-appellee, Severino Mabato. It
is so ordered.
Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Castro, Angeles and Fernando, JJ., concur.
DECISION
PARAS, J.:
This is an appeal by certiorari from the decision of the Court of Appeals from which we are reproducing
the following basic findings of fact: chanroblesvirtuallawlibrary
“STASIKINOCEY is a partnership doing business at No. 58, Aurora Boulevard, San Juan, Rizal, and formed
by Alan W. Gorcey, Louis F. da Costa, Jr., William Kusik and Emma Badong Gavino. This partnership was
denied registration in the Securities and Exchange Commission, and while it is confusing to see in this case
that the CARDINAL RATTAN, sometimes called the CARDINAL RATTAN FACTORY, is treated as a
copartnership, of which Defendants Gorcey and da Costa are considered general partners, we are satisfied
that, as alleged in various instruments appearing of record, said Cardinal Rattan is merely the business
name or style used by the partnership Stasikinocey.
“Prior to June 3, 1949, Defendant Stasikinocey had an overdraft account with The National City Bank of
New York, a foreign banking association duly licensed to do business in the Philippines. On June 3, 1949,
the overdraft showed a balance of P6,134.92 against the Defendant Stasikinocey or the Cardinal Rattan
(Exhibit D), which account, due to the failure of the partnership to make the required payment, was
converted into an ordinary loan for which the corresponding promissory ‘joint note non-negotiable’ was
executed on June 3, 1949, by Louis F. da Costa for and in the name of the Cardinal Rattan, Louis F. da Costa
and Alan Gorcey (Exhibit D). This promissory note was secured on June 7, 1949, by a chattel mortgage
executed by Louis F. da Costa, Jr., General Partner for and in the name of Stasikinocey, alleged to be a
duly registered Philippine partnership, doing business under the name and style of Cardinal Rattan, with
principal office at 69 Riverside, San Juan, Rizal (Exhibit A). The chattels mortgaged were the following
motor vehicles: chanroble svirtuallawlibrary
“(a) Fargo truck with motor No. T-118-202839, Serial No. 81410206 and with plate No. T-7333 (1949);
“(b) Plymouth Sedan automobile motor No. T-5638876, Serial No. 11872718 and with plate No. 10372; chan
and
roblesvirtualawlibrary
“‘(a) That the mortgagor shall not sell or otherwise dispose of the said chattels without the mortgagee’s
written consent; and chan roblesvirtualawlibrary
“‘(b) That the mortgagee may foreclose the mortgage at any time, after breach of any condition thereof,
the mortgagor waiving the 30- day notice of foreclosure.’
“On June 7, 1949, the same day of the execution of the chattel mortgage aforementioned, Gorcey and Da
Costa executed an agreement purporting to convey and transfer all their rights, title and participation
in Defendant partnership to Shaeffer, allegedly in consideration of the cancellation of an indebtedness of
P25,000 owed by them and Defendant partnership to the latter (Exhibit J), which transaction is said to be
in violation of the Bulk Sales Law (Act No. 3952 of the Philippine Legislature).
“While the said loan was still unpaid and the chattel mortgage subsisting, Defendant partnership,
through Defendants Gorcey and Da Costa transferred to Defendant McDonald the Fargo truck and
Plymouth sedan on June 24, 1949 (Exhibit L). The Fargo pickup was also sold on June 28, 1949, by William
Shaeffer to Paul McDonald.
“On or about July 19, 1944, Paul Mcdonald, notwithstanding Plaintiff’s existing mortgage lien, in turn
transferred the Fargo truck and the Plymouth sedan to Benjamin Gonzales.”
The National City Bank of New York, Respondent herein, upon learning of the transfers made by the
partnership Stasikinocey to William Shaeffer, from the latter to Paul McDonald, and from Paul McDonald
to Benjamin Gonzales, of the vehicles previously pledged by Stasikinocey to the Respondent, filed an
action against Stasikinocey and its alleged partners Gorcey and Da Costa, as well as Paul McDonald and
Benjamin Gonzales, to recover its credit and to foreclose the corresponding chattel mortgage. McDonald
and Gonzales were made Defendants because they claimed to have a better right over the pledged
vehicle.
After trial the Court of First Instance of Manila rendered judgment in favor of the Respondent, annulling
the sale of the vehicles in question to Benjamin Gonzales; sentencing Da Costa and Gorcey to pay to chan roblesvirtualawlibrary
the Respondent jointly and severally the sum of P6,134.92, with legal interest from the debt of the
promissory note involved; sentencing the Petitioner Gonzales to deliver the vehicles in question to
chan roble svirtualawlibrary
the Respondent for sale at public auction if Da Costa and Gorcey should fail to pay the money judgment; chan
and sentencing Da Costa, Gorcey and Shaeffers to pay to the Respondent jointly and severally any
roblesvirtualawlibrary
deficiency that may remain unpaid should the proceeds of the sale not be sufficient; and sentencing chan roblesvirtualawlibrary
Gorcey, Da Costa, McDonald and Shaeffer to pay the costs. Only Paul McDonald and Benjamin Gonzales
appealed to the Court of Appeals which rendered a decision the dispositive part of which reads as
follows: chanroblesvirtuallawlibrary
“WHEREFORE, the decision appealed from is hereby modified, relieving Appellant William Shaeffer of the
obligation of paying, jointly and severally, together with Alan W. Gorcey and Louis F. da Costa, Jr., any
deficiency that may remain unpaid after applying the proceeds of the sale of the said motor vehicles which
shall be undertaken upon the lapse of 90 days from the date this decision becomes final, if by
then Defendants Louis F. da Costa, Jr., and Alan W. Gorcey had not paid the amount of the judgment debt.
With this modification the decision appealed from is in all other respects affirmed, with costs
against Appellants. This decision is without prejudice to whatever action Louis F. da Costa, Jr., and Alan
W. Gorcey may take against their co-partners in the Stasikinocey unregistered partnership.”
This appeal by certiorari was taken by Paul McDonald and Benjamin Gonzales, Petitioners herein, who
have assigned the following errors: chanroblesvirtuallawlibrary
“I
“IN RULING THAT AN UNREGISTERED COMMERCIAL CO-PARTNERSHIP WHICH HAS NO INDEPENDENT
JURIDICAL PERSONALITY CAN HAVE A ‘DOMICILE SO THAT A CHATTEL MORTGAGE REGISTERED IN THAT
‘DOMICILE’ WOULD BIND THIRD PERSONS WHO ARE INNOCENT PURCHASERS FOR VALUE.
“II
“IN RULING THAT WHEN A CHATTEL MORTGAGE IS EXECUTED BY ONE OF THE MEMBERS OF AN
UNREGISTERED COMMERCIAL CO-PARTNERSHIP WITHOUT JURIDICAL PERSONALITY INDEPENDENT OF ITS
MEMBERS, IT NEED NOT BE REGISTERED IN THE ACTUAL RESIDENCE OF THE MEMBERS WHO EXECUTED
SAME; AND, AS A CONSEQUENCE THEREOF, IN NOT MAKING ANY FINDING OF FACT AS TO THE ACTUAL
chan roblesvirtualawlibrary
RESIDENCE OF SAID CHATTEL MORTGAGOR, DESPITE APPELLANTS’ RAISING THAT QUESTION PROPERLY
BEFORE IT AND REQUESTING A RULING THEREON.
“III
IN NOT RULING THAT, WHEN A CHATTEL MORTGAGOR EXECUTES AN AFFIDAVIT OF GOOD FAITH BEFORE
A NOTARY PUBLIC OUTSIDE OF THE TERRITORIAL JURISDICTION OF THE LATTER, THE AFFIDAVIT IS VOID
AND THE CHATTEL MORTGAGE IS NOT BINDING ON THIRD PERSONS WHO ARE INNOCENT PURCHASERS
FOR VALUE; AND, AS A CONSEQUENCE THEREOF, IN NOT MAKING ANY FINDING OF FACT AS TO WHERE
chan roblesvirtualawlibrary
THE DEED WAS IN FACT EXECUTED, DESPITE APPELLANTS’ RAISING THAT QUESTION PROPERLY BEFORE IT
AND EXPRESSLY REQUESTING A RULING THEREON.
“IV
“IN RULING THAT A LETTER AUTHORIZING ONE MEMBER OF AN UNREGISTERED COMMERCIAL CO-
PARTNERSHIP ‘TO MAKE ALL OFFICIAL AND BUSINESS ARRANGEMENTS .. WITH THE NATIONAL CITY BANK
OF NEW YORK IN ORDER TO SIMPLIFY ALL MATTERS RELATIVE TO LCS CABLE TRANSFERS, DRAFTS, OR
OTHER BANKING MEDIUMS,’ WAS SUFFICIENT AUTHORITY FOR THE SAID MEMBER TO EXECUTE A
CHATTEL MORTGAGE IN ORDER TO GIVE THE BANK SECURITY FOR A PRE-EXISTING OVERDRAFT, GRANTED
WITHOUT SECURITY. WHICH THE BANK HAD CONVERTED INTO A DEMAND LOAN UPON FAILURE TO PAY
SAME AND BEFORE THE CHATTEL MORTGAGE WAS EXECUTED.’
This is the first question propounded by the Petitioners: “Since an unregistered commercial partnership
chanrobl esvirtuallawlibrary
unquestionably has no juridical personality, can it have a domicile so that the registration of a chattel
mortgage therein is notice to the world?”.
While an unregistered commercial partnership has no juridical personality, nevertheless, where two or
more persons attempt to create a partnership failing to comply with all the legal formalities, the law
considers them as partners and the association is a partnership in so far as it is a favorable to third persons,
by reason of the equitable principle of estoppel. In Jo Chung Chang vs. Pacific Commercial Co., 45 Phil.,
145, it was held “that although the partnership with the firm name of ‘Teck Seing and Co. Ltd.,’ could not
be regarded as a partnership de jure, yet with respect to third persons it will be considered a partnership
with all the consequent obligations for the purpose of enforcing the rights of such third persons.” Da Costa
and Gorcey cannot deny that they are partners of the partnership Stasikinocey, because in all their
transactions with the Respondent they represented themselves as such. Petitioner McDonald cannot
disclaim knowledge of the partnership Stasikinocey because he dealt with said entity in purchasing two of
the vehicles in question through Gorcey and Da Costa. As was held in Behn Meyer & Co. vs. Rosatzin, 5
Phil., 660, where a partnership not duly organized has been recognized as such in its dealings with certain
persons, it shall be considered as “partnership by estoppel” and the persons dealing with it are estopped
from denying its partnership existence. The sale of the vehicles in question being void as
to Petitioner McDonald, the transfer from the latter to Petitioner Benjamin Gonzales is also void, as the
buyer cannot have a better right than the seller.
It results that if the law recognizes a defectively organized partnership as de facto as far as third persons
are concerned, for purposes of its de facto existence it should have such attribute of a partnership as
domicile. In Hung-Man Yoc vs. Kieng-Chiong-Seng, 6 Phil., 498, it was held that although “it has no legal
standing, it is a partnership de facto and the general provisions of the Code applicable to all partnerships
apply to it.” The registration of the chattel mortgage in question with the Office of the Register of Deeds
of Rizal, the residence or place of business of the partnership Stasikinocey being San Juan, Rizal, was
therefore in accordance with section 4 of the Chattel Mortgage Law.
The second question propounded by the Petitioners is: “If not, is a chattel mortgage executed by only
chanroble svirtuallawlibrary
the deed of chattel mortgage — is controlling, may the Court of Appeals refuse to make a finding of fact
as to where the mortgagor resided despite your Petitioners’ having properly raised that question before
it and expressly requested a ruling thereon?”
These two questions have become academic by reason of the answer to the first question, namely, that
as a de facto partnership, Stasikinocey had its domicile in San Juan, Rizal.
The fourth question asked by the Petitioners is as follows: “Is a chattel mortgage executed by only one
chanroblesvirtuallawlibrary
of the ‘partners’ of an unregistered commercial partnership valid as to third persons when that ‘partner’
executed the affidavit of good faith in Quezon City before a notary public whose appointment is only for
the City of Manila? If not, may the Court of Appeals refuse to make a finding of fact as to where the deed
was executed, despite your Petitioners’ having properly raised that issue before it and expressly requested
a ruling thereon?”
It is noteworthy that the chattel mortgage in question is in the form required by law, and there is therefore
the presumption of its due execution which cannot be easily destroyed by the biased testimony of the
one who executed it. The interested version of Da Costa that the affidavit of good faith appearing in the
chattel mortgage was executed in Quezon City before a notary public for and in the City of Manila was
correctly rejected by the trial court and the Court of Appeals. Indeed, cumbersome legal formalities are
imposed to prevent fraud. As aptly pointed out in El Hogar Filipino vs. Olviga, 60 Phil., 17, “If the biased
and interested testimony of a grantor and the vague and uncertain testimony of his son are deemed
sufficient to overcome a public instrument drawn up with all the formalities prescribed by the law then
there will have been established a very dangerous doctrine which would throw wide open the doors to
fraud.”
The last question raised by the Petitioners is as follows: “Does only one of several ‘partners’ of an
chanroblesvirtuallawlibrary
unregistered commercial partnership have authority, by himself alone, to execute a valid chattel mortgage
over property owned by the unregistered commercial partnership in order to guarantee a pre-existing
overdraft previously granted, without guaranty, by the bank?”
In view of the conclusion that Stasikinocey is a de facto partnership, and Da Costa appears as a co-manager
in the letter of Gorcey to the Respondent and in the promissory note executed by Da Costa, and that even
the partners considered him as such, as stated in the affidavit of April 21, 1948, to the effect that “That
we as the majority partners hereby agree to appoint Louis da Costa co-managing partner of Alan W.
Gorcey, duly approved managing partner of the said firm,” the “partner” who executed the chattel
mortgage in question must be deemed to be so fully authorized. Section 6 of the Chattel Mortgage Law
provides that when a partnership is a party to the mortgage, the affidavit may be made and subscribed
by one member thereof. In this case the affidavit was executed and subscribed by Da Costa, not only as a
partner but as a managing partner.
There is no merit in Petitioners’ pretense that the motor vehicles in question are the common property of
Da Costa and Gorcey. Petitioners invoke article 24 of the Code of Commerce in arguing that an
unregistered commercial partnership has no juridical personality and cannot execute any act that would
adversely affect innocent third persons. Petitioners forget that the Respondent is a third person with
respect to the partnership, and the chattel mortgage executed by Da Costa cannot therefore be impugned
by Gorcey on the ground that there is no partnership between them and that the vehicles in question
belonged to them in common. As a matter of fact, the Respondent and the Petitioners are all third persons
as regards the partnership Stasikinocey; and even assuming that the Petitioners are purchasers in good
chan roblesvirtualawlibrary
faith and for value, the Respondenthaving transacted with Stasikinocey earlier than the Petitioners, it
should enjoy and be given priority.
Wherefore, the appealed decision of the Court of Appeals is affirmed with costs against the Petitioners.
Bengzon, Montemayor, Reyes, A., Jugo, Bautista Angelo Labrador, Concepcion, Reyes, J.B.L., and
Endencia, JJ., concur.
REYES, J.:
This is an action originally brought in the Court of First Instance of Rizal, Quezon City Branch, to
recover possesion of registered land situated in barrio Tatalon, Quezon City.
Plaintiff's complaint was amended three times with respect to the extent and description of the land
sought to be recovered. The original complaint described the land as a portion of a lot registered in
plaintiff's name under Transfer Certificate of Title No. 37686 of the land record of Rizal Province and
as containing an area of 13 hectares more or less. But the complaint was amended by reducing the
area of 6 hectares, more or less, after the defendant had indicated the plaintiff's surveyors the
portion of land claimed and occupied by him. The second amendment became necessary and was
allowed following the testimony of plaintiff's surveyors that a portion of the area was embraced in
another certificate of title, which was plaintiff's Transfer Certificate of Title No. 37677. And still later,
in the course of trial, after defendant's surveyor and witness, Quirino Feria, had testified that the area
occupied and claimed by defendant was about 13 hectares, as shown in his Exhibit 1, plaintiff again,
with the leave of court, amended its complaint to make its allegations conform to the evidence.
Defendant, in his answer, sets up prescription and title in himself thru "open, continuous, exclusive
and public and notorious possession (of land in dispute) under claim of ownership, adverse to the
entire world by defendant and his predecessor in interest" from "time in-memorial". The answer
further alleges that registration of the land in dispute was obtained by plaintiff or its predecessors in
interest thru "fraud or error and without knowledge (of) or interest either personal or thru publication
to defendant and/or predecessors in interest." The answer therefore prays that the complaint be
dismissed with costs and plaintiff required to reconvey the land to defendant or pay its value.
After trial, the lower court rendered judgment for plaintiff, declaring defendant to be without any right
to the land in question and ordering him to restore possession thereof to plaintiff and to pay the latter
a monthly rent of P132.62 from January, 1940, until he vacates the land, and also to pay the costs.
Appealing directly to this court because of the value of the property involved, defendant makes the
following assignment or errors:
I. The trial court erred in not dismissing the case on the ground that the case was not brought
by the real property in interest.
II. The trial court erred in admitting the third amended complaint.
IV. The trial court erred in including in its decision land not involved in the litigation.
V. The trial court erred in holding that the land in dispute is covered by transfer certificates of
Title Nos. 37686 and 37677.
Vl. The trial court erred in not finding that the defendant is the true and lawful owner of the
land.
VII. The trial court erred in finding that the defendant is liable to pay the plaintiff the amount
of P132.62 monthly from January, 1940, until he vacates the premises.
VIII. The trial court erred in not ordering the plaintiff to reconvey the land in litigation to the
defendant.
As to the first assigned error, there is nothing to the contention that the present action is not brought
by the real party in interest, that is, by J. M. Tuason and Co., Inc. What the Rules of Court require is
that an action be brought in the name of, but not necessarily by, the real party in interest. (Section 2,
Rule 2.) In fact the practice is for an attorney-at-law to bring the action, that is to file the complaint, in
the name of the plaintiff. That practice appears to have been followed in this case, since the
complaint is signed by the law firm of Araneta and Araneta, "counsel for plaintiff" and commences
with the statement "comes now plaintiff, through its undersigned counsel." It is true that the
complaint also states that the plaintiff is "represented herein by its Managing Partner Gregorio
Araneta, Inc.", another corporation, but there is nothing against one corporation being represented
by another person, natural or juridical, in a suit in court. The contention that Gregorio Araneta, Inc.
can not act as managing partner for plaintiff on the theory that it is illegal for two corporations to
enter into a partnership is without merit, for the true rule is that "though a corporation has no power
to enter into a partnership, it may nevertheless enter into a joint venture with another where the
nature of that venture is in line with the business authorized by its charter." (Wyoming-Indiana Oil
Gas Co. vs. Weston, 80 A. L. R., 1043, citing 2 Fletcher Cyc. of Corp., 1082.) There is nothing in the
record to indicate that the venture in which plaintiff is represented by Gregorio Araneta, Inc. as "its
managing partner" is not in line with the corporate business of either of them.
Errors II, III, and IV, referring to the admission of the third amended complaint, may be answered by
mere reference to section 4 of Rule 17, Rules of Court, which sanctions such amendment. It reads:
Sec. 4. Amendment to conform to evidence. — When issues not raised by the pleadings are
tried by express or implied consent of the parties, they shall be treated in all respects, as if
they had been raised in the pleadings. Such amendment of the pleadings as may be
necessary to cause them to conform to the evidence and to raise these issues may be made
upon motion of any party at my time, even of the trial of these issues. If evidence is objected
to at the trial on the ground that it is not within the issues made by the pleadings, the court
may allow the pleadings to be amended and shall be so freely when the presentation of the
merits of the action will be subserved thereby and the objecting party fails to satisfy the court
that the admission of such evidence would prejudice him in maintaining his action or defense
upon the merits. The court may grant a continuance to enable the objecting party to meet
such evidence.
Under this provision amendment is not even necessary for the purpose of rendering judgment on
issues proved though not alleged. Thus, commenting on the provision, Chief Justice Moran says in
this Rules of Court:
Under this section, American courts have, under the New Federal Rules of Civil Procedure,
ruled that where the facts shown entitled plaintiff to relief other than that asked for, no
amendment to the complaint is necessary, especially where defendant has himself raised the
point on which recovery is based, and that the appellate court treat the pleadings as
amended to conform to the evidence, although the pleadings were not actually amended. (I
Moran, Rules of Court, 1952 ed., 389-390.)
Our conclusion therefore is that specification of error II, III, and IV are without merit..
Let us now pass on the errors V and VI. Admitting, though his attorney, at the early stage of the trial,
that the land in dispute "is that described or represented in Exhibit A and in Exhibit B enclosed in red
pencil with the name Quirino Bolaños," defendant later changed his lawyer and also his theory and
tried to prove that the land in dispute was not covered by plaintiff's certificate of title. The evidence,
however, is against defendant, for it clearly establishes that plaintiff is the registered owner of lot No.
4-B-3-C, situate in barrio Tatalon, Quezon City, with an area of 5,297,429.3 square meters, more or
less, covered by transfer certificate of title No. 37686 of the land records of Rizal province, and of lot
No. 4-B-4, situated in the same barrio, having an area of 74,789 square meters, more or less,
covered by transfer certificate of title No. 37677 of the land records of the same province, both lots
having been originally registered on July 8, 1914 under original certificate of title No. 735. The
identity of the lots was established by the testimony of Antonio Manahan and Magno Faustino,
witnesses for plaintiff, and the identity of the portion thereof claimed by defendant was established
by the testimony of his own witness, Quirico Feria. The combined testimony of these three witnesses
clearly shows that the portion claimed by defendant is made up of a part of lot 4-B-3-C and major on
portion of lot 4-B-4, and is well within the area covered by the two transfer certificates of title already
mentioned. This fact also appears admitted in defendant's answer to the third amended complaint.
As the land in dispute is covered by plaintiff's Torrens certificate of title and was registered in 1914,
the decree of registration can no longer be impugned on the ground of fraud, error or lack of notice
to defendant, as more than one year has already elapsed from the issuance and entry of the decree.
Neither court the decree be collaterally attacked by any person claiming title to, or interest in, the
land prior to the registration proceedings. (Soroñgon vs. Makalintal,1 45 Off. Gaz., 3819.) Nor could
title to that land in derogation of that of plaintiff, the registered owner, be acquired by prescription or
adverse possession. (Section 46, Act No. 496.) Adverse, notorious and continuous possession
under claim of ownership for the period fixed by law is ineffective against a Torrens title. (Valiente vs.
Judge of CFI of Tarlac,2 etc., 45 Off. Gaz., Supp. 9, p. 43.) And it is likewise settled that the right to
secure possession under a decree of registration does not prescribed. (Francisco vs. Cruz, 43 Off.
Gaz., 5105, 5109-5110.) A recent decision of this Court on this point is that rendered in the case
of Jose Alcantara et al., vs. Mariano et al., 92 Phil., 796. This disposes of the alleged errors V and
VI.
As to error VII, it is claimed that `there was no evidence to sustain the finding that defendant should
be sentenced to pay plaintiff P132.62 monthly from January, 1940, until he vacates the premises.'
But it appears from the record that that reasonable compensation for the use and occupation of the
premises, as stipulated at the hearing was P10 a month for each hectare and that the area occupied
by defendant was 13.2619 hectares. The total rent to be paid for the area occupied should therefore
be P132.62 a month. It is appears from the testimony of J. A. Araneta and witness Emigdio
Tanjuatco that as early as 1939 an action of ejectment had already been filed against defendant.
And it cannot be supposed that defendant has been paying rents, for he has been asserting all along
that the premises in question 'have always been since time immemorial in open, continuous,
exclusive and public and notorious possession and under claim of ownership adverse to the entire
world by defendant and his predecessors in interest.' This assignment of error is thus clearly without
merit.
Error No. VIII is but a consequence of the other errors alleged and needs for further consideration.
During the pendency of this case in this Court appellant, thru other counsel, has filed a motion to
dismiss alleging that there is pending before the Court of First Instance of Rizal another action
between the same parties and for the same cause and seeking to sustain that allegation with a copy
of the complaint filed in said action. But an examination of that complaint reveals that appellant's
allegation is not correct, for the pretended identity of parties and cause of action in the two suits
does not appear. That other case is one for recovery of ownership, while the present one is for
recovery of possession. And while appellant claims that he is also involved in that order action
because it is a class suit, the complaint does not show that such is really the case. On the contrary,
it appears that the action seeks relief for each individual plaintiff and not relief for and on behalf of
others. The motion for dismissal is clearly without merit.
Wherefore, the judgment appealed from is affirmed, with costs against the plaintiff.
Paras, C.J., Pablo, Bengzon, Montemayor, Jugo, Bautista Angelo, Labrador, and Concepcion,
JJ., concur.
Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete
and Special Attorneys B. Gatdula, Jr. and T. Temprosa Jr. for petitioner.
A. S. Monzon, Gutierrez, Farrales and Ong for respondents.
A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.," was formed on 30 September
1947 by herein respondent William J. Suter as the general partner, and Julia Spirig and Gustav
Carlson, as the limited partners. The partners contributed, respectively, P20,000.00, P18,000.00 and
P2,000.00 to the partnership. On 1 October 1947, the limited partnership was registered with the
Securities and Exchange Commission. The firm engaged, among other activities, in the importation,
marketing, distribution and operation of automatic phonographs, radios, television sets and
amusement machines, their parts and accessories. It had an office and held itself out as a limited
partnership, handling and carrying merchandise, using invoices, bills and letterheads bearing its
trade-name, maintaining its own books of accounts and bank accounts, and had a quota allocation
with the Central Bank.
In 1948, however, general partner Suter and limited partner Spirig got married and, thereafter, on 18
December 1948, limited partner Carlson sold his share in the partnership to Suter and his wife. The
sale was duly recorded with the Securities and Exchange Commission on 20 December 1948.
The limited partnership had been filing its income tax returns as a corporation, without objection by
the herein petitioner, Commissioner of Internal Revenue, until in 1959 when the latter, in an
assessment, consolidated the income of the firm and the individual incomes of the partners-spouses
Suter and Spirig resulting in a determination of a deficiency income tax against respondent Suter in
the amount of P2,678.06 for 1954 and P4,567.00 for 1955.
Respondent Suter protested the assessment, and requested its cancellation and withdrawal, as not
in accordance with law, but his request was denied. Unable to secure a reconsideration, he
appealed to the Court of Tax Appeals, which court, after trial, rendered a decision, on 11 November
1965, reversing that of the Commissioner of Internal Revenue.
The present case is a petition for review, filed by the Commissioner of Internal Revenue, of the tax
court's aforesaid decision. It raises these issues:
(a) Whether or not the corporate personality of the William J. Suter "Morcoin" Co., Ltd. should be
disregarded for income tax purposes, considering that respondent William J. Suter and his wife, Julia
Spirig Suter actually formed a single taxable unit; and
(b) Whether or not the partnership was dissolved after the marriage of the partners, respondent
William J. Suter and Julia Spirig Suter and the subsequent sale to them by the remaining partner,
Gustav Carlson, of his participation of P2,000.00 in the partnership for a nominal amount of P1.00.
The theory of the petitioner, Commissioner of Internal Revenue, is that the marriage of Suter and
Spirig and their subsequent acquisition of the interests of remaining partner Carlson in the
partnership dissolved the limited partnership, and if they did not, the fiction of juridical personality of
the partnership should be disregarded for income tax purposes because the spouses have exclusive
ownership and control of the business; consequently the income tax return of respondent Suter for
the years in question should have included his and his wife's individual incomes and that of the
limited partnership, in accordance with Section 45 (d) of the National Internal Revenue Code, which
provides as follows:
(d) Husband and wife. — In the case of married persons, whether citizens, residents or non-
residents, only one consolidated return for the taxable year shall be filed by either spouse to
cover the income of both spouses; ....
In refutation of the foregoing, respondent Suter maintains, as the Court of Tax Appeals held, that his
marriage with limited partner Spirig and their acquisition of Carlson's interests in the partnership in
1948 is not a ground for dissolution of the partnership, either in the Code of Commerce or in the New
Civil Code, and that since its juridical personality had not been affected and since, as a limited
partnership, as contra distinguished from a duly registered general partnership, it is taxable on its
income similarly with corporations, Suter was not bound to include in his individual return the income
of the limited partnership.
We find the Commissioner's appeal unmeritorious.
The thesis that the limited partnership, William J. Suter "Morcoin" Co., Ltd., has been dissolved by
operation of law because of the marriage of the only general partner, William J. Suter to the
originally limited partner, Julia Spirig one year after the partnership was organized is rested by the
appellant upon the opinion of now Senator Tolentino in Commentaries and Jurisprudence on
Commercial Laws of the Philippines, Vol. 1, 4th Ed., page 58, that reads as follows:
A husband and a wife may not enter into a contract of general copartnership, because under
the Civil Code, which applies in the absence of express provision in the Code of Commerce,
persons prohibited from making donations to each other are prohibited from entering
into universal partnerships. (2 Echaverri 196) It follows that the marriage of partners
necessarily brings about the dissolution of a pre-existing partnership. (1 Guy de Montella 58)
The petitioner-appellant has evidently failed to observe the fact that William J. Suter "Morcoin" Co.,
Ltd. was not a universal partnership, but a particular one. As appears from Articles 1674 and 1675 of
the Spanish Civil Code, of 1889 (which was the law in force when the subject firm was organized in
1947), a universal partnership requires either that the object of the association be all the present
property of the partners, as contributed by them to the common fund, or else "all that the partners
may acquire by their industry or work during the existence of the partnership". William J. Suter
"Morcoin" Co., Ltd. was not such a universal partnership, since the contributions of the partners were
fixed sums of money, P20,000.00 by William Suter and P18,000.00 by Julia Spirig and neither one of
them was an industrial partner. It follows that William J. Suter "Morcoin" Co., Ltd. was not a
partnership that spouses were forbidden to enter by Article 1677 of the Civil Code of 1889.
The former Chief Justice of the Spanish Supreme Court, D. Jose Casan, in his Derecho Civil, 7th
Edition, 1952, Volume 4, page 546, footnote 1, says with regard to the prohibition contained in the
aforesaid Article 1677:
Los conyuges, segun esto, no pueden celebrar entre si el contrato de sociedad universal,
pero o podran constituir sociedad particular? Aunque el punto ha sido muy debatido, nos
inclinamos a la tesis permisiva de los contratos de sociedad particular entre esposos, ya que
ningun precepto de nuestro Codigo los prohibe, y hay que estar a la norma general segun la
que toda persona es capaz para contratar mientras no sea declarado incapaz por la ley. La
jurisprudencia de la Direccion de los Registros fue favorable a esta misma tesis en su
resolution de 3 de febrero de 1936, mas parece cambiar de rumbo en la de 9 de marzo de
1943.
Nor could the subsequent marriage of the partners operate to dissolve it, such marriage not being
one of the causes provided for that purpose either by the Spanish Civil Code or the Code of
Commerce.
The appellant's view, that by the marriage of both partners the company became a single
proprietorship, is equally erroneous. The capital contributions of partners William J. Suter and Julia
Spirig were separately owned and contributed by them before their marriage; and after they were
joined in wedlock, such contributions remained their respective separate property under the Spanish
Civil Code (Article 1396):
(a) That which is brought to the marriage as his or her own; ....
Thus, the individual interest of each consort in William J. Suter "Morcoin" Co., Ltd. did not become
common property of both after their marriage in 1948.
It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical
personality of its own, distinct and separate from that of its partners (unlike American and English
law that does not recognize such separate juridical personality), the bypassing of the existence of
the limited partnership as a taxpayer can only be done by ignoring or disregarding clear statutory
mandates and basic principles of our law. The limited partnership's separate individuality makes it
impossible to equate its income with that of the component members. True, section 24 of the Internal
Revenue Code merges registered general co-partnerships (compañias colectivas) with the
personality of the individual partners for income tax purposes. But this rule is exceptional in its
disregard of a cardinal tenet of our partnership laws, and can not be extended by mere implication to
limited partnerships.
The rulings cited by the petitioner (Collector of Internal Revenue vs. University of the Visayas, L-
13554, Resolution of 30 October 1964, and Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 504) as authority
for disregarding the fiction of legal personality of the corporations involved therein are not applicable
to the present case. In the cited cases, the corporations were already subject to tax when the fiction
of their corporate personality was pierced; in the present case, to do so would exempt the limited
partnership from income taxation but would throw the tax burden upon the partners-spouses in their
individual capacities. The corporations, in the cases cited, merely served as business conduits
or alter egos of the stockholders, a factor that justified a disregard of their corporate personalities for
tax purposes. This is not true in the present case. Here, the limited partnership is not a mere
business conduit of the partner-spouses; it was organized for legitimate business purposes; it
conducted its own dealings with its customers prior to appellee's marriage, and had been filing its
own income tax returns as such independent entity. The change in its membership, brought about by
the marriage of the partners and their subsequent acquisition of all interest therein, is no ground for
withdrawing the partnership from the coverage of Section 24 of the tax code, requiring it to pay
income tax. As far as the records show, the partners did not enter into matrimony and thereafter buy
the interests of the remaining partner with the premeditated scheme or design to use the partnership
as a business conduit to dodge the tax laws. Regularity, not otherwise, is presumed.
As the limited partnership under consideration is taxable on its income, to require that income to be
included in the individual tax return of respondent Suter is to overstretch the letter and intent of the
law. In fact, it would even conflict with what it specifically provides in its Section 24: for the appellant
Commissioner's stand results in equal treatment, tax wise, of a general copartnership (compañia
colectiva) and a limited partnership, when the code plainly differentiates the two. Thus, the code
taxes the latter on its income, but not the former, because it is in the case of compañias
colectivas that the members, and not the firm, are taxable in their individual capacities for any
dividend or share of the profit derived from the duly registered general partnership (Section 26,
N.I.R.C.; Arañas, Anno. & Juris. on the N.I.R.C., As Amended, Vol. 1, pp. 88-89). lawphi1.nêt
But it is argued that the income of the limited partnership is actually or constructively the income of
the spouses and forms part of the conjugal partnership of gains. This is not wholly correct. As
pointed out in Agapito vs. Molo 50 Phil. 779, and People's Bank vs. Register of Deeds of Manila, 60
Phil. 167, the fruits of the wife's parapherna become conjugal only when no longer needed to defray
the expenses for the administration and preservation of the paraphernal capital of the wife. Then
again, the appellant's argument erroneously confines itself to the question of the legal personality of
the limited partnership, which is not essential to the income taxability of the partnership since the law
taxes the income of even joint accounts that have no personality of their own. 1 Appellant is, likewise,
mistaken in that it assumes that the conjugal partnership of gains is a taxable unit, which it is not.
What is taxable is the "income of both spouses" (Section 45 [d] in their individual capacities. Though
the amount of income (income of the conjugal partnership vis-a-vis the joint income of husband and
wife) may be the same for a given taxable year, their consequences would be different, as their
contributions in the business partnership are not the same.
The difference in tax rates between the income of the limited partnership being consolidated with,
and when split from the income of the spouses, is not a justification for requiring consolidation; the
revenue code, as it presently stands, does not authorize it, and even bars it by requiring the limited
partnership to pay tax on its own income.
GANCAYCO, J.:
This petition for review on certiorari seeks the reversal of the decision of the Insurance Commission in IC Case #367 1 dismissing the
complaint 2 for recovery of the alleged unpaid balance of the proceeds of the Fire Insurance Policies issued by herein respondent insurance
company in favor of petitioner-intervenor.
The facts of the case as found by respondent Insurance Commission are as follows:
On April 19, 1975, Azucena Palomo obtained a loan from Tai Tong Chuache Inc. in
the amount of P100,000.00. To secure the payment of the loan, a mortgage was
executed over the land and the building in favor of Tai Tong Chuache & Co. (Exhibit
"1" and "1-A"). On April 25, 1975, Arsenio Chua, representative of Thai Tong
Chuache & Co. insured the latter's interest with Travellers Multi-Indemnity
Corporation for P100,000.00 (P70,000.00 for the building and P30,000.00 for the
contents thereof) (Exhibit "A-a," contents thereof) (Exhibit "A-a").
On June 11, 1975, Pedro Palomo secured a Fire Insurance Policy No. F- 02500
(Exhibit "A"), covering the building for P50,000.00 with respondent Zenith Insurance
Corporation. On July 16, 1975, another Fire Insurance Policy No. 8459 (Exhibit "B")
was procured from respondent Philippine British Assurance Company, covering the
same building for P50,000.00 and the contents thereof for P70,000.00.
On July 31, 1975, the building and the contents were totally razed by fire.
M Ze Bu P P1
I nit ildi 5 7,6
R h ng 0, 10.
O 0 93
0
0
F In
- su
0 ra
2 nc
5 e
0
0
C
or
p.
F Ph Ho 7 24,
- il. us 0, 65
8 eh 0 5.3
4 old 0 1
5 0
9
0
Bri
tis
h
As
sc
o.
C
o.
In FF 5 39,
c. F 0, 18
& 0 6.1
F5 0 0
0
P C Ri In Pa
o o sk s ys
l m ur
i pa e
c ny s
y
N
o
.
F S
I S
C S
- Ac
1 cr
5 e
3
8
1
dit
ed
Gr
ou
p
of Bu P P8,
In ildi 2 80
su ng 5, 5.4
rer 0 7
s 0
0
To P P9
tal 1 0,2
s 9 57.
5, 81
0
0
0
We are showing hereunder another apportionment of the loss which includes the
Travellers Multi-Indemnity policy for reference purposes.
P C Ri Inj Pa
o
l o sk ur ys
i m es
c
y
pa
N ny
o
.
M Z
I en
R ith
O
/
F In
- su
0 ra
2 nc
5 e
0
0
C Bu P P1
or ildi 5 1,8
p. ng 0, 77.
0 14
0
0
F P
- hil
8 .
4
5
9
0
Br
iti
sh
A I- 7 16,
ss Bu 0, 62
co ildi 0 8.0
. ng 0 0
C 0
o.
II-
B
uil
di
n
g
FF 5 24,
F 0, 91
& 0 8.7
PE 0 9
0
P S Ac
V S cr
C S edi
- te
1 d
5
1
8
1
Gr
ou
p
of
In Bu 2 5,9
su ildi 5, 38.
re ng 0 50
rs 0
0
F In I- 3 14,
- su Re 0, 46
5 re f 0 7.3
9 rs 0 1
9 0
D
V
M II- 7 16,
ult Bu 0, 62
i ildi 0 8.0
ng 0 0
0
To P P9
tal 2 0,2
s 9 57.
5. 81
0
0
0
Based on the computation of the loss, including the Travellers Multi- Indemnity,
respondents, Zenith Insurance, Phil. British Assurance and S.S.S. Accredited Group
of Insurers, paid their corresponding shares of the loss. Complainants were paid the
following: P41,546.79 by Philippine British Assurance Co., P11,877.14 by Zenith
Insurance Corporation, and P5,936.57 by S.S.S. Group of Accredited Insurers (Par.
6. Amended Complaint). Demand was made from respondent Travellers Multi-
Indemnity for its share in the loss but the same was refused. Hence, complainants
demanded from the other three (3) respondents the balance of each share in the loss
based on the computation of the Adjustment Standards Report excluding Travellers
Multi-Indemnity in the amount of P30,894.31 (P5,732.79-Zenith Insurance:
P22,294.62, Phil. British: and P2,866.90, SSS Accredited) but the same was refused,
hence, this action.
Travellers Insurance, on its part, admitted the issuance of the Policy No. 599 DV and
alleged as its special and affirmative defenses the following, to wit: that Fire
Policy No. 599 DV, covering the furniture and building of complainants was secured
by a certain Arsenio Chua, mortgage creditor, for the purpose of protecting his
mortgage credit against the complainants; that the said policy was issued in the
name of Azucena Palomo, only to indicate that she owns the insured premises; that
the policy contains an endorsement in favor of Arsenio Chua as his mortgage interest
may appear to indicate that insured was Arsenio Chua and the complainants; that the
premium due on said fire policy was paid by Arsenio Chua; that respondent
Travellers is not liable to pay complainants.
On May 31, 1977, Tai Tong Chuache & Co. filed a complaint in intervention claiming
the proceeds of the fire Insurance Policy No. F-559 DV, issued by respondent
Travellers Multi-Indemnity.
From the above decision, only intervenor Tai Tong Chuache filed a motion for reconsideration but it
was likewise denied hence, the present petition.
It is the contention of the petitioner that respondent Insurance Commission decided an issue not
raised in the pleadings of the parties in that it ruled that a certain Arsenio Lopez Chua is the one
entitled to the insurance proceeds and not Tai Tong Chuache & Company.
This Court cannot fault petitioner for the above erroneous interpretation of the decision appealed
from considering the manner it was written. 5 As correctly pointed out by respondent insurance
commission in their comment, the decision did not pronounce that it was Arsenio Lopez Chua who
has insurable interest over the insured property. Perusal of the decision reveals however that it
readily absolved respondent insurance company from liability on the basis of the commissioner's
conclusion that at the time of the occurrence of the peril insured against petitioner as mortgagee had
no more insurable interest over the insured property. It was based on the inference that the credit
secured by the mortgaged property was already paid by the Palomos before the said property was
gutted down by fire. The foregoing conclusion was arrived at on the basis of the certification issued
by the then Court of First Instance of Davao, Branch II that in a certain civil action against the
Palomos, Antonio Lopez Chua stands as the complainant and not petitioner Tai Tong Chuache &
Company.
We find the petition to be impressed with merit. It is a well known postulate that the case of a party is
constituted by his own affirmative allegations. Under Section 1, Rule 1316 each party must prove his
own affirmative allegations by the amount of evidence required by law which in civil cases as in the
present case is preponderance of evidence. The party, whether plaintiff or defendant, who asserts
the affirmative of the issue has the burden of presenting at the trial such amount of evidence as
required by law to obtain favorable judgment.7 Thus, petitioner who is claiming a right over the
insurance must prove its case. Likewise, respondent insurance company to avoid liability under the
policy by setting up an affirmative defense of lack of insurable interest on the part of the petitioner
must prove its own affirmative allegations.
It will be recalled that respondent insurance company did not assail the validity of the insurance
policy taken out by petitioner over the mortgaged property. Neither did it deny that the said property
was totally razed by fire within the period covered by the insurance. Respondent, as mentioned
earlier advanced an affirmative defense of lack of insurable interest on the part of the petitioner that
before the occurrence of the peril insured against the Palomos had already paid their credit due the
petitioner. Respondent having admitted the material allegations in the complaint, has the burden of
proof to show that petitioner has no insurable interest over the insured property at the time the
contingency took place. Upon that point, there is a failure of proof. Respondent, it will be noted,
exerted no effort to present any evidence to substantiate its claim, while petitioner did. For said
respondent's failure, the decision must be adverse to it.
The record of the case shows that the petitioner to support its claim for the insurance proceeds
offered as evidence the contract of mortgage (Exh. 1) which has not been cancelled nor released. It
has been held in a long line of cases that when the creditor is in possession of the document of
credit, he need not prove non-payment for it is presumed. 8 The validity of the insurance policy taken
b petitioner was not assailed by private respondent. Moreover, petitioner's claim that the loan
extended to the Palomos has not yet been paid was corroborated by Azucena Palomo who testified
that they are still indebted to herein petitioner. 9
Public respondent argues however, that if the civil case really stemmed from the loan granted to
Azucena Palomo by petitioner the same should have been brought by Tai Tong Chuache or by its
representative in its own behalf. From the above premise respondent concluded that the obligation
secured by the insured property must have been paid.
The premise is correct but the conclusion is wrong. Citing Rule 3, Sec. 2 10 respondent pointed out
that the action must be brought in the name of the real party in interest. We agree. However, it
should be borne in mind that petitioner being a partnership may sue and be sued in its name or by
its duly authorized representative. The fact that Arsenio Lopez Chua is the representative of
petitioner is not questioned. Petitioner's declaration that Arsenio Lopez Chua acts as the managing
partner of the partnership was corroborated by respondent insurance company. 11 Thus Chua as the
managing partner of the partnership may execute all acts of administration 12 including the right to
sue debtors of the partnership in case of their failure to pay their obligations when it became due and
demandable. Or at the very least, Chua being a partner of petitioner Tai Tong Chuache & Company
is an agent of the partnership. Being an agent, it is understood that he acted for and in behalf of the
firm.13 Public respondent's allegation that the civil case flied by Arsenio Chua was in his capacity as
personal creditor of spouses Palomo has no basis.
The respondent insurance company having issued a policy in favor of herein petitioner which policy
was of legal force and effect at the time of the fire, it is bound by its terms and conditions. Upon its
failure to prove the allegation of lack of insurable interest on the part of the petitioner, respondent
insurance company is and must be held liable.
IN VIEW OF THE FOREGOING, the decision appealed from is hereby SET ASIDE and ANOTHER
judgment is rendered order private respondent Travellers Multi-Indemnity Corporation to pay
petitioner the face value of Insurance Policy No. 599-DV in the amount of P100,000.00. Costs
against said private respondent.
SO ORDERED.
DECISION
PANGANIBAN, J.:
A partnership may be deemed to exist among parties who agree to borrow money to pursue a
business and to divide the profits or losses that may arise therefrom, even if it is shown that they
have not contributed any capital of their own to a "common fund." Their contribution may be in
the form of credit or industry, not necessarily cash or fixed assets. Being partners, they are all
liable for debts incurred by or on behalf of the partnership. The liability for a contract entered into
on behalf of an unincorporated association or ostensible corporation may lie in a person who may
not have directly transacted on its behalf, but reaped benefits from that contract.
The Case
In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998
Decision of the Court of Appeals in CA-GR CV 41477,[1] which disposed as follows:
WHEREFORE, [there being] no reversible error in the appealed decision, the same is hereby
affirmed.[2]
The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was
affirmed by the CA, reads as follows:
1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court
on September 20, 1990;
2. That defendants are jointly liable to plaintiff for the following amounts, subject to
the modifications as hereinafter made by reason of the special and unique facts and
circumstances and the proceedings that transpired during the trial of this case;
a. P532,045.00 representing [the] unpaid purchase price of the fishing nets covered by
the Agreement plus P68,000.00 representing the unpaid price of the floats not covered
by said Agreement;
b. 12% interest per annum counted from date of plaintiffs invoices and computed on
their respective amounts as follows:
ii. Accrued interest of P27,904.02 on Invoice No. 14413 for P146,868.00 dated
February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated
February 19, 1990;
c. P50,000.00 as and for attorneys fees, plus P8,500.00 representing P500.00 per
appearance in court;
d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the nets
counted from September 20, 1990 (date of attachment) to September 12, 1991 (date of
auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the principal obligation or for the
unpaid price of nets and floats in the amount of P532,045.00 and P68,000.00,
respectively, or for the total amount of P600,045.00, this Court noted that these items
were attached to guarantee any judgment that may be rendered in favor of the plaintiff
but, upon agreement of the parties, and, to avoid further deterioration of the nets
during the pendency of this case, it was ordered sold at public auction for not less
than P900,000.00 for which the plaintiff was the sole and winning bidder. The
proceeds of the sale paid for by plaintiff was deposited in court. In effect, the amount
of P900,000.00 replaced the attached property as a guaranty for any judgment that
plaintiff may be able to secure in this case with the ownership and possession of the
nets and floats awarded and delivered by the sheriff to plaintiff as the highest bidder
in the public auction sale. It has also been noted that ownership of the nets [was]
retained by the plaintiff until full payment [was] made as stipulated in the invoices;
hence, in effect, the plaintiff attached its own properties. It [was] for this reason also
that this Court earlier ordered the attachment bond filed by plaintiff to guaranty
damages to defendants to be cancelled and for the P900,000.00 cash bidded and paid
for by plaintiff to serve as its bond in favor of defendants.
From the foregoing, it would appear therefore that whatever judgment the plaintiff
may be entitled to in this case will have to be satisfied from the amount
of P900,000.00 as this amount replaced the attached nets and floats. Considering,
however, that the total judgment obligation as computed above would amount to
only P840,216.92, it would be inequitable, unfair and unjust to award the excess to the
defendants who are not entitled to damages and who did not put up a single centavo to
raise the amount of P900,000.00 aside from the fact that they are not the owners of the
nets and floats. For this reason, the defendants are hereby relieved from any and all
liabilities arising from the monetary judgment obligation enumerated above and for
plaintiff to retain possession and ownership of the nets and floats and for the
reimbursement of the P900,000.00 deposited by it with the Clerk of Court.
SO ORDERED. [3]
The Facts
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a
Contract dated February 7, 1990, for the purchase of fishing nets of various sizes from the
Philippine Fishing Gear Industries, Inc. (herein respondent). They claimed that they were engaged
in a business venture with Petitioner Lim Tong Lim, who however was not a signatory to the
agreement. The total price of the nets amounted to P532,045. Four hundred pieces of floats
worth P68,000 were also sold to the Corporation.[4]
The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondent
filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of
preliminary attachment. The suit was brought against the three in their capacities as general
partners, on the allegation that Ocean Quest Fishing Corporation was a nonexistent corporation as
shown by a Certification from the Securities and Exchange Commission.[5] On September 20,
1990, the lower court issued a Writ of Preliminary Attachment, which the sheriff enforced by
attaching the fishing nets on board F/B Lourdes which was then docked at the Fisheries Port,
Navotas, Metro Manila.
Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and
requesting a reasonable time within which to pay. He also turned over to respondent some of the
nets which were in his possession. Peter Yao filed an Answer, after which he was deemed to have
waived his right to cross-examine witnesses and to present evidence on his behalf, because of his
failure to appear in subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with
Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment.[6] The trial court
maintained the Writ, and upon motion of private respondent, ordered the sale of the fishing nets at
a public auction. Philippine Fishing Gear Industries won the bidding and deposited with the said
court the sales proceeds of P900,000.[7]
On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing
Gear Industries was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general
partners, were jointly liable to pay respondent.[8]
The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the
testimonies of the witnesses presented and (2) on a Compromise Agreement executed by the
three[9] in Civil Case No. 1492-MN which Chua and Yao had brought against Lim in the RTC of
Malabon, Branch 72, for (a) a declaration of nullity of commercial documents; (b) a reformation
of contracts; (c) a declaration of ownership of fishing boats; (d) an injunction and (e)
damages.[10] The Compromise Agreement provided:
a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels sold
in the amount of P5,750,000.00 including the fishing net. This P5,750,000.00 shall be
applied as full payment for P3,250,000.00 in favor of JL Holdings Corporation and/or
Lim Tong Lim;
b) If the four (4) vessel[s] and the fishing net will be sold at a higher price
than P5,750,000.00 whatever will be the excess will be divided into 3: 1/3 Lim Tong
Lim; 1/3 Antonio Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever the deficiency
shall be shouldered and paid to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3 Antonio
Chua; 1/3 Peter Yao.[11]
The trial court noted that the Compromise Agreement was silent as to the nature of their
obligations, but that joint liability could be presumed from the equal distribution of the profit and
loss.[12]
Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a
fishing business and may thus be held liable as a such for the fishing nets and floats purchased by
and for the use of the partnership. The appellate court ruled:
The evidence establishes that all the defendants including herein appellant Lim Tong Lim
undertook a partnership for a specific undertaking, that is for commercial fishing x x
x. Obviously, the ultimate undertaking of the defendants was to divide the profits among
themselves which is what a partnership essentially is x x x. By a contract of partnership, two or
more persons bind themselves to contribute money, property or industry to a common fund with
the intention of dividing the profits among themselves (Article 1767, New Civil Code).[13]
The Issues
In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the
following grounds:
In arguing that he should not be held liable for the equipment purchased from respondent,
petitioner controverts the CA finding that a partnership existed between him, Peter Yao and
Antonio Chua. He asserts that the CA based its finding on the Compromise Agreement
alone. Furthermore, he disclaims any direct participation in the purchase of the nets, alleging that
the negotiations were conducted by Chua and Yao only, and that he has not even met the
representatives of the respondent company. Petitioner further argues that he was a lessor, not a
partner, of Chua and Yao, for the "Contract of Lease" dated February 1, 1990, showed that he had
merely leased to the two the main asset of the purported partnership -- the fishing boat F/B
Lourdes. The lease was for six months, with a monthly rental of P37,500 plus 25 percent of the
gross catch of the boat.
We are not persuaded by the arguments of petitioner. The facts as found by the two lower
courts clearly showed that there existed a partnership among Chua, Yao and him, pursuant to
Article 1767 of the Civil Code which provides:
Article 1767 - By the contract of partnership, two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention of
dividing the profits among themselves.
Specifically, both lower courts ruled that a partnership among the three existed based on the
following factual findings:[15]
(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in
commercial fishing to join him, while Antonio Chua was already Yaos partner;
(2) That after convening for a few times, Lim Chua, and Yao verbally agreed to
acquire two fishing boats, the FB Lourdes and the FB Nelson for the sum of P3.35
million;
(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong
Lim, to finance the venture.
(4) That they bought the boats from CMF Fishing Corporation, which executed a
Deed of Sale over these two (2) boats in favor of Petitioner Lim Tong Lim only to
serve as security for the loan extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing , re-equipping, repairing, dry
docking and other expenses for the boats would be shouldered by Chua and Yao;
(6) That because of the unavailability of funds, Jesus Lim again extended a loan to the
partnership in the amount of P1 million secured by a check, because of which, Yao
and Chua entrusted the ownership papers of two other boats, Chuas FB Lady Anne
Mel and Yaos FB Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought
nets from Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing
Corporation," their purported business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC,
Branch 72 by Antonio Chua and Peter Yao against Lim Tong Lim for (a) declaration
of nullity of commercial documents; (b) reformation of contracts; (c) declaration of
ownership of fishing boats; (4) injunction; and (e) damages.
(9) That the case was amicably settled through a Compromise Agreement executed
between the parties-litigants the terms of which are already enumerated above.
From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided
to engage in a fishing business, which they started by buying boats worth P3.35 million, financed
by a loan secured from Jesus Lim who was petitioners brother. In their Compromise Agreement,
they subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats,
and to divide equally among them the excess or loss. These boats, the purchase and the repair of
which were financed with borrowed money, fell under the term common fund under Article
1767. The contribution to such fund need not be cash or fixed assets; it could be an intangible like
credit or industry. That the parties agreed that any loss or profit from the sale and operation of the
boats would be divided equally among them also shows that they had indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase of the boat, but
also to that of the nets and the floats. The fishing nets and the floats, both essential to fishing, were
obviously acquired in furtherance of their business. It would have been inconceivable for Lim to
involve himself so much in buying the boat but not in the acquisition of the aforesaid equipment,
without which the business could not have proceeded.
Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a
partnership engaged in the fishing business. They purchased the boats, which constituted the main
assets of the partnership, and they agreed that the proceeds from the sales and operations thereof
would be divided among them.
We stress that under Rule 45, a petition for review like the present case should involve only
questions of law. Thus, the foregoing factual findings of the RTC and the CA are binding on this
Court, absent any cogent proof that the present action is embraced by one of the exceptions to the
rule.[16] In assailing the factual findings of the two lower courts, petitioner effectively goes beyond
the bounds of a petition for review under Rule 45.
Petitioner argues that the appellate courts sole basis for assuming the existence of a partnership
was the Compromise Agreement. He also claims that the settlement was entered into only to end
the dispute among them, but not to adjudicate their preexisting rights and obligations. His
arguments are baseless. The Agreement was but an embodiment of the relationship extant among
the parties prior to its execution.
A proper adjudication of claimants rights mandates that courts must review and thoroughly
appraise all relevant facts. Both lower courts have done so and have found, correctly, a preexisting
partnership among the parties. In implying that the lower courts have decided on the basis of one
piece of document alone, petitioner fails to appreciate that the CA and the RTC delved into the
history of the document and explored all the possible consequential combinations in harmony with
law, logic and fairness. Verily, the two lower courts factual findings mentioned above nullified
petitioners argument that the existence of a partnership was based only on the Compromise
Agreement.
We are not convinced by petitioners argument that he was merely the lessor of the boats to
Chua and Yao, not a partner in the fishing venture. His argument allegedly finds support in the
Contract of Lease and the registration papers showing that he was the owner of the boats,
including F/B Lourdes where the nets were found.
His allegation defies logic. In effect, he would like this Court to believe that he consented to
the sale of his own boats to pay a debt of Chua and Yao, with the excess of the proceeds to be
divided among the three of them. No lessor would do what petitioner did. Indeed, his consent to
the sale proved that there was a preexisting partnership among all three.
Verily, as found by the lower courts, petitioner entered into a business agreement with Chua
and Yao, in which debts were undertaken in order to finance the acquisition and the upgrading of
the vessels which would be used in their fishing business. The sale of the boats, as well as the
division among the three of the balance remaining after the payment of their loans, proves beyond
cavil that F/B Lourdes, though registered in his name, was not his own property but an asset of the
partnership. It is not uncommon to register the properties acquired from a loan in the name of the
person the lender trusts, who in this case is the petitioner himself. After all, he is the brother of the
creditor, Jesus Lim.
We stress that it is unreasonable indeed, it is absurd -- for petitioner to sell his property to pay
a debt he did not incur, if the relationship among the three of them was merely that of lessor-lessee,
instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed
only to Chua and Yao, and not to him. Again, we disagree.
Section 21 of the Corporation Code of the Philippines provides:
Sec. 21. Corporation by estoppel. - All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general partners for all
debts, liabilities and damages incurred or arising as a result thereof: Provided
however, That when any such ostensible corporation is sued on any transaction
entered by it as a corporation or on any tort committed by it as such, it shall not be
allowed to use as a defense its lack of corporate personality.
Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may
be estopped from denying its corporate existence. The reason behind this doctrine is obvious - an
unincorporated association has no personality and would be incompetent to act and appropriate for
itself the power and attributes of a corporation as provided by law; it cannot create agents or confer
authority on another to act in its behalf; thus, those who act or purport to act as its representatives
or agents do so without authority and at their own risk. And as it is an elementary principle of law
that a person who acts as an agent without authority or without a principal is himself regarded as
the principal, possessed of all the right and subject to all the liabilities of a principal, a person
acting or purporting to act on behalf of a corporation which has no valid existence assumes such
privileges and obligations and becomes personally liable for contracts entered into or for other acts
performed as such agent.[17]
The doctrine of corporation by estoppel may apply to the alleged corporation and to a third
party. In the first instance, an unincorporated association, which represented itself to be a
corporation, will be estopped from denying its corporate capacity in a suit against it by a third
person who relied in good faith on such representation. It cannot allege lack of personality to be
sued to evade its responsibility for a contract it entered into and by virtue of which it received
advantages and benefits.
On the other hand, a third party who, knowing an association to be unincorporated,
nonetheless treated it as a corporation and received benefits from it, may be barred from denying
its corporate existence in a suit brought against the alleged corporation. In such case, all those
who benefited from the transaction made by the ostensible corporation, despite knowledge of its
legal defects, may be held liable for contracts they impliedly assented to or took advantage of.
There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be
paid for the nets it sold. The only question here is whether petitioner should be held jointly[18] liable
with Chua and Yao. Petitioner contests such liability, insisting that only those who dealt in the
name of the ostensible corporation should be held liable. Since his name does not appear on any
of the contracts and since he never directly transacted with the respondent corporation, ergo, he
cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the
boat which has earlier been proven to be an asset of the partnership. He in fact questions the
attachment of the nets, because the Writ has effectively stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a
corporation. Although it was never legally formed for unknown reasons, this fact alone does not
preclude the liabilities of the three as contracting parties in representation of it. Clearly, under the
law on estoppel, those acting on behalf of a corporation and those benefited by it, knowing it to be
without valid existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the
corporation. However, having reaped the benefits of the contract entered into by persons with
whom he previously had an existing relationship, he is deemed to be part of said association and
is covered by the scope of the doctrine of corporation by estoppel. We reiterate the ruling of the
Court in Alonso v. Villamor:[19]
A litigation is not a game of technicalities in which one, more deeply schooled and
skilled in the subtle art of movement and position , entraps and destroys the other. It
is, rather, a contest in which each contending party fully and fairly lays before the
court the facts in issue and then, brushing aside as wholly trivial and indecisive all
imperfections of form and technicalities of procedure, asks that justice be done upon
the merits. Lawsuits, unlike duels, are not to be won by a rapiers thrust. Technicality,
when it deserts its proper office as an aid to justice and becomes its great hindrance
and chief enemy, deserves scant consideration from courts. There should be no vested
rights in technicalities.
Finally, petitioner claims that the Writ of Attachment was improperly issued against the
nets. We agree with the Court of Appeals that this issue is now moot and academic. As previously
discussed, F/B Lourdes was an asset of the partnership and that it was placed in the name of
petitioner, only to assure payment of the debt he and his partners owed. The nets and the floats
were specifically manufactured and tailor-made according to their own design, and were bought
and used in the fishing venture they agreed upon. Hence, the issuance of the Writ to assure the
payment of the price stipulated in the invoices is proper. Besides, by specific agreement, ownership
of the nets remained with Respondent Philippine Fishing Gear, until full payment thereof.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs
against petitioner.
SO ORDERED.
DECISION
ROMERO, J.:
Petitioner was charged with the crime of estafa before the Regional Trial
Court (RTC), Branch 93, Quezon City, in an information which reads as follows:
That on or between the month of May 19, 1988 and August, 1988 in Quezon City,
Philippines and within the jurisdiction of this Honorable Court, the said accused, with
intent of gain, with unfaithfulness, and abuse of confidence, did then and there,
willfully, unlawfully and feloniously defraud one ISIDORA ROSALES, in the
following manner, to wit: on the date and in the place aforementioned, said
accused received in trust from the offended party cash money amounting
to P536,650.00, Philippine Currency, with the express obligation involving the duty to
act as complainants agent in purchasing local cigarettes (Philip Morris and Marlboro
cigarettes), to resell them to several stores, to give her commission corresponding to
40% of the profits; and to return the aforesaid amount of offended party, but said
accused, far from complying her aforesaid obligation, and once in possession thereof,
misapplied, misappropriated and converted the same to her personal use and benefit,
despite repeated demands made upon her, accused failed and refused and still fails and
refuses to deliver and/or return the same to the damage and prejudice of the said
ISIDORA ROSALES, in the aforementioned amount and in such other amount as
may be awarded under the provision of the Civil Code.
CONTRARY TO LAW.
WHEREFORE, the Court holds, that the prosecution has established the guilt of the
accused, beyond reasonable doubt, and therefore, imposes upon the accused, Carmen
Liwanag, an Indeterminate Penalty of SIX (6) YEARS, EIGHT (8) MONTHS AND
TWENTY ONE (21) DAYS OF PRISION CORRECCIONAL TO FOURTEEN (14)
YEARS AND EIGHT (8) MONTHS OF PRISION MAYOR AS MAXIMUM, AND
TO PAY THE COSTS.
The accused is likewise ordered to reimburse the private complainant the sum
of P526,650.00, without subsidiary imprisonment, in case of insolvency.
SO ORDERED.
SO ORDERED.
Her motion for reconsideration having been denied in the resolution of
March 16, 1994, Liwanag filed the instant petition, submitting the following
assignment of errors:
Liwanag advances the theory that the intention of the parties was to enter
into a contract of partnership, wherein Rosales would contribute the funds while
she would buy and sell the cigarettes, and later divide the profits between
them.[1] She also argues that the transaction can also be interpreted as a simple
loan, with Rosales lending to her the amount stated on an installment basis.[2]
The Court of Appeals correctly rejected these pretenses.
While factual findings of the Court of Appeals are conclusive on the parties
and not reviewable by the Supreme Court, and carry more weight when these
affirm the factual findings of the trial court,[3] we deem it more expedient to
resolve the instant petition on its merits.
Estafa is a crime committed by a person who defrauds another causing him
to suffer damages, by means of unfaithfulness or abuse of confidence, or of
false pretenses of fraudulent acts.[4]
From the foregoing, the elements of estafa are present, as follows: (1) that
the accused defrauded another by abuse of confidence or deceit; and (2) that
damage or prejudice capable of pecuniary estimation is caused to the offended
party or third party,[5] and it is essential that there be a fiduciary relation between
them either in the form of a trust, commission or administration.[6]
The receipt signed by Liwanag states thus:
The language of the receipt could not be any clearer. It indicates that the
money delivered to Liwanag was for a specific purpose, that is, for the purchase
of cigarettes, and in the event the cigarettes cannot be sold, the money must
be returned to Rosales.
Thus, even assuming that a contract of partnership was indeed entered into
by and between the parties, we have ruled that when money or property have
been received by a partner for a specific purpose (such as that obtaining in the
instant case) and he later misappropriated it, such partner is guilty of estafa.[7]
Neither can the transaction be considered a loan, since in a contract of loan
once the money is received by the debtor, ownership over the same is
transferred.[8] Being the owner, the borrower can dispose of it for whatever
purpose he may deem proper.
In the instant petition, however, it is evident that Liwanag could not dispose
of the money as she pleased because it was only delivered to her for a single
purpose, namely, for the purchase of cigarettes, and if this was not possible
then to return the money to Rosales. Since in this case there was no transfer of
ownership of the money delivered, Liwanag is liable for conversion under Art.
315, par. 1(b) of the Revised Penal Code.
WHEREFORE, in view of the foregoing, the appealed decision of the Court
of Appeals dated November 29, 1993, is AFFIRMED. Costs against petitioner.
SO ORDERED.
G.R. No. L-39780 November 11, 1985
In this petition for certiorari, the petitioner seeks to annul and set added the decision of the Court of
Appeals affirming the existence of a partnership between petitioner and one of the respondents,
Celestino Galan and holding both of them liable to the two intervenors which extended credit to their
partnership. The petitioner wants to be excluded from the liabilities of the partnership.
Petitioner Elmo Muñasque filed a complaint for payment of sum of money and damages against
respondents Celestino Galan, Tropical Commercial, Co., Inc. (Tropical) and Ramon Pons, alleging
that the petitioner entered into a contract with respondent Tropical through its Cebu Branch Manager
Pons for remodelling a portion of its building without exchanging or expecting any consideration from
Galan although the latter was casually named as partner in the contract; that by virtue of his having
introduced the petitioner to the employing company (Tropical). Galan would receive some kind of
compensation in the form of some percentages or commission; that Tropical, under the terms of the
contract, agreed to give petitioner the amount of P7,000.00 soon after the construction began and
thereafter, the amount of P6,000.00 every fifteen (15) days during the construction to make a total
sum of P25,000.00; that on January 9, 1967, Tropical and/or Pons delivered a check for P7,000.00
not to the plaintiff but to a stranger to the contract, Galan, who succeeded in getting petitioner's
indorsement on the same check persuading the latter that the same be deposited in a joint account;
that on January 26, 1967 when the second check for P6,000.00 was due, petitioner refused to
indorse said cheek presented to him by Galan but through later manipulations, respondent Pons
succeeded in changing the payee's name from Elmo Muñasque to Galan and Associates, thus
enabling Galan to cash the same at the Cebu Branch of the Philippine Commercial and Industrial
Bank (PCIB) placing the petitioner in great financial difficulty in his construction business and
subjecting him to demands of creditors to pay' for construction materials, the payment of which
should have been made from the P13,000.00 received by Galan; that petitioner undertook the
construction at his own expense completing it prior to the March 16, 1967 deadline;that because of
the unauthorized disbursement by respondents Tropical and Pons of the sum of P13,000.00 to
Galan petitioner demanded that said amount be paid to him by respondents under the terms of the
written contract between the petitioner and respondent company.
The respondents answered the complaint by denying some and admitting some of the material
averments and setting up counterclaims.
During the pre-trial conference, the petitioners and respondents agreed that the issues to be
resolved are:
(1) Whether or not there existed a partners between Celestino Galan and Elmo
Muñasque; and
(2) Whether or not there existed a justifiable cause on the part of respondent Tropical
to disburse money to respondent Galan.
The business firms Cebu Southern Hardware Company and Blue Diamond Glass Palace were
allowed to intervene, both having legal interest in the matter in litigation.
After trial, the court rendered judgment, the dispositive portion of which states:
(1) ordering plaintiff Muñasque and defendant Galan to pay jointly and severally the
intervenors Cebu and Southern Hardware Company and Blue Diamond Glass
Palace the amount of P6,229.34 and P2,213.51, respectively;
(2) absolving the defendants Tropical Commercial Company and Ramon Pons from
any liability,
The petitioner and intervenor Cebu Southern Company and its proprietor, Tan Siu filed motions for
reconsideration.
On January 15, 197 1, the trial court issued 'another order amending its judgment to make it read as
follows:
(1) ordering plaintiff Muñasque and defendant Galan to pay jointly and severally the
intervenors Cebu Southern Hardware Company and Blue Diamond Glass Palace the
amount of P6,229.34 and P2,213.51, respectively,
(2) ordering plaintiff and defendant Galan to pay Intervenor Cebu Southern Hardware
Company and Tan Siu jointly and severally interest at 12% per annum of the sum of
P6,229.34 until the amount is fully paid;
(3) ordering plaintiff and defendant Galan to pay P500.00 representing attorney's
fees jointly and severally to Intervenor Cebu Southern Hardware Company:
(4) absolving the defendants Tropical Commercial Company and Ramon Pons from
any liability,
No damages awarded whatsoever.
On appeal, the Court of Appeals affirmed the judgment of the trial court with the sole modification
that the liability imposed in the dispositive part of the decision on the credit of Cebu Southern
Hardware and Blue Diamond Glass Palace was changed from "jointly and severally" to "jointly."
The present controversy began when petitioner Muñasque in behalf of the partnership of "Galan and
Muñasque" as Contractor entered into a written contract with respondent Tropical for remodelling the
respondent's Cebu branch building. A total amount of P25,000.00 was to be paid under the contract
for the entire services of the Contractor. The terms of payment were as follows: thirty percent (30%)
of the whole amount upon the signing of the contract and the balance thereof divided into three
equal installments at the lute of Six Thousand Pesos (P6,000.00) every fifteen (15) working days.
The first payment made by respondent Tropical was in the form of a check for P7,000.00 in the
name of the petitioner.Petitioner, however, indorsed the check in favor of respondent Galan to
enable the latter to deposit it in the bank and pay for the materials and labor used in the project.
Petitioner alleged that Galan spent P6,183.37 out of the P7,000.00 for his personal use so that when
the second check in the amount of P6,000.00 came and Galan asked the petitioner to indorse it
again, the petitioner refused.
The check was withheld from the petitioner. Since Galan informed the Cebu branch of Tropical that
there was a"misunderstanding" between him and petitioner, respondent Tropical changed the name
of the payee in the second check from Muñasque to "Galan and Associates" which was the duly
registered name of the partnership between Galan and petitioner and under which name a permit to
do construction business was issued by the mayor of Cebu City. This enabled Galan to encash the
second check.
Meanwhile, as alleged by the petitioner, the construction continued through his sole efforts. He
stated that he borrowed some P12,000.00 from his friend, Mr. Espina and although the expenses
had reached the amount of P29,000.00 because of the failure of Galan to pay what was partly due
the laborers and partly due for the materials, the construction work was finished ahead of schedule
with the total expenditure reaching P34,000.00.
The two remaining checks, each in the amount of P6,000.00,were subsequently given to the
petitioner alone with the last check being given pursuant to a court order.
As stated earlier, the petitioner filed a complaint for payment of sum of money and damages against
the respondents,seeking to recover the following: the amounts covered by the first and second
checks which fell into the hands of respondent Galan, the additional expenses that the petitioner
incurred in the construction, moral and exemplary damages, and attorney's fees.
Both the trial and appellate courts not only absolved respondents Tropical and its Cebu Manager,
Pons, from any liability but they also held the petitioner together with respondent Galan, hable to the
intervenors Cebu Southern Hardware Company and Blue Diamond Glass Palace for the credit which
the intervenors extended to the partnership of petitioner and Galan
In this petition the legal questions raised by the petitioner are as follows: (1) Whether or not the
appellate court erred in holding that a partnership existed between petitioner and respondent Galan.
(2) Assuming that there was such a partnership, whether or not the court erred in not finding Galan
guilty of malversing the P13,000.00 covered by the first and second checks and therefore,
accountable to the petitioner for the said amount; and (3) Whether or not the court committed grave
abuse of discretion in holding that the payment made by Tropical through its manager Pons to Galan
was "good payment, "
Petitioner contends that the appellate court erred in holding that he and respondent Galan were
partners, the truth being that Galan was a sham and a perfidious partner who misappropriated the
amount of P13,000.00 due to the petitioner.Petitioner also contends that the appellate court
committed grave abuse of discretion in holding that the payment made by Tropical to Galan was
"good" payment when the same gave occasion for the latter to misappropriate the proceeds of such
payment.
The records will show that the petitioner entered into a con-tract with Tropical for the renovation of
the latter's building on behalf of the partnership of "Galan and Muñasque." This is readily seen in the
first paragraph of the contract where it states:
This agreement made this 20th day of December in the year 1966 by Galan and
Muñasque hereinafter called the Contractor, and Tropical Commercial Co., Inc.,
hereinafter called the owner do hereby for and in consideration agree on the
following: ... .
There is nothing in the records to indicate that the partner-ship organized by the two men was not a
genuine one. If there was a falling out or misunderstanding between the partners, such does not
convert the partnership into a sham organization.
Likewise, when Muñasque received the first payment of Tropical in the amount of P7,000.00 with a
check made out in his name, he indorsed the check in favor of Galan. Respondent Tropical
therefore, had every right to presume that the petitioner and Galan were true partners. If they were
not partners as petitioner claims, then he has only himself to blame for making the relationship
appear otherwise, not only to Tropical but to their other creditors as well. The payments made to the
partnership were, therefore, valid payments.
Although it may be presumed that Margarita G. Saldajeno had acted in good faith,
the appellees also acted in good faith in extending credit to the partnership. Where
one of two innocent persons must suffer, that person who gave occasion for the
damages to be caused must bear the consequences.
No error was committed by the appellate court in holding that the payment made by Tropical to
Galan was a good payment which binds both Galan and the petitioner. Since the two were partners
when the debts were incurred, they, are also both liable to third persons who extended credit to their
partnership. In the case of George Litton v. Hill and Ceron, et al, (67 Phil. 513, 514), we ruled:
There is a general presumption that each individual partner is an authorized agent for
the firm and that he has authority to bind the firm in carrying on the partnership
transactions. (Mills vs. Riggle,112 Pan, 617).
The presumption is sufficient to permit third persons to hold the firm liable on
transactions entered into by one of members of the firm acting apparently in its
behalf and within the scope of his authority. (Le Roy vs. Johnson, 7 U.S. (Law. ed.),
391.)
Petitioner also maintains that the appellate court committed grave abuse of discretion in not holding
Galan liable for the amounts which he "malversed" to the prejudice of the petitioner. He adds that
although this was not one of the issues agreed upon by the parties during the pretrial, he,
nevertheless, alleged the same in his amended complaint which was, duly admitted by the court.
When the petitioner amended his complaint, it was only for the purpose of impleading Ramon Pons
in his personal capacity. Although the petitioner made allegations as to the alleged malversations of
Galan, these were the same allegations in his original complaint. The malversation by one partner
was not an issue actually raised in the amended complaint but the alleged connivance of Pons with
Galan as a means to serve the latter's personal purposes.
The petitioner, therefore, should be bound by the delimitation of the issues during the pre-trial
because he himself agreed to the same. In Permanent Concrete Products, Inc. v. Teodoro, (26
SCRA 336), we ruled:
... The appellant is bound by the delimitation of the issues contained in the trial
court's order issued on the very day the pre-trial conference was held. Such an order
controls the subsequent course of the action, unless modified before trial to prevent
manifest injustice.In the case at bar, modification of the pre-trial order was never
sought at the instance of any party.
Petitioner could have asked at least for a modification of the issues if he really wanted to include the
determination of Galan's personal liability to their partnership but he chose not to do so, as he
vehemently denied the existence of the partnership. At any rate, the issue raised in this petition is
the contention of Muñasque that the amounts payable to the intervenors should be shouldered
exclusively by Galan. We note that the petitioner is not solely burdened by the obligations of their
illstarred partnership. The records show that there is an existing judgment against respondent Galan,
holding him liable for the total amount of P7,000.00 in favor of Eden Hardware which extended credit
to the partnership aside from the P2, 000. 00 he already paid to Universal Lumber.
We, however, take exception to the ruling of the appellate court that the trial court's ordering
petitioner and Galan to pay the credits of Blue Diamond and Cebu Southern Hardware"jointly and
severally" is plain error since the liability of partners under the law to third persons for contracts
executed inconnection with partnership business is only pro rata under Art. 1816, of the Civil Code.
While it is true that under Article 1816 of the Civil Code,"All partners, including industrial ones, shall
be liable prorate with all their property and after all the partnership assets have been exhausted, for
the contracts which may be entered into the name and fm the account cd the partnership, under its
signature and by a person authorized to act for the partner-ship. ...". this provision should be
construed together with Article 1824 which provides that: "All partners are liable solidarily with the
partnership for everything chargeable to the partnership under Articles 1822 and 1823." In short,
while the liability of the partners are merely joint in transactions entered into by the partnership, a
third person who transacted with said partnership can hold the partners solidarily liable for the whole
obligation if the case of the third person falls under Articles 1822 or 1823.
Articles 1822 and 1823 of the Civil Code provide:
Art. 1822. Where, by any wrongful act or omission of any partner acting in the
ordinary course of the business of the partner-ship or with the authority of his co-
partners, loss or injury is caused to any person, not being a partner in the partnership
or any penalty is incurred, the partnership is liable therefor to the same extent as the
partner so acting or omitting to act.
(1) Where one partner acting within the scope of his apparent authority receives
money or property of a third person and misapplies it; and
(2) Where the partnership in the course of its business receives money or property of
a third person and t he money or property so received is misapplied by any partner
while it is in the custody of the partnership.
The obligation is solidary, because the law protects him, who in good faith relied upon the authority
of a partner, whether such authority is real or apparent. That is why under Article 1824 of the Civil
Code all partners, whether innocent or guilty, as well as the legal entity which is the partnership, are
solidarily liable.
In the case at bar the respondent Tropical had every reason to believe that a partnership existed
between the petitioner and Galan and no fault or error can be imputed against it for making
payments to "Galan and Associates" and delivering the same to Galan because as far as it was
concerned, Galan was a true partner with real authority to transact on behalf of the partnership with
which it was dealing. This is even more true in the cases of Cebu Southern Hardware and Blue
Diamond Glass Palace who supplied materials on credit to the partnership. Thus, it is but fair that
the consequences of any wrongful act committed by any of the partners therein should be answered
solidarily by all the partners and the partnership as a whole
However. as between the partners Muñasque and Galan,justice also dictates that Muñasque be
reimbursed by Galan for the payments made by the former representing the liability of their
partnership to herein intervenors, as it was satisfactorily established that Galan acted in bad faith in
his dealings with Muñasque as a partner.
WHEREFORE, the decision appealed from is hereby AFFIRMED with the MODIFICATION that the
liability of petitioner and respondent Galan to intervenors Blue Diamond Glass and Cebu Southern
Hardware is declared to be joint and solidary. Petitioner may recover from respondent Galan any
amount that he pays, in his capacity as a partner, to the above intervenors,
SO ORDERED.
RESOLUTION
The matter now pending is the appellant's motion for reconsideration of our main decision, wherein
we have upheld the validity of the sale of the lands owned by the partnership Goquiolay & Tan Sin
An, made in 1949 by the widow of the managing partner, Tan Sin An (Executed in her dual capacity
as Administratrix of the husband's estate and as partner in lieu of the husband), in favor of the
buyers Washington Sycip and Betty Lee for the following consideration:
TOTAL P153,726.04
Appellant Goquiolay, in his motion for reconsideration, insist that, contrary to our holding, Kong Chai
Pin, widow of the deceased partner Tan Sin An, never became more than a limited partner,
incapacitated by law to manage the affairs of partnership; that the testimony of her witness Young
and Lim belies that she took over the administration of the partnership property; and that, in any
event, the sale should be set aside because it was executed with the intent to defraud appellant of
his share in the properties sold.
Three things must be always held in mind in the discussion of this motion to reconsider, being basic
and beyond controversy:
(a) That we are dealing here with the transfer of partnership property by one partner, acting in behalf
of the firm, to a stranger. There is no question between partners inter se, and this aspect to the case
was expressly reserved in the main decision of 26 July 1960;
(b) That partnership was expressly organized: "to engage in real estate business, either by buying
and selling real estate". The Articles of co-partnership, in fact, expressly provided that:
1. To engage in real estate business, either by buying and selling real estates; to subdivide
real estates into lots for the purpose of leasing and selling them.;
(c) That the properties sold were not part of the contributed capital (which was in cash) but land
precisely acquired to be sold, although subject to a mortgage in favor of the original owners, from
whom the partnership had acquired them.
With these points firmly in mind, let us turn to the points insisted upon by appellant.
It is first averred that there is "not one iota of evidence" that Kong Chai Pin managed and retained
possession of the partnership properties. Suffice it to point out that appellant Goquiolay himself
admitted that —
... Mr. Yu Eng Lai asked me if I can just let Mrs. Kong Chai Pin continue to manage the
properties (as) she had no other means of income. Then I said, because I wanted to help
Mrs. Kong Chai Pin, she could just do it and besides I am not interested in agricultural
lands. I allowed her to take care of the properties in order to help her and because I believe
in God and — wanted to help her.
A — I did not.
Q — And this conversation which you had with Mrs. Yu Eng Lai was few months
after 1945?
The appellant subsequently ratified this testimony in his deposition of 30 June 1956, pages 8-9,
wherein he stated:
that plantation was being occupied at that time by the widow, Mrs. Tan Sin An, and of course
they are receiving quiet a lot benefit from the plantation.
Discarding the self-serving expressions, these admissions of Goquiolay are certainly entitled to
greater weight than those of Hernando Young and Rufino Lim, having been made against the party's
own interest.
Moreover, the appellant's reference to the testimony of Hernando Young, that the witness found the
properties "abandoned and undeveloped", omits to mention that said part of the testimony started
with the question:
Now, you said that about 1942 or 1943 you returned to Davao. Did you meet Mrs. Kong Chai
Pin there in Davao at that time?
Similarly, the testimony of Rufino Lim, to the effect that the properties of the partnership were
undeveloped, and the family of the widow (Kong Chai Pin) did not receive any income from the
partnership properties, was given in answer to the question:
According to Mr. Goquiolay, during the Japanese occupation Tan Sin an and his family lived
on the plantation of the partnership and derived their subsistence from that plantation. What
can you say to that? (Dep. 19 July 1956, p. 8).
And also —
What can you say as to the development of these other properties of the partnership which
you saw during the occupation? (Dep. p. 13, Emphasis supplied).
Plainly, both Young and Lim's testimonies do not belie, or contradict, Goquiolay's admission that he
told Mr. Yu Eng Lai that the widow "could just do it" (i.e., continue to manage the properties).
Witnesses Lim and Young referred to the period of Japanese occupation; but Goquiolay's authority
was, in fact, given to the widow in 1945, after the occupation.
Again, the disputed sale by the widow took place in 1949. That Kong Chai Pin carried out no acts of
management during the Japanese occupation (1942-1944) does not mean that she did not do so
from 1945 to 1949.
We thus find that Goquiolay did not merely rely on reports from Lim and Young; he actually
manifested his willingness that the widow should manage the partnership properties. Whether or not
she complied with this authority is a question between her and the appellant, and is not here
involved. But the authority was given, and she did have it when she made the questioned sale,
because it was never revoked.
It is argued that the authority given by Goquiolay to the widow Kong Chai Pin was only
to manage the property, and that it did not include the power to alienate, citing Article 1713 of the
Civil Code of 1889. What this argument overlooks is that the widow was not a mere agent, because
she had become a partner upon her husband's death, as expressly provided by the articles of
copartnership. Even more, granting that by succession to her husband, Tan Sin An, the widow only
became a limited partner, Goquiolay's authorization to manage the partnership property was proof
that he considered and recognized her as general partner, at least since 1945. The reason is plain:
Under the law (Article 148, last paragraph, Code of Commerce), appellant could not empower the
widow, if she were only a limited partner, to administer the properties of the firm, even as a mere
agent:
Limited partners may not perform any act of administration with respect to the interests of the
copartnership, not even in the capacity of agents of the managing partners. (Emphasis
supplied).
By seeking authority to manage partnership property, Tan Sin An's widow showed that she desired
to be considered a general partner. By authorizing the widow to manage partnership property (which
a limited partner could not be authorized to do), Goquiolay recognized her as such partner, and is
now in estoppel to deny her position as a general partner, with authority to administer and alienate
partnership property.
Besides, as we pointed out in our main decision, the heir ordinarily (and we did not say
"necessarily") becomes a limited partner for his own protection, because he would normally prefer to
avoid any liability in excess of the value of the estate inherited so as not to jeopardize his personal
assets. But this statutory limitation of responsibility being designed to protect the heir, the latter may
disregard it and instead elect to become a collective or general partner, with all the rights and
privileges of one, and answering for the debts of the firm not only with the inheritance but also with
the heir's personal fortune. This choice pertains exclusively to the heir, and does not require the
assent of the surviving partner.
It must be remember that the articles of co-partnership here involved expressly stipulated that:
In the event of the death of any of the partners at any time before the expiration of said term,
the co-partnership shall not be dissolved but will have to be continued and the deceased
partner shall be represented by his heirs or assigns in said co-partnership (Art. XII, Articles of
Co-Partnership).
The Articles did not provide that the heirs of the deceased would be merely limited partners; on the
contrary, they expressly stipulated that in case of death of either partner "the co-partnership ... will
have to be continued" with the heirs or assigns. It certainly could not be continued if it were to be
converted from a general partnership into a limited partnership, since the difference between the two
kinds of associations is fundamental; and specially because the conversion into a limited association
would have the heirs of the deceased partner without a share in the management. Hence, the
contractual stipulation does actually contemplate that the heirs would become general
partners rather than limited ones.
Of course, the stipulation would not bind the heirs of the deceased partner should they refuse to
assume personal and unlimited responsibility for the obligations of the firm. The heirs, in other
words, can not be compelled to become general partners against their wishes. But because they are
not so compellable, it does not legitimately follow that they may not voluntarily choose to become
general partners, waiving the protective mantle of the general laws of succession. And in the latter
event, it is pointless to discuss the legality of any conversion of a limited partner into a general one.
The heir never was a limited partner, but chose to be, and became, a general partner right at the
start.
It is immaterial that the heir's name was not included in the firm name, since no conversion of status
is involved, and the articles of co-partnership expressly contemplated the admission of the partner's
heirs into the partnership.
It must never be overlooked that this case involved the rights acquired by strangers, and does not
deal with the rights existing between partners Goquiolay and the widow of Tan Sin An. The issues
between the partners inter sewere expressly reserved in our main decision. Now, in determining
what kind of partner the widow of partner Tan Sin an Had elected to become, strangers had to be
guided by her conduct and actuations and those of appellant Goquiolay. Knowing that by law a
limited partner is barred from managing the partnership business or property, third parties (like the
purchasers) who found the widow possessing and managing the firm property with the acquiescence
(or at least without apparent opposition) of the surviving partners were perfectly justified in assuming
that she had become a general partner, and, therefore, in negotiating with her as such a partner,
having authority to act for, and in behalf of the firm. This belief, be it noted, was shared even by the
probate court that approved the sale by the widow of the real property standing in the partnership
name. That belief was fostered by the very inaction of appellant Goquiolay. Note that for seven long
years, from partner Tan Sin An's death in 1942 to the sale in 1949, there was more than ample time
for Goquiolay to take up the management of these properties, or at least ascertain how its affairs
stood. For seven years Goquiolay could have asserted his alleged rights, and by suitable notice in
the commercial registry could have warned strangers that they must deal with him alone, as sole
general partner. But he did nothing of the sort, because he was not interested (supra), and he did
not even take steps to pay, or settle the firm debts that were overdue since before the outbreak of
the last war. He did not even take steps, after Tan Sin An died, to cancel, or modify, the provisions of
the partnership articles that he (Goquiolay) would have no intervention in the management of the
partnership. This laches certainly contributed to confirm the view that the widow of Tan Sin An had,
or was given, authority to manage and deal with the firm's properties apart from the presumption that
a general partner dealing with partnership property has to requisite authority from his co-partners
(Litton vs. Hill and Ceron, et al., 67 Phil. 513; quoted in our main decision, p. 11).
The stipulation in the articles of partnership that any of the two managing partners may
contract and sign in the name of the partnership with the consent of the other, undoubtedly
creates on obligation between the two partners, which consists in asking the other's consent
before contracting for the partnership. This obligation of course is not imposed upon a third
person who contracts with the partnership. Neither it is necessary for the third person to
ascertain if the managing partner with whom he contracts has previously obtained the
consent of the other. A third person may and has a right to presume that the partner with
whom he contracts has, in the ordinary and natural course of business, the consent of his
copartner; for otherwise he would not enter into the contract. The third person would
naturally not presume that the partner with whom he enters into the transaction is violating
the articles of partnership, but on the contrary is acting in accordance therewith. And this
finds support in the legal presumption that the ordinary course of business has been followed
(No. 18, section 334, Code of Civil Procedure), and that the law has been obeyed (No. 31,
section 334). This last presumption is equally applicable to contracts which have the force of
law between the parties. (Litton vs. Hill & Ceron, et al., 67 Phil. 409, 516). (Emphasis
supplied.)
It is next urged that the widow, even as a partner, had no authority to sell the real estate of the firm.
This argument is lamentably superficial because it fails to differentiate between real estate acquired
and held as stock-in-trade and real estate held merely as business site (Vivante's "taller o banco
social") for the partnership. Where the partnership business is to deal in merchandise and goods,
i.e., movable property, the sale of its real property (immovables) is not within the ordinary powers of
a partner, because it is not in line with the normal business of the firm. But where the express and
avowed purpose of the partnership is to buy and sell real estate (as in the present case), the
immovables thus acquired by the firm from part of its stock-in-trade, and the sale thereof is in
pursuance of partnership purposes, hence within the ordinary powers of the partner. This distinction
is supported by the opinion of Gay de Montella1 , in the very passage quoted in the appellant's
motion for reconsideration:
La enajenacion puede entrar en las facultades del gerante, cuando es conforme a los fines
sociales. Pero esta facultad de enajenar limitada a las ventas conforme a los fines sociales,
viene limitada a los objetos de comercio o a los productos de la fabrica para explotacion de
los cuales se ha constituido la Sociedad. Ocurrira una cosa parecida cuando el objeto de la
Sociedad fuese la compra y venta de inmuebles, en cuyo caso el gerente estaria facultado
para otorgar las ventas que fuere necesario. (Montella) (Emphasis supplied).
In Rosen vs. Rosen, 212 N.Y. Supp. 405, 406, it was held:
a partnership to deal in real estate may be created and either partner has the legal right to
sell the firm real estate.
And hence, when the partnership business is to deal in real estate, one partner has ample power, as
a general agent of the firm, to enter into an executory contract for the sale of real estate.
And in Revelsky vs. Brown, 92 Ala. 522, 9 South 182, 25 Am. St. Rep. 83:
If the several partners engaged in the business of buying and selling real estate can not bind
the firm by purchases or sales of such property made in the regular course of business, then
they are incapable of exercising the essential rights and powers of general partners and their
association is not really a partnership at all, but a several agency.
Since the sale by the widow was in conformity with the express objective of the partnership, "to
engage ... in buying and selling real estate" (Art. IV, No. 1 Articles of Copartnership), it can not be
maintained that the sale was made in excess of her power as general partner.
Considerable stress is laid by appellant in the ruling of the Supreme Court of Ohio in McGrath, et al.,
vs. Cowen, et al., 49 N.E., 338. But the facts of that case are vastly different from the one before us.
In the McGrath case, the Court expressly found that:
The firm was then, and for some time had been, insolvent, in the sense that its property was
insufficient to pay its debts, though it still had good credit, and was actively engaged in the
prosecution of its business. On that day, which was Saturday, the plaintiff caused to be
prepared, ready for execution, the four chattel mortgages in question, which cover all the
tangible property then belonging to the firm, including the counters, shelving, and other
furnishings and fixtures necessary for, and used in carrying on, its business, and signed the
same in this form: "In witness whereof, the said Cowen & McGrath, a firm, and Owen
McGrath, surviving partner, of said firm, and Owen McCrath, individually, have hereunto set
their hands, this 20th day of May, A.D. 1893. Cowen & Mcgrath, by Owen McGrath. Owen
McGrath, Surviving partner of Cowen & McGrath. Owen McGrath." At the same time,
the plaintiff had prepared, ready for filing, the petition for the dissolution of the partnership
and appointment of a receiver which he subsequently filed, as hereinafter stated. On the day
the mortgages were signed, they were placed in the hands of the mortgagees, which was the
first intimation to them that there was any intention to make them. At the time none of the
claims secured by the mortgages were due, except, it may be, a small part of one of them,
and none of the creditors to whom the mortgages were made had requested security, or
were pressing for the payment of their debts. ... The mortgages appear to be without a
sufficient condition of defiance, and contain a stipulation authorizing the mortgagees to take
immediate possession of the property, which they did as soon as the mortgages were filed
through the attorney who then represented them, as well as the plaintiff; and the stores were
at once closed, and possession delivered by them to the receiver appointed upon the filing of
the petition. The avowed purposes of the plaintiff, in the course pursued by him, was to
terminate the partnership, place its properly beyond the control of the firm, and insure the
preference of the mortgagees, all of which was known to them at the time; .... (Cas cit., p.
343, Emphasis supplied).
It is natural that form these facts the Supreme Court of Ohio should draw the conclusion that the
conveyances were made with intent to terminate the partnership, and that they were not within the
powers of McGrath as a partner. But there is no similarity between those acts and the sale by the
widow of Tan Sin An. In the McGrath case, the sale included even the fixtures used in the business;
in our case, the lands sold were those acquired to be sold. In the McGrath case, none of the
creditors were pressing for payment; in our case, the creditors had been unpaid for more than seven
years, and their claims had been approved by the probate court for payment. In the McGrath case,
the partnership received nothing beyond the discharge of its debts; in the present case, not only
were its debts assumed by the buyers, but the latter paid, in addition, P37,000.00 in cash to the
widow, to the profit of the partnership. Clearly, the McGrath ruling is not applicable.
We will now turn to the question of fraud. No direct evidence of it exists; but appellant point out, as
indicia thereof, the allegedly low price paid for the property, and the relationship between the buyers,
the creditors of the partnership, and the widow of Tan Sin An.
First, as to the price: As already noted, this property was actually sold for a total of P153,726.04, of
which P37,000.00 was in cash, and the rest in partnership debts assumed by the purchaser. These
debts (62,415.91 to Yutivo, and P54,310.13 to Sing Ye Cuan & Co.) are not questioned; they were
approved by the court, and its approval is now final. The claims were, in fact, for the balance on the
original purchase price of the land sold (sue first to La Urbana, later to the Banco Hipotecario) plus
accrued interests and taxes, redeemed by the two creditors-claimants. To show that the price was
inadquate, appellant relies on the testimony of the realtor Mata, who is 1955, six years after the sale
in question, asserted that the land was worth P312,000.00. Taking into account the continued rise of
real estate values since liberation, and the fact that the sale in question was practically a forced sale
because the partnership had no other means to pay its legitimate debts, this evidence certainly does
not show such "gross inadequacy" as to justify recission of the sale. If at the time of the sale (1949)
the price of P153,726.04 was really low, how is it that appellant was not able to raise the amount,
even if the creditor's representative, Yu Khe Thai, had already warned him four years before (1945)
that the creditors wanted their money back, as they were justly entitled to?
It is argued that the land could have been mortgaged to raise the sum needed to discharge the
debts. But the lands were already mortgaged, and had been mortgaged since 1940, first to La
Urbana, and then to the Banco Hipotecario. Was it reasonable to expect that other persons would
loan money to the partnership when it was unable even to pay the taxes on the property, and the
interest on the principal since 1940? If it had been possible to find lenders willing to take a chance
on such a bad financial record, would not Goquiolay have taken advantage of it? But the fact is clear
on the record that since liberation until 1949 Goquiolay never lifted a finger to discharge the debts of
the partnership. Is he entitled now to cry fraud after the debts were discharged with no help from
him.
With regard to the relationship between the parties, suffice it to say that the Supreme Court has
ruled that relationship alone is not a badge of fraud (Oria Hnos. vs. McMicking, 21 Phil. 243; also
Hermandad del Smo. Nombre de Jesus vs. Sanchez, 40 Off. Gaz., 1685). There is no evidence that
the original buyers, Washington Sycip and Betty Lee, were without independent means to purchase
the property. That the Yutivos should be willing to extend credit to them, and not to appellant, is
neither illegal nor immoral; at the very least, these buyers did not have a record of inveterate
defaults like the partnership "Tan Sin An & Goquiolay".
Appellant seeks to create the impression that he was the victim of a conspiracy between the Yutivo
firm and their component members. But no proof is adduced. If he was such a victim, he could have
easily defeated the conspirators by raising money and paying off the firm's debts between 1945 and
1949; but he did not; he did not even care to look for a purchaser of the partnership assets. Were it
true that the conspiracy to defraud him arose (as he claims) because of his refusal to sell the lands
when in 1945 Yu Khe Thai asked him to do so, it is certainly strange that the conspirators should
wait 4 years, until 1949, to have the sale effected by the widow of Tan Sin An, and that the sale
should have been routed through the probate court taking cognizance of Tan Sin An's estate, all of
which increased the risk that the supposed fraud should be detected.
Neither was there any anomaly in the filing of the claims of Yutivo and Sing Yee Cuan & Co., (as
subrogees of the Banco Hipotecario) in proceedings for the settlement of the estate of Tan Sin An.
This for two reasons: First, Tan Sin An and the partnership "Tan Sin An & Goquiolay"
were solidary (Joint and several)debtors (Exhibits "N", mortgage to the Banco Hipotecario), and Rule
87, section 6 is the effect that:
Where the obligation of the decedent is joint and several with another debtor, the claim shall
be filed against the decedent as if he were the only debtor, without prejudice to the right of
the estate to recover contribution from the other debtor. (Emphasis supplied).
Secondly, the solidary obligation was guaranteed by a mortgage on the properties of the partnership
and those of Tan Sim An personally, and a mortgage is indivisible, in the sense that each and every
parcel under mortgage answers for the totality of the debt (Civ. Code of 1889, Article 1860; New Civil
Code, Art. 2089).
A final and conclusive consideration: The fraud charged not being one used to obtain a party's
consent to a contract (i.e., not being deceit or dolus in contrahendo), if there is fraud at al, it can only
be a fraud of creditors that gives rise to a rescission of the offending contract. But by express
provision of law (Article 1294, Civil Code of 1889; Article 1383, New Civil Code) "the action for
rescission is subsidiary; it can not be instituted except when the party suffering damage has no other
legal means to obtain reparation for the same". Since there is no allegation, or evidence, that
Goquiolay can not obtain reparation from the widow and heirs of Tan Sin An, the present suit to
rescind the sale in question is not maintainable, even if the fraud charged actually did exist.
Montenegro, Madayag, Viola and Hernandez, Olimpio R. Epis, David C. Ocangas and Bonifacio M.
Belderol for petitioners.
Lozano, Soria, Muana, Ruiz and Morales for respondents.
Appeal from a decision of the Court of Appeals (G.R. No. 24248-R) reversing a judgment of the
Court of First Instance of Bohol and ordering appellant Gregorio Magdusa to pay to appellees, by
way of refund of their shares as partners, the following amounts: Gerundio Albaran, P8,979.10;
Pascual Albaran, P5,394.78; Zosimo Albaran, P1,979.28; and Telesforo Bebero, P3,020.27; plus
legal interests from the filing of the complaint, and costs.
The Court of Appeals found that appellant and appellees, together with various other persons, had
verbally formed a partnership de facto, for the sale of general merchandise in Surigao, Surigao, to
which appellant contributed P2,000 as capital, and the others contributed their labor, under the
condition that out of the net profits of the business 25% would be added to the original capital, and
the remaining 75% would be divided among the members in proportion to the length of service of
each. Sometime in 1953 and 1954, the appellees expressed their desire to withdraw from the
partnership, and appellant thereupon made a computation to determine the value of the partners'
shares to that date. The results of the computation were embodied in the document Exhibit "C",
drawn in the handwriting of appellant. Appellees thereafter made demands upon appellant for
payment, but appellant having refused, they filed the initial complaint in the court below. Appellant
defended by denying any partnership with appellees, whom he claimed to be mere employees of his.
The Court of First Instance of Bohol refused to give credence to Exhibit "C", and dismissed the
complaint on the ground that the other were indispensable parties but hid not been impleaded. Upon
appeal, the Court of Appeals reversed, with the result noted at the start of this opinion.
Gregorio Magdusa then petitioned for a review of the decision, and we gave it due course. 1äw phï1.ñët
The main argument of appellant is that the appellees' action can not be entertained, because in the
distribution of all or part of a partnership's assets, all the partners have no interest and are
indispensable parties without whose intervention no decree of distribution can be validly entered.
This argument was considered and answered by the Court of Appeals in the following words:
We now come to the last issue involved. While finding that some amounts are due the
plaintiffs, the lower court withheld an award in their favor, reasoning that a judgment ordering
the defendant to pay might affect the rights of other partners who were not made parties in
this case. The reason cited by the lower court does not constitute a legal impediment to a
judgment for the plaintiffs in this case. This is not an action for a dissolution of a partnership
and winding up of its affairs or liquidation of its assets in which the interest of other partners
who are not brought into the case may be affected. The action of the plaintiffs is one for the
recovery of a sum of money with Gregorio Magdusa as the principal defendant. The
partnership, with Gregorio Magdusa as managing partner, was brought into the case as an
alternative defendant only. Plaintiffs' action was based on the allegation, substantiated in
evidence, that Gregorio Magdusa, having taken delivery of their shares, failed and refused
and still fails and refuses to pay them their claims. The liability, therefore, is personal to
Gregorio Magdusa, and the judgment should be against his sole interest, not against the
partnership's although the judgment creditors may satisfy the judgment against the interest
of Gregorio Magdusa in the partnership subject to the condition imposed by Article 1814 of
the Civil Code.
We do not find the preceding reasoning tenable. A partner's share can not be returned without first
dissolving and liquidating the partnership (Po Yeng Cheo vs. Lim Ka Yam, 44 Phil. 177), for the
return is dependent on the discharge of the creditors, whose claims enjoy preference over those of
the partners; and it is self-evident that all members of the partnership are interested in his assets
and business, and are entitled to be heard in the matter of the firm's liquidation and the distribution of
its property. The liquidation Exhibit "C" is not signed by the other members of the partnership
besides appellees and appellant; it does not appear that they have approved, authorized, or ratified
the same, and, therefore, it is not binding upon them. At the very least, they are entitled to be heard
upon its correctness.
In addition, unless a proper accounting and liquidation of the partnership affairs is first had, the
capital shares of the appellees, as retiring partners, can not be repaid, for the firm's outside creditors
have preference over the assets of the enterprise (Civ. Code, Art. 1839), and the firm's property can
not be diminished to their prejudice. Finally, the appellant can not be held liable in his personal
capacity for the payment of partners' shares for he does not hold them except as manager of, or
trustee for, the partnership. It is the latter that must refund their shares to the retiring partners. Since
not all the members of the partnership have been impleaded, no judgment for refund can be
rendered, and the action should have been dismissed.
IN VIEW OF THE FOREGOING, the decision of the Court of Appeals is reversed and the action
ordered dismissed, without prejudice to a proper proceeding for the dissolution and liquidation of the
common enterprise. Costs against appellees.
Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Barrera, Paredes, Dizon, Regala
and Makalintal, JJ., concur.
DECISION
PANGANIBAN, J.:
The Case
The Petition for Review on Certiorari before us challenges the March 23,
2000 Decision and the July 26, 2000 Resolution of the Court of Appeals (CA)
[1] [2] [3]
WHEREFORE, foregoing premises considered, the Decision dated July 21, 1992
rendered by the Regional Trial Court, Branch 148, Makati City is hereby SET ASIDE
and NULLIFIED and in lieu thereof a new decision is rendered ordering the
[petitioners] jointly and severally to pay and reimburse to [respondents] the amount
of P253,114.00. No pronouncement as to costs. [4]
The Facts
On July 25, 1984, Luzviminda J. Villareal, Carmelito Jose and Jesus Jose
formed a partnership with a capital of P750,000 for the operation of a restaurant
and catering business under the name Aquarius Food House and Catering
Services. Villareal was appointed general manager and Carmelito Jose,
[5]
operations manager.
Respondent Donaldo Efren C. Ramirez joined as a partner in the business
on September 5, 1984. His capital contribution of P250,000 was paid by his
parents, Respondents Cesar and Carmelita Ramirez. [6]
After Jesus Jose withdrew from the partnership in January 1987, his capital
contribution of P250,000 was refunded to him in cash by agreement of the
partners.[7]
Before the Regional Trial Court (RTC) of Makati, Branch 59, respondents
subsequently filed a Complaint dated November 10, 1987, for the collection of
[11]
In their Reply, respondents alleged that they did not know of any loan
encumbrance on the restaurant. According to them, if such allegation were true,
then the loans incurred by petitioners should be regarded as purely personal
and, as such, not chargeable to the partnership. The former further averred that
they had not received any regular report or accounting from the latter, who had
solely managed the business. Respondents also alleged that they expected the
equipment and the furniture stored in their house to be removed by petitioners
as soon as the latter found a better location for the restaurant.
[13]
Respondents filed an Urgent Motion for Leave to Sell or Otherwise Dispose
of Restaurant Furniture and Equipment on July 8, 1988. The furniture and the
[14]
After trial, the RTC ruled that the parties had voluntarily entered into a
[17]
The CA Ruling
The CA held that, although respondents had no right to demand the return
of their capital contribution, the partnership was nonetheless dissolved when
petitioners lost interest in continuing the restaurant business with
them. Because petitioners never gave a proper accounting of the partnership
accounts for liquidation purposes, and because no sufficient evidence was
presented to show financial losses, the CA computed their liability as follows:
Consequently, since what has been proven is only the outstanding obligation of the
partnership in the amount of P240,658.00, although contracted by the partnership
before [respondents] have joined the partnership but in accordance with Article 1826
of the New Civil Code, they are liable which must have to be deducted from the
remaining capitalization of the said partnership which is in the amount
of P1,000,000.00 resulting in the amount of P759,342.00, and in order to get the share
of [respondents], this amount of P759,342.00 must be divided into three (3) shares or
in the amount of P253,114.00 for each share and which is the only amount which
[petitioner] will return to [respondents] representing the contribution to the
partnership minus the outstanding debt thereof. [19]
consideration:
9.1. Whether the Honorable Court of Appeals decision ordering the distribution of the
capital contribution, instead of the net capital after the dissolution and liquidation of a
partnership, thereby treating the capital contribution like a loan, is in accordance with
law and jurisprudence;
9.2. Whether the Honorable Court of Appeals decision ordering the petitioners to
jointly and severally pay and reimburse the amount of [P]253,114.00 is supported by
the evidence on record; and
9.3. Whether the Honorable Court of Appeals was correct in making [n]o
pronouncement as to costs. [22]
On closer scrutiny, the issues are as follows: (1) whether petitioners are
liable to respondents for the latters share in the partnership; (2) whether the
CAs computation of P253,114 as respondents share is correct; and (3) whether
the CA was likewise correct in not assessing costs.
First Issue:
Share in Partnership
Both the trial and the appellate courts found that a partnership had indeed
existed, and that it was dissolved on March 1, 1987. They found that the
dissolution took place when respondents informed petitioners of the intention to
discontinue it because of the formers dissatisfaction with, and loss of trust in,
the latters management of the partnership affairs. These findings were amply
supported by the evidence on record. Respondents consequently demanded
from petitioners the return of their one-third equity in the partnership.
We hold that respondents have no right to demand from petitioners the
return of their equity share. Except as managers of the partnership, petitioners
did not personally hold its equity or assets. The partnership has a juridical
personality separate and distinct from that of each of the partners. Since the
[23]
Second Issue:
What Must Be Returned?
Since it is the partnership, as a separate and distinct entity, that must refund
the shares of the partners, the amount to be refunded 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 [25]
the creditors have been paid, whatever is left of the partnership assets becomes
available for the payment of the partners shares.
Evidently, in the present case, the exact amount of refund equivalent to
respondents one-third share in the partnership cannot be determined until all
the partnership assets will have been liquidated -- in other words, sold and
converted to cash -- and all partnership creditors, if any, paid. The CAs
computation of the amount to be refunded to respondents as their share was
thus erroneous.
First, it seems that the appellate court was under the misapprehension that
the total capital contribution was equivalent to the gross assets to be distributed
to the partners at the time of the dissolution of the partnership. We cannot
sustain the underlying idea that the capital contribution at the beginning of the
partnership remains intact, unimpaired and available for distribution or return to
the partners. Such idea is speculative, conjectural and totally without factual or
legal support.
Generally, in the pursuit of a partnership business, its capital is either
increased by profits earned or decreased by losses sustained. It does not
remain static and unaffected by the changing fortunes of the business. In the
present case, the financial statements presented before the trial court showed
that the business had made meager profits. However, notable therefrom is the
[26]
omission of any provision for the depreciation of the furniture and the
[27]
not reflected either.Properly taking these non-cash items into account will show
that the partnership was actually sustaining substantial losses, which
consequently decreased the capital of the partnership.Both the trial and the
appellate courts in fact recognized the decrease of the partnership assets to
almost nil, but the latter failed to recognize the consequent corresponding
decrease of the capital.
Second, the CAs finding that the partnership had an outstanding obligation
in the amount of P240,658 was not supported by evidence. We sustain the
contrary finding of the RTC, which had rejected the contention that the
obligation belonged to the partnership for the following reason:
x x x [E]vidence on record failed to show the exact loan owed by the partnership to its
creditors. The balance sheet (Exh. 4) does not reveal the total loan. The Agreement
(Exh. A) par. 6 shows an outstanding obligation of P240,055.00 which the partnership
owes to different creditors, while the Certification issued by Mercator Finance (Exh.
8) shows that it was Sps. Diogenes P. Villareal and Luzviminda J. Villareal, the
former being the nominal party defendant in the instant case, who obtained a loan
of P355,000.00 on Oct. 1983, when the original partnership was not yet formed.
Third, the CA failed to reduce the capitalization by P250,000, which was the
amount paid by the partnership to Jesus Jose when he withdrew from the
partnership.
Because of the above-mentioned transactions, the partnership capital was
actually reduced. When petitioners and respondents ventured into business
together, they should have prepared for the fact that their investment would
either grow or shrink. In the present case, the investment of respondents
substantially dwindled. The original amount of P250,000 which they had
invested could no longer be returned to them, because one third of the
partnership properties at the time of dissolution did not amount to that much.
It is a long established doctrine that the law does not relieve parties from
the effects of unwise, foolish or disastrous contracts they have entered into with
all the required formalities and with full awareness of what they were
doing. Courts have no power to relieve them from obligations they have
voluntarily assumed, simply because their contracts turn out to be disastrous
deals or unwise investments. [29]
Third Issue:
Costs
Although, as a rule, costs are adjudged against the losing party, courts have
discretion, for special reasons, to decree otherwise. When a lower court is
reversed, the higher court normally does not award costs, because the losing
party relied on the lower courts judgment which is presumed to have been
issued in good faith, even if found later on to be erroneous.Unless shown to be
patently capricious, the award shall not be disturbed by a reviewing tribunal.
WHEREFORE, the Petition is GRANTED, and the assailed Decision and
Resolution SET ASIDE. This disposition is without prejudice to proper
proceedings for the accounting, the liquidation and the distribution of the
remaining partnership assets, if any. No pronouncement as to costs.
SO ORDERED.
DECISION
YNARES-SANTIAGO, J.:
Petitioner Emilio Emnace, Vicente Tabanao and Jacinto Divinagracia were partners in a
business concern known as Ma. Nelma Fishing Industry. Sometime in January of 1986, they
decided to dissolve their partnership and executed an agreement of partition and distribution of the
partnership properties among them, consequent to Jacinto Divinagracias withdrawal from the
partnership.[1] Among the assets to be distributed were five (5) fishing boats, six (6) vehicles, two
(2) parcels of land located at Sto. Nio and Talisay, Negros Occidental, and cash deposits in the
local branches of the Bank of the Philippine Islands and Prudential Bank.
Throughout the existence of the partnership, and even after Vicente Tabanaos untimely
demise in 1994, petitioner failed to submit to Tabanaos heirs any statement of assets and liabilities
of the partnership, and to render an accounting of the partnerships finances. Petitioner also reneged
on his promise to turn over to Tabanaos heirs the deceaseds 1/3 share in the total assets of the
partnership, amounting to P30,000,000.00, or the sum of P10,000,000.00, despite formal demand
for payment thereof.[2]
Consequently, Tabanaos heirs, respondents herein, filed against petitioner an action for
accounting, payment of shares, division of assets and damages.[3] In their complaint, respondents
prayed as follows:
1. Defendant be ordered to render the proper accounting of all the assets and liabilities
of the partnership at bar; and
A. No less than One Third (1/3) of the assets, properties, dividends, cash, land(s),
fishing vessels, trucks, motor vehicles, and other forms and substance of treasures
which belong and/or should belong, had accrued and/or must accrue to the
partnership;
Petitioner filed a motion to dismiss the complaint on the grounds of improper venue, lack of
jurisdiction over the nature of the action or suit, and lack of capacity of the estate of Tabanao to
sue.[5] On August 30, 1994, the trial court denied the motion to dismiss. It held that venue was
properly laid because, while realties were involved, the action was directed against a particular
person on the basis of his personal liability; hence, the action is not only a personal action but also
an action in personam. As regards petitioners argument of lack of jurisdiction over the action
because the prescribed docket fee was not paid considering the huge amount involved in the claim,
the trial court noted that a request for accounting was made in order that the exact value of the
partnership may be ascertained and, thus, the correct docket fee may be paid. Finally, the trial court
held that the heirs of Tabanao had a right to sue in their own names, in view of the provision of
Article 777 of the Civil Code, which states that the rights to the succession are transmitted from
the moment of the death of the decedent.[6]
The following day, respondents filed an amended complaint,[7] incorporating the additional
prayer that petitioner be ordered to sell all (the partnerships) assets and thereafter
pay/remit/deliver/surrender/yield to the plaintiffs their corresponding share in the proceeds
thereof. In due time, petitioner filed a manifestation and motion to dismiss,[8] arguing that the trial
court did not acquire jurisdiction over the case due to the plaintiffs failure to pay the proper docket
fees. Further, in a supplement to his motion to dismiss,[9] petitioner also raised prescription as an
additional ground warranting the outright dismissal of the complaint.
On June 15, 1995, the trial court issued an Order,[10] denying the motion to dismiss inasmuch
as the grounds raised therein were basically the same as the earlier motion to dismiss which has
been denied.Anent the issue of prescription, the trial court ruled that prescription begins to run
only upon the dissolution of the partnership when the final accounting is done. Hence, prescription
has not set in the absence of a final accounting. Moreover, an action based on a written contract
prescribes in ten years from the time the right of action accrues.
Petitioner filed a petition for certiorari before the Court of Appeals,[11] raising the following
issues:
I. Whether or not respondent Judge acted without jurisdiction or with grave abuse of discretion
in taking cognizance of a case despite the failure to pay the required docket fee;
II. Whether or not respondent Judge acted without jurisdiction or with grave abuse of discretion
in insisting to try the case which involve (sic) a parcel of land situated outside of its territorial
jurisdiction;
III. Whether or not respondent Judge acted without jurisdiction or with grave abuse of discretion
in allowing the estate of the deceased to appear as party plaintiff, when there is no intestate
case and filed by one who was never appointed by the court as administratrix of the estates;
and
IV. Whether or not respondent Judge acted without jurisdiction or with grave abuse of discretion
in not dismissing the case on the ground of prescription.
On August 8, 1996, the Court of Appeals rendered the assailed decision,[12] dismissing the
petition for certiorari, upon a finding that no grave abuse of discretion amounting to lack or excess
of jurisdiction was committed by the trial court in issuing the questioned orders denying petitioners
motions to dismiss.
Not satisfied, petitioner filed the instant petition for review, raising the same issues resolved
by the Court of Appeals, namely:
I. Failure to pay the proper docket fee;
II. Parcel of land subject of the case pending before the trial court is outside the said courts
territorial jurisdiction;
III. Lack of capacity to sue on the part of plaintiff heirs of Vicente Tabanao; and
IV. Prescription of the plaintiff heirs cause of action.
It can be readily seen that respondents primary and ultimate objective in instituting the action
below was to recover the decedents 1/3 share in the partnerships assets. While they ask for an
accounting of the partnerships assets and finances, what they are actually asking is for the trial
court to compel petitioner to pay and turn over their share, or the equivalent value thereof, from
the proceeds of the sale of the partnership assets. They also assert that until and unless a proper
accounting is done, the exact value of the partnerships assets, as well as their corresponding share
therein, cannot be ascertained.Consequently, they feel justified in not having paid the
commensurate docket fee as required by the Rules of Court.
We do not agree. The trial court does not have to employ guesswork in ascertaining the
estimated value of the partnerships assets, for respondents themselves voluntarily pegged the worth
thereof at Thirty Million Pesos (P30,000,000.00). Hence, this case is one which is really not
beyond pecuniary estimation, but rather partakes of the nature of a simple collection case where
the value of the subject assets or amount demanded is pecuniarily determinable.[13] While it is true
that the exact value of the partnerships total assets cannot be shown with certainty at the time of
filing, respondents can and must ascertain, through informed and practical estimation, the amount
they expect to collect from the partnership, particularly from petitioner, in order to determine the
proper amount of docket and other fees.[14] It is thus imperative for respondents to pay the
corresponding docket fees in order that the trial court may acquire jurisdiction over the action.[15]
Nevertheless, unlike in the case of Manchester Development Corp. v. Court of
Appeals,[16] where there was clearly an effort to defraud the government in avoiding to pay the
correct docket fees, we see no attempt to cheat the courts on the part of respondents. In fact, the
lower courts have noted their expressed desire to remit to the court any payable balance or lien on
whatever award which the Honorable Court may grant them in this case should there be any
deficiency in the payment of the docket fees to be computed by the Clerk of Court. [17] There is
evident willingness to pay, and the fact that the docket fee paid so far is inadequate is not an
indication that they are trying to avoid paying the required amount, but may simply be due to an
inability to pay at the time of filing. This consideration may have moved the trial court and the
Court of Appeals to declare that the unpaid docket fees shall be considered a lien on the judgment
award.
Petitioner, however, argues that the trial court and the Court of Appeals erred in condoning
the non-payment of the proper legal fees and in allowing the same to become a lien on the monetary
or property judgment that may be rendered in favor of respondents. There is merit in petitioners
assertion. The third paragraph of Section 16, Rule 141 of the Rules of Court states that:
The legal fees shall be a lien on the monetary or property judgment in favor of the
pauper-litigant.
Respondents cannot invoke the above provision in their favor because it specifically applies
to pauper-litigants. Nowhere in the records does it appear that respondents are litigating as paupers,
and as such are exempted from the payment of court fees.[18]
The rule applicable to the case at bar is Section 5(a) of Rule 141 of the Rules of Court, which
defines the two kinds of claims as: (1) those which are immediately ascertainable; and (2) those
which cannot be immediately ascertained as to the exact amount. This second class of claims,
where the exact amount still has to be finally determined by the courts based on evidence
presented, falls squarely under the third paragraph of said Section 5(a), which provides:
In case the value of the property or estate or the sum claimed is less or more in
accordance with the appraisal of the court, the difference of fee shall be refunded or
paid as the case may be. (Underscoring ours)
In Pilipinas Shell Petroleum Corporation v. Court of Appeals,[19] this Court pronounced that
the above-quoted provision clearly contemplates an initial payment of the filing fees corresponding
to the estimated amount of the claim subject to adjustment as to what later may be
proved.[20] Moreover, we reiterated therein the principle that the payment of filing fees cannot be
made contingent or dependent on the result of the case. Thus, an initial payment of the docket fees
based on an estimated amount must be paid simultaneous with the filing of the
complaint. Otherwise, the court would stand to lose the filing fees should the judgment later turn
out to be adverse to any claim of the respondent heirs.
The matter of payment of docket fees is not a mere triviality. These fees are necessary to
defray court expenses in the handling of cases. Consequently, in order to avoid tremendous losses
to the judiciary, and to the government as well, the payment of docket fees cannot be made
dependent on the outcome of the case, except when the claimant is a pauper-litigant.
Applied to the instant case, respondents have a specific claim 1/3 of the value of all the
partnership assets but they did not allege a specific amount. They did, however, estimate the
partnerships total assets to be worth Thirty Million Pesos (P30,000,000.00), in a letter[21] addressed
to petitioner. Respondents cannot now say that they are unable to make an estimate, for the said
letter and the admissions therein form part of the records of this case. They cannot avoid paying
the initial docket fees by conveniently omitting the said amount in their amended complaint. This
estimate can be made the basis for the initial docket fees that respondents should pay. Even if it
were later established that the amount proved was less or more than the amount alleged or
estimated, Rule 141, Section 5(a) of the Rules of Court specifically provides that the court may
refund the excess or exact additional fees should the initial payment be insufficient. It is clear that
it is only the difference between the amount finally awarded and the fees paid upon filing of this
complaint that is subject to adjustment and which may be subjected to a lien.
In the oft-quoted case of Sun Insurance Office, Ltd. v. Hon. Maximiano Asuncion,[22] this Court
held that when the specific claim has been left for the determination by the court, the additional
filing fee therefor shall constitute a lien on the judgment and it shall be the responsibility of the
Clerk of Court or his duly authorized deputy to enforce said lien and assess and collect the
additional fee. Clearly, the rules and jurisprudence contemplate the initial payment of filing and
docket fees based on the estimated claims of the plaintiff, and it is only when there is a deficiency
that a lien may be constituted on the judgment award until such additional fee is collected.
Based on the foregoing, the trial court erred in not dismissing the complaint outright despite
their failure to pay the proper docket fees. Nevertheless, as in other procedural rules, it may be
liberally construed in certain cases if only to secure a just and speedy disposition of an
action. While the rule is that the payment of the docket fee in the proper amount should be adhered
to, there are certain exceptions which must be strictly construed.[23]
In recent rulings, this Court has relaxed the strict adherence to the Manchester doctrine,
allowing the plaintiff to pay the proper docket fees within a reasonable time before the expiration
of the applicable prescriptive or reglementary period.[24]
In the recent case of National Steel Corp. v. Court of Appeals,[25] this Court held that:
The court acquires jurisdiction over the action if the filing of the initiatory pleading is
accompanied by the payment of the requisite fees, or, if the fees are not paid at the
time of the filing of the pleading, as of the time of full payment of the fees within such
reasonable time as the court may grant, unless, of course, prescription has set in the
meantime.
It does not follow, however, that the trial court should have dismissed the complaint
for failure of private respondent to pay the correct amount of docket fees. Although
the payment of the proper docket fees is a jurisdictional requirement, the trial court
may allow the plaintiff in an action to pay the same within a reasonable time before
the expiration of the applicable prescriptive or reglementary period. If the plaintiff
fails to comply within this requirement, the defendant should timely raise the issue of
jurisdiction or else he would be considered in estoppel. In the latter case, the balance
between the appropriate docket fees and the amount actually paid by the plaintiff will
be considered a lien or any award he may obtain in his favor. (Underscoring ours)
Accordingly, the trial court in the case at bar should determine the proper docket fee based on
the estimated amount that respondents seek to collect from petitioner, and direct them to pay the
same within a reasonable time, provided the applicable prescriptive or reglementary period has not
yet expired. Failure to comply therewith, and upon motion by petitioner, the immediate dismissal
of the complaint shall issue on jurisdictional grounds.
On the matter of improper venue, we find no error on the part of the trial court and the Court
of Appeals in holding that the case below is a personal action which, under the Rules, may be
commenced and tried where the defendant resides or may be found, or where the plaintiffs reside,
at the election of the latter.[26]
Petitioner, however, insists that venue was improperly laid since the action is a real action
involving a parcel of land that is located outside the territorial jurisdiction of the court a quo. This
contention is not well-taken. The records indubitably show that respondents are asking that the
assets of the partnership be accounted for, sold and distributed according to the agreement of the
partners. The fact that two of the assets of the partnership are parcels of land does not materially
change the nature of the action. It is an action in personam because it is an action against a person,
namely, petitioner, on the basis of his personal liability. It is not an action in rem where the action
is against the thing itself instead of against the person.[27] Furthermore, there is no showing that the
parcels of land involved in this case are being disputed. In fact, it is only incidental that part of the
assets of the partnership under liquidation happen to be parcels of land.
The time-tested case of Claridades v. Mercader, et al.,[28] settled this issue thus:
The fact that plaintiff prays for the sale of the assets of the partnership, including the
fishpond in question, did not change the nature or character of the action, such sale
being merely a necessary incident of the liquidation of the partnership, which should
precede and/or is part of its process of dissolution.
The action filed by respondents not only seeks redress against petitioner. It also seeks the
enforcement of, and petitioners compliance with, the contract that the partners executed to
formalize the partnerships dissolution, as well as to implement the liquidation and partition of the
partnerships assets. Clearly, it is a personal action that, in effect, claims a debt from petitioner and
seeks the performance of a personal duty on his part.[29] In fine, respondents complaint seeking the
liquidation and partition of the assets of the partnership with damages is a personal action which
may be filed in the proper court where any of the parties reside.[30] Besides, venue has nothing to
do with jurisdiction for venue touches more upon the substance or merits of the case.[31] As it is,
venue in this case was properly laid and the trial court correctly ruled so.
On the third issue, petitioner asserts that the surviving spouse of Vicente Tabanao has no legal
capacity to sue since she was never appointed as administratrix or executrix of his
estate. Petitioners objection in this regard is misplaced. The surviving spouse does not need to be
appointed as executrix or administratrix of the estate before she can file the action. She and her
children are complainants in their own right as successors of Vicente Tabanao. From the very
moment of Vicente Tabanaos death, his rights insofar as the partnership was concerned were
transmitted to his heirs, for rights to the succession are transmitted from the moment of death of
the decedent.[32]
Whatever claims and rights Vicente Tabanao had against the partnership and petitioner were
transmitted to respondents by operation of law, more particularly by succession, which is a mode
of acquisition by virtue of which the property, rights and obligations to the extent of the value of
the inheritance of a person are transmitted.[33] Moreover, respondents became owners of their
respective hereditary shares from the moment Vicente Tabanao died.[34]
A prior settlement of the estate, or even the appointment of Salvacion Tabanao as executrix
or administratrix, is not necessary for any of the heirs to acquire legal capacity to sue. As
successors who stepped into the shoes of their decedent upon his death, they can commence any
action originally pertaining to the decedent.[35] From the moment of his death, his rights as a partner
and to demand fulfillment of petitioners obligations as outlined in their dissolution agreement were
transmitted to respondents. They, therefore, had the capacity to sue and seek the courts intervention
to compel petitioner to fulfill his obligations.
Finally, petitioner contends that the trial court should have dismissed the complaint on the
ground of prescription, arguing that respondents action prescribed four (4) years after it accrued in
1986. The trial court and the Court of Appeals gave scant consideration to petitioners hollow
arguments, and rightly so.
The three (3) final stages of a partnership are: (1) dissolution; (2) winding-up; and (3)
termination.[36] The partnership, although dissolved, continues to exist and its legal personality is
retained, at which time it completes the winding up of its affairs, including the partitioning and
distribution of the net partnership assets to the partners.[37] For as long as the partnership exists, any
of the partners may demand an accounting of the partnerships business. Prescription of the said
right starts to run only upon the dissolution of the partnership when the final accounting is done.[38]
Contrary to petitioners protestations that respondents right to inquire into the business affairs
of the partnership accrued in 1986, prescribing four (4) years thereafter, prescription had not even
begun to run in the absence of a final accounting. Article 1842 of the Civil Code provides:
The right to an account of his interest shall accrue to any partner, or his legal
representative as against the winding up partners or the surviving partners or the
person or partnership continuing the business, at the date of dissolution, in the absence
of any agreement to the contrary.
Applied in relation to Articles 1807 and 1809, which also deal with the duty to account, the
above-cited provision states that the right to demand an accounting accrues at the date of
dissolution in the absence of any agreement to the contrary. When a final accounting is made, it is
only then that prescription begins to run. In the case at bar, no final accounting has been made, and
that is precisely what respondents are seeking in their action before the trial court, since petitioner
has failed or refused to render an accounting of the partnerships business and assets. Hence, the
said action is not barred by prescription.
In fine, the trial court neither erred nor abused its discretion when it denied petitioners motions
to dismiss. Likewise, the Court of Appeals did not commit reversible error in upholding the trial
courts orders. Precious time has been lost just to settle this preliminary issue, with petitioner
resurrecting the very same arguments from the trial court all the way up to the Supreme Court. The
litigation of the merits and substantial issues of this controversy is now long overdue and must
proceed without further delay.
WHEREFORE, in view of all the foregoing, the instant petition is DENIED for lack of merit,
and the case is REMANDED to the Regional Trial Court of Cadiz City, Branch 60, which is
ORDERED to determine the proper docket fee based on the estimated amount that plaintiffs
therein seek to collect, and direct said plaintiffs to pay the same within a reasonable time, provided
the applicable prescriptive or reglementary period has not yet expired. Thereafter, the trial court is
ORDERED to conduct the appropriate proceedings in Civil Case No. 416-C.
Costs against petitioner.
SO ORDERED.
Davide, Jr., C.J., (Chairman), Puno, Kapunan, and Pardo, JJ., concur.
TECK SEING & CO., LTD., petitioner-appellee. SANTIAGO JO CHUNG CANF ET AL., partners, v.
PACIFIC COMMERCIAL COMPANY ET AL., creditors-appellants.
Del Rosario & Del Rosario and Block, Johnston & Greenbaum for Appellants.
F. V. Arias for appellees Jo Ibec and Go Tayco.
SYLLABUS
1. MERCANTILE LAW; CONTRACTS; PARTNERSHIP; INSTANT CASE. — Held: That the mercantile
establishment which operated under the name of Teck Seing & Co., Ltd., and which was constituted by the
document set forth in the decision, is not a corporation, nor a cuenta en participacion (joint account
association), nor a sociedad anonima, nor a sociedad en comandita (limited partnership), nor a de facto
commercial association, but is a general partnership.
2. ID.; ID.; ID.; LIMITED PARTNERSHIP. -- Those who seek to avail themselves of the protection of laws
permitting the creation of limited partnership must show a substantially full compliance with such laws. A
limited partnership that has not complied with the law of its creation is not considered a limited partnership
at all, but a general partnership in which all the members are liable.
3. ID.; ID.; ID. — To establish a limited partnership, there must be, at least, one general partner and the
name of the least one of the general partners in the firm name. (Code of Commerce, arts. 122 [2], 146,
148.)
4. ID.; ID.; ID.; DEFECTS IN THE ORGANIZATION; FIRM NAME; ARTICLE 126 OF THE CODE OF COMMERCE,
CONSTRUED. — Article 126 of the Code of Commerce requires the general copartnership to transact
business under the name of all its members, or of several of them, or of one only. The object of the article is
manifestly to protect the public against imposition and fraud.
5. ID.; ID.; ID,; ID.; ID.; ID. — Article 126 of the Code of Commerce was intended more for the protection
of the creditors than of the partners themselves. A distinction can be drawn between the right of the alleged
partnership to institute action when failing to live up to the provision of the law, or even the rights of the
partners as among themselves, and the right of a third person to hold responsible a general partnership
which merely lacks a firm name, in order to make it a partnership de jure. the law should be construed as
rendering contracts made in violation of it unlawful and unenforceable at the instance of the offending party
only, but not as designed to take away the rights of innocent parties who may have dealt with the offenders
in ignorance of their having violated the law.
6. ID.; ID., ID.; ID.; ID.; ID. — The civil law and the common law alike point to a difference between the
rights of the partners who have failed to comply with the law and the rights of third persons who have dealt
with the partnership.
7. ID.; ID.; ID.; ID.; ID.; ID. — According to the Spanish civil law, defects in the organization cannot effect
relations with third persons. Contracts entered into by commercial associations defectively organized are
valid when they are voluntarily executed by the parties, if the only controversy relates to whether or not
they complied with the agreement.
8. ID.; ID.; ID.; ID.; ID.; ID.; FAILURE OF REGISTRY, EFFECT. — While the failure to register in the
commercial registry, necessarily precludes the members from enforcing rights acquired by them against
third persons, such failure cannot prejudice the rights of third persons. (Decisions of the supreme court of
Spain of December 6, 1887, January 25, 1888, November 10, 1890, and January 26, 1900.)
9. ID.; ID.; ID.; ID.; ID.; ID.; DECISION IN HUNG-MAN-YOC v. KIENG-CHIONG-SENG, DISTINGUISHED. —
There is a marked difference between the facts of the case of Hung-Man-Yoc v. Kieng-Chiong-Seng ([1906],
6 Phil., 498), and the facts of the instant case.
10. ID.; ID.; ID.; ID.; ID.; ID,; TEST OF PARTNERSHIP. — The legal intention deducible from the acts of the
parties controls in determining the existence of a partnership. If they intend to do a thing which in law
constitutes a partnership, they are partners, although their purpose was to avoid the creation of such
relation.
11. ID.; ID.; ID.; ID.; ID.; ID.; BANKRUPTCY AND INSOLVENCY; LIABILITY OF PARTNERSHIP AND
PARTNERS. — If a firm be insolvent, the creditors may proceed both against the firm against the solvent
partner or partners, first exhausting the assets of the firm before seizing the property of the partners.
DECISION
MALCOLM, J. :
Following the presentation of an application to be adjudged an insolvent by the "Sociedad Mercantile, Teck
Seing & Co., Ltd.," the creditor, the Pacific Commercial Company, Pinol & Company, Riu Hermanos, and W.
H. Anderson & Company, filed a motion in which the Court was prayed to enter an order:" (A) Declaring the
individual partners as described in paragraph 5 parties to this proceeding; (B) to require each of said
partners to file an inventory of his property in the manner required by section 51 of Act No. 1956; and (C)
that each of said partners be adjudicated insolvent debtors in this proceeding." The trial judge first granted
the motion, but, subsequently, on opposition being renewed, denied it. it is from this last order that an
appeal was taken in accordance with section 82 of the Insolvency Law.
There has been laid before us for consideration and decision a question of some importance and of some
intricacy. The issue in the case relates to a determination of the nature of the mercantile establishment
which operated under the name into, and analyze, the document constituting Teck Seing & Co., Ltd. It
reads:jgc:chan roble s.com.p h
"Que nosotros, Santiago Jo Chung Cang, mayor de edad, comerciante, vecino y residente del municipio de
Tabogon, Provincia de Cebu, Islas Filipinas, Go Tayco, mayor de edad, comerciante, vecino y residente del
municipio de Cebu, Provincia de Cebu, Islas Filipinas, Yap Gueco, mayor de edad, comerciante, vecino y
residente del municipio y Provincia de Cebu, Islas Filipinas, Lim Yogsing, mayor de edad, comerciante,
vecino y residente del municipio de Cebu, Provincia de Cebu, Islas Filipinas, y Jo Ybec, mayor de edad,
comerciante, vecino y residente del municipio de Jagna, Provincia de Bohol, Islas Filipinas, hacemos constar
por la presente, que constituimos y formamos una sociedad Mercantile limitada, bajo la leyes vigentes en las
Islas Filipinas, y para ser registrada de acuerdo con los reglamentos vigentes del Codigo de Comercio en
Filipinas.
"Que la razon social se denominara "Teck Seing & Co., Ltd," y tendra su domicilio principal en la Calle
Magallanes No. 94, de la Ciudad de Cebu, Provincia de Cebu, Islas Filipinas.
"Que el capital socia sera de treinta mil pesos (P30,000) moneda legal de las Islas Filipinas, dividido en cinco
acciones de a P6,000 como sigue:
Go TAYCO 6,000.00
Jo Ybec 6,000.00
Total 30,000.00
"Que la duracion de la sociedad sera la de seis anos a contar de la fecha de esta escritura, pudiendo
prorrogarse este tiempo a discrecion unanime de todos los accionistas.
"Las ganacias perdiad que resultaren durante cada ano comercial, se distribuiran proporcionalmente entre
los accionistas, de acuerdo con el capital apotado por cada uno de los mismos.
"Las ganancias que resultaren en cads ano comercial, si resultaren algunas ganancias, no podran ser
retiradas por los accionistas hasta dentro del termino de tres anos a contar de la fecha del primer balance
anual de negocio, quendando por tanto estas ganancias en reserva, para ampliar el capital aportado por los
accionistas y ampliar portanto la esfera de accion emprendida por la misma sociedad. Al pasar o expirar el
termino de tres anos, cada accionista podra retirar o depositar en poder de la sociedad, las ganancias que le
debieran corresponder durante dicho termino de tres anos.
"Que los accionistas no podran extraer ni disponer en ningun tiempo cualesquirea cantidad o cantidades de
la sociedad, que haya sido aportadoo por los mismo, para atender sus gastos particulares ni aun pagando
redito alguno sobre la cantidad que intenten disponer o extraer de dicha sociedad.
"El accionista Sr. Lim Yogsing tendra a su cargo, en union del Sr. Vicente Jocson Jo, la administracion de la
Compania, quienes podran usar indisstintamente la firma social, quedando por consiquiente authorizados
ambos para hacer en nombre de ella toda clase de operaciones, negocios y especulaciones mercantiles,
practicando judicial y extrajudicialmente cuantos actos se requieran para el bien de la sociedad, nombrar
procuradores o abogados para reclamaciones y cobro de creditors y proponer ante los tribunales las
demandas, convenios, transacciones y excepciones procedentes. En caso de ausencia, enfermedad o
cualquier otro impedimento del accionista administrador Sr. Lim Yogsing, este podra conferir poder general
o especial al accionista que crea conveniente para que en union del administrador auxiliar Sr. Vicente Jocson
Jo, pudieran ambos administrar convenientemente los negocious de la sociedad. Que los administradores
podran tener los empleados necesarios para el mejor manejo de los negocios de la sociedad, y fijaran los
sueldos que debieran percibir dichos empleados por servicios rendidos a la sociedad.
"Que ambos administradores podran disponer de mil doscientos pesos (1,200) moneda filipina, anualmente,
para sus gastos particulares, siendo dicha cantidad de P1,200 la que corresponde a cada uno de dichos
administradores, como emolumentos o salarios que se les asigna a cada uno, por sus trabajos en la
administracioon de la sociedad. Entendiendose, que, los accionistas podran disponer cada fin de ano la
gratificacion que se concedera a cada administrador, si los negocios del ano fueran boyantes y justifiquen la
concesion de una grtificacion especial, aparte del salario aqui dispuesto y especificado.
"Que pasado el termino de seis años, y es de la conveniencia de los accionistas la continuacion del negocio
de esta sociedad, dicho termino sera prorrogado por igual numero de anos, sin necesidad del otorgamiento
de ulteriores escrituras, quedando la presente en vigor hasta el termino dispuesto por todos los accionistas.
"Que las diferencias que pudieran suscitarse entre los accionistas, bien sea por razon de lo estipulado en
esta escritura, ya por actos en el curso y direccion de los negocios en ella comprendidos, se procurara
arreglar entre los mis-mos amistosa y extrajudicialmente, y si no se consiguiere un arreglo de este modo,
dichos accionistas nombraran un arbitro, cuya resolucion estan todos obligados y por la presente se
comprometen y se obligan a acatarla en todas sus partes, renunciando ulteriores recursos.
"En cuyos terminos dejamos formalizada esta escritura de sociedad Mercantile limitada, y prometemos
cumplirla fiel y estrictamente segun los pactos que hemos establecido.
"En testimonio de todo lo cual, firmamos en la Ciudad de Cebu, Provincia de Cebu, Islas Filipinas, hoy 31 de
octubre de mil novecientos diez y nueve.
"GO TAYCO
"YAP GUECO
"JULIO DIAZ
"ISLA FILIPINAS
"PROVINCIA DE CEBU
"En el Municipio de Cebu, de la Provincia antes mencionada, I. F. ., hoy 31 de octubre de 1919, A. D., ante
mi, Notario Publico que subscribe, comparecieron personalmente Santiago Jo Ching Cang, go Tayco, Yapp
Guenco, Lim Yogsing y Ybec, representado este ultimo por Ho Seng Sian, segun authorizacion hecha en
telegrama de fecha 27 de septiembre de 1919 que se me ha presentado en este mismo acto, de quienes doy
fe de que les conozco por ser las mismas personas que otorgaron el preinserto documento, ratificando ante
mi su contenido y manifestando ser el mismo un acto de su libre y voluntario otorgamiento. El Sr. Santiago
Jo Chung me exhibio su cedula personal expedida en Cebu, Cebu, I. F. el dia 19 de septiembre de 1919 bajo
el No. H77742, Go Tayco tambien me exhibio la suya expedida en Cebu, Cebu, I. F., el dia 9 de octubre de
1919 bajo el No. G2042490, Yap Guenco tambien me exhibio la suya expedida en Cebu, Cebu, I. F. el dia 20
de enero de 1919 bajo el No. F1452296, Lim Yogsing tambien me exhibio la suya expedia en Cebu, Cebu, I.
F., el dia 26 de febrero de 1919 bajo el No. F1455662, y Ho Seng Sian representante de Jo Ybec, me exhibo
su cedula personal expedida en Cebu, Cebu, I. F. el dia 4 de febrero expedida en Cebuu, Cebu, I. F. el dia 4
de febrero de 1919 bajo el No. F1453733.
"Ante mi,
"Notario publico
Pagina No. 95 de mi
Registro Notarial
Serie 1919
Libro 2. o.
"Presentado a las diez y cuarentay tres minutos de la manana de hoy, segun el asiento No. 125, pagina 9
del Tomo 1. o del Libro Diario. Cebu, 11 de febrero de 1920.
[SELLO]
"Inscrito el documento que precede al folio 84 hoja No. 188, inscripcion 1. a del Tomo 3. o del Libro Registro
de Sociedades Mercantiles. Cebu, 11 de febrero de 1920. Honorarios treinta pesos con cincuenta centavos.
Art.197, Ley No. 2711, Codigo Administrativo.
Proceeding by process of elimination, it is self-evident that Teck Seing & Co., Ltd., is not a corporation.
Neither is it contended by any one that Teck Seing & Co., Ltd., is the accidental partnership denominated
cuenta en participacion (joint account association).
Counsel for the petitioner and appellee described his client in one place in his opposition to the motion of the
creditors, as "una verdadera sociedad anonima" (a true sociedad anonima). The provisions of the Code of
Commerce relating to sociedades anonimas were, however, repealed by section 191 of the Corporation Law
(Act No. 1459), with the exceptions that sociedades anomimas lawfully organized at the time of the passage
of the Corporation Law were recognized, which is not our case.
The document providing for the partnership contract purported to form "una sociedad mercantile limitada,"
and counsel of the petitioner’s first contention was that Teck SEing & Co., Ltd. was not "sociedad regular
colectiva, ni siquiera comanditaria, sino una sociedad mercantile limitada." Let us see if the partnership
contract created a "sociedad en comandita," or, as it known in English, and will hereafter be spoken of, "a
limited partnership."cralaw vi rtua 1aw lib rary
To establish a limited partnership there must be, at least one general partner and the name of at least one
of the general partners must appear in the firm name. (Code of Commerce, Arts. 122 [2], 146, 148.) But
neither of these requirements have been fulfilled. The general rule is, that those who seek to avail
themselves of the protection of laws permitting the creation of limited partnerships must show a
substantially full compliance with such laws. A limited partnership that has not complied with the law of its
creation is not considered a limited partnership at all, but a general partnership in which all the members
are liable. (Mechem, Elements of Partnership, p. 412; Gilmore, Partnership, pp. 499,595; 20 R. C. L.,
1064.)
The contention of the creditors and appellants is that the partnership contract established a general
partnership.
Article 125 of the Code of Commerce provides that the articles of general copartnership must state the
names, surnames, and domiciles of the partners; the firm name; the names, and surnames of the partners
to whom the management of the firm and the use of its signature is intrusted; the capital which each
partner contributes in cash, credits, or the basis on which their appraisement is to be made; the duration of
the copartnership; and the amounts which, in a proper case, are to be given to each managing partner
annually for his private expenses, while the succeeding article of the Code provides that the general
copartnership must transact business under the name of all its members, of several of them, or of done
only. Turning to the document before us, it will be noted that all of the requirements of the Code have been
met, with the sole exception of the relating to the sole exception of that relating to the composition of the
firm name. We leave consideration of this phase of the case for later discussion.
The remaining possibility is the revised contention of counsel for the petitioners to the effect that Teck Seing
& Co., Ltd. is "una sociedad mercantile ’de facto’ solamante" (only a de facto commercial association), and
that the decision of the Supreme Court in the case of Hung-Man-Yoc v. Kieng-Chiong-Seng [1906], is
controlling. It was this argument which convinced the trial judge, who gave effect to his understanding of
the case last cited and which here must be given serious attention.
The decision in Hung-Man-Yoc v. Kieng-Chiong-Seng, supra, discloses that the firm Kieng-Chiong-Seng was
not organized by means of any public document; that the partnership had not recorded in the mercantile
registry; and that Kieng-Chiong-Seng was not proven to be the firm name, but rather the designation of the
partnership. The conclusion then was, that the partnership in question was merely de facto and that,
therefore, giving effect to the provisions of article 120 of the Code of Commerce, the right of action was
against the persons in charge of the management of the association.
Laying the facts of the case of Hung-Man-Yoc v. Kieng-Chiong-Seng, supra, side by side with the facts
before us, a marked difference is at once disclosed. In the cited case, the organization of the partnership
was not evidenced by any public document; here, it is by a public document. In the cited case, the
partnership naturally could not present a public instrument for record in the mercantile registry; here, the
contract of partnership has been duly registered. But the two cases are similar in that the firm name failed
to include the name of any of the partners.
We come then to the ultimate question, which is, whether we should follow the decision in Hung-man-Yoc v.
Kieng-Chiong-Seng, supra, or whether we should differentiate the two cases, holding Teck Seing & Co., Ltd.,
a general copartnership, notwithstanding the failure of the firm name to include the name of one of the
partners. Let us now notice this decisive point this decisive point in the case.
Article 119 of the Code of Commerce requires every commercial association before beginning its business to
state its articles, agreements, and conditions in a public instrument, which shall be presented for record in
the mercantile registry. Article 120, next following, provides that the persons in charge of the management
of the association who violate the provisions of the foregoing article shall be responsible in solidum to the
persons not members of the association with whom they may have transacted business in the name of the
association. Applied to the facts before us, it would seem that Teck Seing & Co., Ltd. has fulfilled the
provisions of article 119. Moreover, to permit the creditors only to look to the person in charge of the
management of the association, the partner Lim Yogsing, would not prove very helpful to them.
What is said in article 126 of the Code of Commerce relating to the general copartnership transacting
business under the name of all its members or of several of them or of one only, is wisely included in our
commercial law. It would appear, however, that this provision was inserted more for the protection of the
creditors than of the partners themselves. A distinction could well be drawn between the right of the alleged
partnership to institute action when failing to live up to the provisions of the law, or even the rights of the
partners as among themselves, and the right of a third person to hold responsible a general copartnership
which merely lacks a legal firm in order to make it a partnership de jure.
The civil law and the common law alike seem to point to a difference between the rights of the partners who
have failed to comply with the law and the rights of third persons who have dealt with the partnership.
The supreme court of Spain has repeatedly held that notwithstanding the obligation of the members to
register the articles of association in the commercial registry, agreements containing all the essential
requisites are valid as between the contracting parties, whatever the form adopted, and that, while the
failure to register in the commercial registry necessarily precludes the members from enforcing rights
acquired by them against third persons, such failure cannot prejudice the rights of third person. (See
decisions of December 6, 1887, January 25, 1888, November 10, 1890, and January 26, 1900.) The same
reasoning would be applicable to the formal requisite pertaining to the firm name.
The common law is to the same effect. The State of Michian had a statute prohibiting the transaction of
business under an assumed name or any other than the real name of the individual conducting the same,
unless such person shall file with the county clerk a certificate setting forth the name under which the
business is to be conducted and the real name of each of the partners, with their residences and post-office
addresses, and making a violation thereof a misdemeanor. The Supreme Court of Michigan said: jgc:chan robles. com.ph
"The one object of the act is manifestly to protect the public against imposition and fraud, prohibiting
persons from concealing their identity by doing business under an assumed name, making it unlawful to use
that their real names in transacting business without a public record of who they are, available for use in
courts, and to punish those who violate the prohibition. the object of this act is not limited to facilitating the
collection of debts, or the protection of those giving credit to person doing business under an assumed
name. It is not unilateral in its application. It applies to debtor and creditor, contractor and contractee, alike.
Parties doing business with those acting under an assumed name, Whether they buy or sell, have a right,
under the law, to know who they are, and who to hold responsible, in case the question of damages for
failure to perform or breach of warranty should arise.
"The general rule is well settled that, where statutes enacted to protect the public against fraud or
imposition, or to safeguard the public health or morals, contain a prohibition and impose a penalty, all
contract in violation thereof are void. . . .
"As this act involves purely business transactions, and affects only money interests, we think it should be
construed as rendering contracts made in violation of it unlawful and unenforceable at the instance of the
offending party only, but not as designed to take away the right of innocent parties who may have dealt
with the offenders in ignorance of their having violated the statute." (Cashin v. Pilter [1912], 168 Mich.,
386; Ann. Cas. [1913-C], 697.)
The early decision of our Supreme Court in the case of Prautch, Scholes & Co. v. Hernandez ([1903], 1 Phil.,
705), contains the following pertinent observations: jgc:c hanro bles. com.ph
"Another case may be supposed. A partnership is organized for commercial purposes. It fails to comply with
the requirement of article 119, A creditor sues the partnership for a debt contracted by it, claiming to hold
the partners severally. They answer that their failure to comply with the Code of Commerce makes them a
civil partnership and that they are in accordance with article 1698 of the Civil Code only liable jointly. to
allow such liberty of action would be to permit the parties by a violation of the code to escape a liability
which the law has seen fit to impose upon persons who organized commercial partnership; ’Because it would
be contrary to all legal principles that the nonperformance of a duty should redound to the benefit of the
person in default either intentional or unintentional.’ (Mercantile Law, Eixala, fourth ed., p. 145.)" (See also
Lichauco v. Lichauco [1916], 33 Phil., 350, 360.)
Dr. Jose de Echavarri y Vivanco, in his Codigo de Comercio, includes the following comment after articles
121 and 126 of the Code: jgc:chanroble s.com.p h
"From the decision cited in this and in the previous comments, the following is deduced : 1st Defects in the
organization cannot affect relations with third persons. 2d. Member who contract with other persons before
the association is lawfully organized are liable to these persons. 3d. The intention to form an association is
necessary, so that if the intention of mutual participation in the profits and losses in a particular business is
proved, and there are no articles of association, there is no association. 4th. An association, the article of
which have not been registered, is valid in favor of third persons. 5th. The private pact or agreement to
form a commercial association is governed not by the commercial law but by the civil law. 6th. Secret
stipulations expressed in a public instrument, but not inserted in the articles of association, do not affect
third person, but are binding on the parties themselves. 7th. An agreement made in a public instrument,
other than the articles of association, by means of which one of the partners guarantees to another certain
profits or secures him from losses, is valid between them, without affecting the association. 8th. Contracts
entered into by commercial associations defectively organized are valid when they are voluntarily executed
by the parties, if the only controversy relates to whether or not they complied with the agreement.
x x x
"The name of the collective merchant is called firm name. By this name, the new being is distinguished from
others, its sphere of action fixed, and the juridical personality better determined, without constituting an
exclusive character of the general partnership to such an extent as to serve the purpose of giving a
definition of said kind of a mercantile partnership, as is the case in our Code.
"Having in mind that these partnership are prevailingly of a personal character, article 126 says that they
must transact business under the name of all its members, of some of them or of one only, the words ’and
company’ to be added in the latter two cases.
"It is rendered impossible for the general partnership to adopt a firm name appropriate to its commercial
object; the law wants to link, and does link, the solidary and unlimited responsibility of the member of this
partnership with the formation of its name, and imposes a limitation upon personal liberty in its selection,
not only by prescribing the requisites, but also by prohibiting persons not members of the company from
including their names in its firm name under penalty of civil solidary responsibility.
"Of course, the form required by the Code for the adoption of the firm name does not prevent the addition
thereto of any other title connected with the commercial purpose of the association. The reader may see our
commentaries on the mercantile registry about the business names and firm names of associations, but it is
proper to establish here that, while the business name may be alienated by any of the means admitted by
the law, it seems impossible to separate the firm names of general partnerships from the juridical entity for
the creation of which it was formed." (Vol. 2, pp. 197, 213.)
On the question of whether the fact that the dirm name "Teck Seing & Co., Ltd." does not contain the name
of all or any of the partners as prescribed by the Code of Commerce prevents the creation of a general
partnership, Professor Jose A. Espiritu, as amicus curiae, states: jgc:chanroble s.com.p h
"My opinion is that such a fact alone cannot and will not be a sufficient cause of preventing the information
of a general partnership, especially if the other requisites are present and the requisites regarding
registration of the articles of association in the Commercial Registry has been complied with, as in present
case. I do not believe that the adoption of a wrong name is a material fact to be taken into consideration in
this case; first, because the mere fact that a person uses a name not his own does not prevent him being
bound in a contract or an obligation he voluntarily entered into; second, because such a requirement of the
law is merely a formal and not necessarily an essential one to the existence of the partnership, and as long
as the name to use it, the acts and contracts done and entered into under such a name bind the firm to third
persons; and third, because the failure of the partners herein to adopt the correct name prescribed by law
cannot shield them from their personal liabilities, as neither law nor equity will permit them to utilize their
own mistake in order to put the blame on third persons, and much less, on the firm creditors in order to
avoid their personal responsibility."
cralaw vi rtua 1aw lib rary
The legal intention deducible from the acts of the parties controls in determining the existence of a
partnership. If they intend to do a thing which in law constitute a partnership, they are partners, although
their purpose was to avoid the creation of such relation. Here, the intention of the persons making up Teck
Seing & Co., Ltd. was to establish a partnership which they erroneously denominated a limited partnership.
If this was their purpose, all subterfuges resorted to in order to evade liability for possible losses, while
assuming their enjoyment of the advantages to be derived from the relation must be disregarded. The
partners who have their identity under a designation distinct from that of any of the members of the firm
should be penalized, and not the creditors who presumably have dealt with the partnership in good faith.
Article 127 and 237 of the Code of Commerce make all the member of the general copartnership liable
personally and in solidum with all their property for the results of the transaction made in the name and for
the account of the partnership. Section 51 of the Insolvency Law, likewise, makes all the property of the
partnership and also all the separate property of each of the partners liable. In other words, if a firm be
insolvent, but one or more partners thereof are solvent, the creditors may proceed both against the firm and
against the solvent partner or partners, first exhausting the assets of the firm before seizing the property of
the partners. (Brandenburg on Bankruptcy, sec. 108; De los Reyes v. Lukban and Borja [1916], 35 Phil.,
757; Involuntary Insolvency of Campos Rueda & Co. v. Pacific Commercial Co. [1922], 44 Phil., 916)
We reach the conclusion that the contract of partnership in the document hereinbefore quoted established a
general partnership or, to be more exact, a partnership as this word is used in the Insolvency Law.
Wherefore, the order appealed from is reversed, and the record shall be returned to the court of origin for
further proceedings pursuant to the motion presented by the creditors, in conformity with the provision of
the Insolvency Law. Without special finding as to the costs in this instance, it is so ordered.
Araullo, C.J., Johnson, Street, Avancena, Villamor, Johns, and Romualdez, JJ., concur.
ROMUALDEZ, J.:
The record of this proceeding having been transmitted to this court by virtue of an appeal taken
herein, a motion was presented by the appellants praying this court that this case be considered
purely a moot question now, for the reason that subsequent to the decision appealed from, the
partnership Campos Rueda & Co., voluntarily filed an application for a judicial decree adjudging itself
insolvent, which is just what the herein petitioners and appellants tried to obtain from the lower court
in this proceeding.
The motion now before us must be, and is hereby, denied even under the facts stated by the
appellants in their motion aforesaid. 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.
Proof that a man was insolvent on a certain day does not justify an inference that he was on
a day some time prior thereto. Many contingencies, such as unwise investments, losing
contracts, misfortune, or accident, might happen to reduce a person from a state of solvency
within a short space of time. (Kimball vs. Dresser, 98 Me., 519; 57 Atl. Rep., 767.)
A decree of insolvency begins to operate on the date it is issued. It is one thing to adjudge Campos
Rueda & Co. insolvent in December, 1921, as prayed for in this case, and another to declare it
insolvent in July, 1922, as stated in the motion.
Turning to the merits of this appeal, we find that this limited partnership was, and is, indebted to the
appellants in various sums amounting to not less than P1,000, payable in the Philippines, which
were not paid more than thirty days prior to the date of the filing by the petitioners of the application
for involuntary insolvency now before us. These facts were sufficient established by the evidence.
The trial court denied the petition on the ground that it was not proven, nor alleged, that the
members of the aforesaid firm were insolvent at the time the application was filed; and that was said
partners are personally and solidarily liable for the consequence of the transactions of the
partnership, it cannot be adjudged insolvent so long as the partners are not alleged and proven to be
insolvent. From this judgment the petitioners appeal to this court, on the ground that this finding of
the lower court is erroneous.
The fundamental question that presents itself for decision is whether or not a limited partnership,
such as the appellee, which has failed to pay its obligation with three creditors for more than thirty
days, may be held to have committed an act of insolvency, and thereby be adjudged insolvent
against its will.
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 being so and the juridical personality of a limited partnership being different from
that of its members, it must, on general principle, answer for, and suffer, the consequence of its acts
as such an entity capable of being the subject of rights and obligations. 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. We are
not unmindful of the fact that some courts of the United States have held that a partnership may not
be adjudged insolvent in an involuntary insolvency proceeding unless all of its members are
insolvent, while others have maintained a contrary view. But it must be borne in mind that under the
American common law, partnerships have no juridical personality independent from that of its
members; and if now they have such personality for the purpose of the insolvency law, it is only by
virtue of general law enacted by the Congress of the United States on July 1, 1898, section 5,
paragraph (h), of which reads thus:
In the event of one or more but not all of the members of a partnership being adjudged
bankrupt, the partnership property shall not be administered in bankruptcy, unless by
consent of the partner or partners not adjudged bankrupt; but such partner or partners not
adjudged bankrupt shall settle the partnership business as expeditiously as its nature will
permit, and account for the interest of the partner or partners adjudged bankrupt.
The general consideration that these partnership had no juridical personality and the limitations
prescribed in subsection (h) above set forth gave rise to the conflict noted in American decisions, as
stated in the case of In reSamuels (215 Fed., 845), which mentions the two apparently conflicting
doctrines, citing one from In re Bertenshaw (157 Fed., 363), and the other from Francis vs. McNeal
(186 Fed., 481).
But there being in our insolvency law no such provision as that contained in section 5 of said Act of
Congress of July 1, 1898, nor any rule similar thereto, and the juridical personality of limited
partnership being recognized by our statutes from their formation in all their acts and contracts the
decision of American courts on this point can have no application in this jurisdiction, nor we see any
reason why these partnerships cannot be adjudged bankrupt irrespective of the solvency or
insolvency of their members, provided the partnership has, as such, committed some of the acts of
insolvency provided in our law. Under this view it is unnecessary to discuss the other points raised
by the parties, although in the particular case under consideration it can be added that the liability of
the limited partners for the obligations and losses of the partnership is limited to the amounts paid or
promised to be paid into the common fund except when a limited partner should have included his
name or consented to its inclusion in the firm name (arts. 147 and 148, Code of Commerce).
Therefore, it having been proven that the partnership Campos Rueda & Co. failed for more than
thirty days to pay its obligations to the petitioners the Pacific Commercial Co. the Asiatic Petroleum
Co. and the International Banking Corporation, the case comes under paragraph 11 of section 20 of
Act No. 1956, and consequently the petitioners have the right to a judicial decree declaring the
involuntary insolvency of said partnership.
Wherefore, the judgment appealed from is reversed, and it is adjudged that the limited partnership
Campos Rueda & Co. is and was on December 28, 1921, insolvent and liable for having failed for
more than thirty days to meet its obligations with the three petitioners herein, and it is ordered that
this proceeding be remanded to the Court of First Instance of Manila with instruction to said court to
issue the proper decrees under section 24 of Act No. 1956, and proceed therewith until its final
disposition.