Partnership and Agency Digests for Atty. Cochingyan

PARTNERSHIP Digests  Atty. Cochingyan TAN SEN GUAN & CO. VS. PHILIPPINE TRUST CO. Facts: Plaintiff Tan Sen Guan & Co. secured a judgment for a sum of P21,426 against the Mindoro Sugar Co. of which the Philippine Trust is the trustee. The plaintiff entered into an agreement with the defendant Philippine Trust Co. wherein the former assigned, transferred, and sold to the latter the full amount of said judgment against Mindoro Sugar Co. together with all its rights thereto and the latter offered satisfactory consideration thereto. The agreement further stipulated that upon signing of the agreement, Phil Trust shall pay Tan Sen the sum of P5000; should the Mindoro Sugar be sold or its ownership be transferred, an additional P10,000 pesos will be paid to Tan Sen upon perfection of the sale; in case any other creditor of Mindoro Sugar obtains in the payment of his credit a greater proportion than the price paid to Tan Sen, the Phil Trust shall pay to the latter whatever sum may be necessary to be proportioned the claim of the creditor. However, if the Mindoro Sugar is sold to any person who does not pay anything to the creditors or pay them equal or less than 70 percent of their claim, or should the creditors obtain from other sources the payment of their claim equal to or less than 70 percent, the Phil Trust will only pay to Tan Senthe additional sum of P10,000 upon the sale or transfer of the Mindoro Sugar as above stated. The properties of Mindoro Sugar were later on sold at public auction to the Roman Catholic Archbishop of Manila and base on the agreement plaintiff Tan Sen brought suit against defendant Phil Trust for the sum of P10,000. Defendant’s argument: Only a portion of the Mindoro Sugar’s properties were sold. CFI: Absolved the defendant on two grounds: (a) in the contract, it was only bound as a trustee and not as an individual; (b) that it has not been proved that all the properties of the Mindoro Sugar had been sold. Issues: (1) W/N the defendant is not personally responsible for the claim of the plaintiff based on the deed of assignment because of having executed the same in its capacity as trustee of the properties of the Mindoro Sugar. (2) W/N all the properties of the Mindoro Sugar were sold at public auction to the Roman Catholic Archbishop of Manila. Held: SC reversed CFI’s ruling. (1) The Phil Trust Company in its individual capacity is responsible for the contract as there was no express stipulation that the trust estate and not the trustee should be held liable on the contract in question. Not only is there no express stipulation that the trustee should not be held responsible but the ‘Wherefore’ clause of the contract states the judgment was expressly assigned in favor of Phil Trust Company and not Phil Trust Company, the trustee. It therefore follows that appellant had a right to proceed directly against the Phil Trust on its contract and has no claim against either Mindoro Sugar or the trust estate.

(2) Exhibit D (the certificate of sale to Roman Catholic Archbishop) shows that all properties to Phil Trust as Trustee were included in the sale. The only thing reserved from the sale was the standing crops, and it is reasonable to presume that they had also been sold between the date of the sale and the institution of this action. Where the real estate, the personal property including animals, and all the bills receivable are sold, it would be a forced construction of the contract of agreement to hold that the assets of the Mindoro Sugar Company had not been sold.

PHIL. AIR LINES, INC. VS. HEALD LUMBER CO. Facts: Lepanto Consolidated Mines chartered a helicopter belonging to plaintiff Phil. Air Lines to make a flight from its base at Nichols Field Airport to the former’s camp at Manyakan Mountain Province. The helicopter, with Capt. Gabriel Hernandez and Lt. Rex Imperial on board, failed to reach the destination as it collided with defendant’s tramway steel cables resulting in its destruction and death of the officers. Plaintiff insured the helicopters and the officers who piloted the same for P80,000 and P20,000 respectively and as a result of the crash, the insurance companies paid to the plaintiff the total indemnity of P120,000. Plaintiff sustained additional damages totaling P103,347.82 which were not recovered by insurance. The plaintiff instituted this action against defendant Heald Lumber Company to recover the sum paid by the insurance company to the plaintiff and the additional damages which was not recovered from the insurance. Defendant’s argument: Plaintiff has no cause of action against defendant for if anyone should due defendant for its recovery, it will only be the insurance companies. Plaintiff’s argument: It asserts that the claim of the said amount of P120,000 is on behalf and for the benefit of the insurers and shall be held by plaintiff in trust for the insurers. It is appellant’s theory that, inasmuch as the loss it has sustained exceeds the amount of the insurance paid to it by the insurers, the right to recover the entire loss from the wrongdoer remains with the insured and so the action must be brought in its own name as real party in interest. To the extent of the amount received by it as indemnity from the insurers, plaintiff would then be acting as a trustee for them. To support this contention, appellant cites American authorities. RTC’s Ruling: The court ordered the plaintiff to amend its complaint to delete the first allegation that insurance companies have paid a portion of the plaintiff’s damages, since the Court believes that the real parties in interest are the insurance companies concerned or bring in the insurance companies as parties plaintiff. And having manifested plaintiff’s decision not to amend the complaint, such move of plaintiff amounts to a deletion of the portion objected to and so the complaint should be deemed limited to the additional damages. Issue: (1) W/N the plaintiff is not the real party in interest respecting the claim for P120,000.

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan Held: SC affirmed the appealed judgment. (1) In this jurisdiction, we have our own legal provision which in substance differs from the American law. Art. 2207 of the NCC provides that if a property is insured and the owner receives the indemnity from the insurer the same is deemed subrogated to the rights of the insured against the wrongdoer and if the amount paid by the insurer does not fully cover the loss, then the aggrieved party is the one entitled to recover the deficiency. Under this legal provision, the real party in interest with regard to the portion of the indemnity paid is the insurer and not the insured. (2) Before a person can sue for the benefit of another under a trusteeship, he must be ‘a trustee of an express trust.’ The right does not exist in cases of implied trust, that is, a trust which may be inferred merely from the acts of the parties or from other circumstances. Also, to adopt a contrary rule to what is authorized by the American statues would be splitting a cause of action or promoting multiplicity of suits which should be avoided. Under our rules, both the insurer and the insured may join as plaintiffs to press their claims against the wrongdoer when the same arise out of the same transaction or event. This is authorized by section 6, rule 3, of the Rules of Court.

CRISTOBAL VS. GOMEZ Facts: Epifanio Gomez owned a property which was sold in a pacto de retro sale to Luis Yangco redeemable in 5 years, although the period passed without redemption, the vendee conceded the vendor the privilege of repurchase. Gomez apply to a kinsman, Bibiano Bañas, for assistance on a condition that he will let him have the money if his brother Marcelino Gomez and his sister Telesfora Gomez would make themselves responsible for the loan. The siblings agreed and Bañas advance the sum of P7000 which was used to repurchase the property in the names of Marcelino and Telesfora.. A ‘private partnership in participation’ was created between Marcelino and Telesfora and therein agreed that the capital of the partnership should consist of P7000 of which Marcelino was to supply the amount of P1500 and Telesora the sume of P5500. It was further agreed that the all the property to be redeemed shall be named to the two, that Marcelino should be its manager, that all the income, rent, produce of the property shall be applied exclusively to the amortization of the capital employed by the two parties with its corresponding interest and other incidental expenses and as soon as the capital employed, with its interest and other incidental expenses, shall have been covered, said properties shall be returned to Epifanio Gomez or his legitimate children. A year after Epifanio’s death, Telesfora wanted to free herself from the responsibility which she had assumed to Bañas and conveyed to Marcelino her interest and share in the three properties previously redeemed from Yangco and both declared dissolved the partnership they created. With Marcelino as the sole debtor, Bañas required him to execute a contract of sale of the three parcels with pacto de retro for the purpose of securing the indebtedness. Marcelino later on paid the sum in full satisfaction of the entire claim and received from Bañas a reconveyance of the three

parcels. The widow, Paulina Cristobal, and the children of Epifanio Gomez instituted an action for the recovery of the three parcels of land from Marcelino Gomez. Defendant’s argument: Defendant answered with a general denial and claimed to be the owner in his own right of all the property which is the subject of the action. He further claimed that the trust agreement was kept secret from Epifanio Gomez, and that, having no knowledge of it, he could not have accepted it before the stipulation was revoked. And that he has the benefit of prescription in his favor, having been in possession of more than 10 years under the deed which he acquired the sole right from his sister. RTC’s ruling: ruled in favor of plaintiffs and found that the property in question belongs to the plaintiffs, as co-owners, and ordered the defendant to surrender the property to them and execute an appropriate deed of transfer as well as to pay the cost of the proceeding. Issue: (1) W/N the dissolution of partnership between Marcelino and Telesfora destroyed the beneficial right of Epifanio Gomez in the property. (2) W/N the partnership agreement of Marcelino and Telesfora was a donation in favor of Epifanio or an express trust. (3) W/N Marcelino Gomez acquired the property through prescription. Held: SC declared ownership in favor of plaintiffs. (1) The fact that one of the two individuals who have constituted themselves trustees for the purpose above indicated conveys his interest in the property to his cotrustee does not relieve the latter from the obligation to comply with the trust. (2) A trust constituted between two contracting parties for the benefit of a third person is not subject to the rules governing donations of real property. The beneficiary of the trust may demand performance of the obligation without having formally accepted the benefit of the trust in a public document, upon mere acquiescence in the formation of the trusts and acceptance under the second par. of article 1257 of the CC. Much energy has been expanded by the attorneys for the appellant in attempting to demonstrate that, if Epifanio at any time had any right in the property by virtue of the partnership agreement between Marcelino and Telesfora such right could be derived as a donation and that, inasmuch as the donation was never accepted by Epifanio in a public document, his supposed interest therein is unenforceable. The partnership should not be viewed in light of an intended donation, but as an express trust. (3) As against the beneficiary, prescription is not effective in favor of a person who is acting as a trustee of a continuing and subsisting trust. Therefore, Marcelino cannot acquire ownership over the property through prescription.

SALAO VS. SALAO

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan Facts: After the death of Valentina Ignacio, her estate was administered by her daughter Ambrosia. It was partitioned extrajudically and the deed was signed by her four legal heirs namely her 3 children (Alejandra, Juan, and Ambrosia) and Valentin Salao, in representation of his deceased father, Patricio. The Calunuran fishpond is the property in contention in this case. Prior to the death of Valentina Ignacio, her children Juan and Ambrosia secured a torrens title in their names a 47 ha. fishpond located at Sitio Calunuran, Lubao, Pampanga. A decree was also issued in the names of Juan and Ambrosia for the Pinanganacan fishpond which adjoins the Calunuran fishpond. A year before Ambrosia’s death, she donated her one-half share in the two fishponds in question to her nephew, Juan Salo Jr. He was already the owner of the other half of the fishponds having inherited it from his father, Juan Salao Sr. After Ambrosia died, the heirs of Valentin Salao, Benita Salao and the children of Victorina Salao, filed a complaint against Juan Salao Jr. for the reconveyance to them of the Canluran fishpond as Valentin Salao’s supposed one – third share in the 145 ha. of fishpond registered in the names of Juan Salao Sr. and Ambrosia Salao. Defendant’s argument: Valentin Salao did not have any interest in the two fishponds and that the sole owners thereof were his father and his aunt Ambrosia, as shown in the Torrens titles and that he was the donee of Ambrosia’s one-half share. Plaintiff’s argument: Their action is to enforce a trust which defendant Juan Salao Jr. allegedly violated. The existence of trust was not definitely alleged in the plaintiff’s complaint but in their appellant’s brief. RTC’s Ruling: There was no community of property among Juan, Ambrosia and Valentin when the Calunuran and the Pinanganacan lands were acquired; that co – ownership over the real properties of Valentina Ignacio existed among her heirs after her death in 1914; that the co – ownership was administered by Ambrosia and that it subsisted up to 1918 when her estate was partitioned among her three children and her grandson, Valentin Salao. It rationalized that Valentin’s omission during his lifetime to assail the Torrens titles of Juan and Ambrosia signified that he was not a co-owner of the fishponds. It did not give credence to the testimonies of plaintiffs’ witnesses because their memories could not be trusted and because no strong evidence supported the declarations. Moreover, the parties involved in the alleged trust were already dead. Judgment appealed to CA but the amounts involved exceeded two hundred thousand pesos, the CA elevated the case to the SC. Issue: (1) W/N plaintiffs’ massive oral evidence sufficient to prove an implied trust, resulting or constructive, regarding the two fishponds. Held: SC affirmed lower court’s decision. (1) Plaintiff’s pleading and evidence cannot be relied upon to prove an implied trust. The trial court’s firm conclusion that there was no community of property during the lifetime of Valentina Ignacio or before 1914 is substantiated by defendant’s

documentary evidence. There was no resulting trust in this case because there never was any intention on the part of Juan, Ambrosia and Valentin to create any trust. There was no constructive trust because the registration of the 2 fishponds in the names of Juan and Ambrosia was not vitiated by fraud or mistake. This is not a case where to satisfy the demands of justice it is necessary to consider the Calunuran fishpond as being held in trust by the heirs of Juan Salao Sr. for the heirs of Valentin Salao. And even assuming that there was an implied trust, plaintiffs’ action is clearly barred by prescription when it filed an action in 1952 or after the lapse of more than 40 years from the date of registration.

CARANTES VS. CA Facts: A proceeding for expropriation was commenced by the government for the construction of the Loakan Airport and a portion of Lot 44, which was originally owned by Mateo Carantes, was needed for the landing field. The lot was subdivided into Lots Nos. 44-a (the portion which the government sought to expropriate), 44-b, 44-c, 44-d and 44-e. Negotiations were also under way for the purchase by the government of lots 44-b and 44-c. When Mateo Carantes died, his son Maximino Carantes was appointed administrator of the estate and filed a project of partition of the remaining portion of Lot 44 wherein he listed as the heirs of Mateo Carantes who were entitled to inherit the estate, himself and his brothers and sisters. An ‘Assignment of Right to Inheritance’ was executed by the children of Mateo and the heirs of Apung Carantes in favor of Maximino Carantes for a consideration of P1. Maximino sold to the government lots nos. 44-b and 44-c and divided the proceeds of the sale among himself and the other heirs of Mateo. The assignment of right to inheritance was registered by Maximino and the TCT in the names of the heirs was cancelled and a new one was issued in the name of Maximino Carantes as the sole owner of the remaining portions of lot 44. A complaint was instituted by the three children of Mateo and the heirs of Apung Carantes against Maximino praying that the deed of assignment be declared null and void and that the remaining portions of lot 44 be ordered partitioned into six equal shares and Maximino be accordingly ordered to execute the necessary deed of conveyance in favor of the other heirs. Plaintiffs’ argument: They executed the deed of assignment only because they were made to believe by Maximino that the said instrument embodied the understanding among parties that it merely authorized the defendant Maximino to convey portions of lot 44 to the government in their behalf to minimize expenses and facilitate the transaction and it was only when they secured a copy of the deed that they came to know that the same purported to assign in favor of Maximino their rights to inheritance from Mateo Carantes. Defendant’s argument: Filed a motion to dismiss. The plaintiffs’ cause of action is barred by the statute of limitations because the deed of assignment was recorded in the Registry of Property and that ownership over the property became vested in him by acquisitive prescription ten years from its registration in his name of Feb. 21, 1947.

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan RTC’s ruling: Ruled in favor of defendant Maximino Carantes stating that since an action based on fraud prescribes in four years from the discovery of the fraud, and in this case the fraud allegedly perpetrated by defendant must deemed to have been discovered on march 16, 1940 when the deed of assignment was registered, the plaintiff’s right of action had already prescribed when they filed the action in 1958. And even assuming co-ownership existed, the same was completely repudiated by the said defendant by performance pf several acts such as the execution of deed of sale in favor of the government in 1939, hence ownership had vested in the defendant by acquisitive prescription. CA reversed. Issue: (1) W/N the deed of assignment is void ab initio on the ground of fraud and the action to annul it has prescribed. (2) W/N a constructive trust exist making an action for reconveyance based on constructive trust imprescriptable. Held: SC dismissed the complaint and set aside CA’s decision. (1) When the consent to a contract was fraudulently obtained, the contract is voidable. Fraud or deceit does not render a contract void ab initio, and can only be a ground for rendering the contract voidable or annullable pursuant to article 1390 of the NCC by a proper action in court. The present action being one to annul a contract on the ground of fraud, its prescriptive period is 4 years from the time of discovery of fraud. The weight og authorities is the effect that the registration of an instrument in the Office of the Register of Deeds constitutes a constructive notice to the whole world, and, therefore, discovery of fraud is deemed to have taken place at the time of the registration. In this case, the deed of assignment was registered on March 16, 1940. The 4 years period within which the private respondents could have filed the present action consequently commenced on march 16, 1940, and since they filed it only in September 4, 1958, it follows that the same is barred by the statute of limitations. (2) No express trust was created in favor of the private respondents. If trust there was, it could only be a constructive trust, which is imposed by law. In constructive trusts there is neither promise nor fiduciary relation; the so called trustee does not recognize any trust and has no intent to hold the property for the beneficiary. An action for reconveyance based on implied or constructive trust is prescriptable and prescribes in 10 years. In this case, the ten – year prescriptive period began on march 16, 1940, when the petitioner registered the deed of assignment and secured the cancellation of the certificate of title in the joint names of the heirs of Mateo Carantes and, in lieu thereof, the issuance of a new title exclusively in his name. Since the present action was commenced only on

September 4, 1958, the same in barred by extinctive prescription.

MUNICIPALITY OF VICTORIAS VS. CA Facts: Norma Leuenberger, respondent, inherited a parcel of land from her grandmother, Simeona Vda. de Ditching in 1941. In 1963, she discovered that a part of the parcel of land was being used by petitioner Municipality of Victorias as a cemetery. By reason of the discovery, respondent wrote a letter to the Mayor of Victorias demanding payment of past rentals over the land used a cemetery and requesting delivery of the illegally occupied land by the petitioner. The Mayor replied that the municipality bought the land but however refused to show the papers concerning the sale. Apparently, the municipality failed to register the Deed of Sale of the lot in dispute. Respondent filed a complaint in the Court of First Instance of Negros Occidental for recovery of possession of the parcel of land occupied by the municipal cemetery. In its answer, petitioner Municipality alleged ownership of the lot having bought it from Simeona Vda. de Ditching sometime in 1934. The lower court decided in favor of the petitioner municipality. On appeal, petitioner presented an entry in the notarial register form the Bureau of Records Management in Manila of a notary public of a sale purporting to be that of the disputed parcel of land. Included within it are the parties to the sale, Vda. de Ditching, as the vendor and the Municipal Mayor of Victorias in 1934, as vendee. The Court of Appeals however claimed that this evidence is not a sufficient Deed of Sale. It therefore reversed the ruling of the CFI and ordered the petitioner to deliver the possession of the land in question to respondents. Issue: W/N the notary public of sale is sufficient to substantiate the municipality’s claim that it acquired the disputed land by means of a Deed of Sale. Yes. Held: The fact that the notary public of sale showed the nature of the instrument, the subject of the sale, the parties of the contract, the consideration and the date of sale, the Court held that it was a sufficient evidence of the Deed of Sale. Thus, when Norma inherited the land from her grandmother, a portion of it has already been sold by the latter to the Municipality of Victorias in 1934. Her registration of the parcel of land did not therefore transfer ownership but merely confirmed it. As the civil code provides, where the land is decreed in the name of a person through fraud or mistake, such person is by operation of law considered a trustee of an implied trust for the benefit of the persons from whom the property comes. Consequently, she only held the land in dispute in trust for the petitioner hence private respondent is in equity bound to reconvey the subject land to the cestui que trust, the Municipality of Victorias.

MARIANO VS. DE VEGA

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan Facts: Spouses Urbano and Panganiban owned as conjugal property 29 unregistered parcels of land during their lifetime. When Urbano died, his compulsory heirs were the children of Gaudencia, his child with Panganiban, who are petitioners in this case, and two other legitimate children, his children with his second wife, who are the private respondents in this case. Petitioners filed a civil case in the CFI for partition and delivery of possession of certain shares in the conjugal assets. They contended that private respondents have excluded them from taking possession of the whole conjugal property and that the latter appropriated to themselves the products coming from the parcels of land. The court ruled in favor of the private respondents claiming that the action of the petitioners has already prescribed for the reason that an implied or constructive trust prescribes in ten years. Issue: W/N there is an implied or constructive trust granted by the petitioners in favor of the respondents. No. Held: The Court ruled that the present case does not fall under the rules of implied trust. Considering the fact that the parties in this case inherited the land from the same ancestor, Urbano, both parties are clearly co-owners of the disputed properties. This case is therefore governed by the rules on coownership. Under the civil code, prescription does not run against a co-owner or a co-heir so long as he expressly or impliedly recognizes the co-ownership. In view of their lack of a clear repudiation of the co-ownership, private respondents cannot acquire the share of the petitioners by prescription.

HEIRS OF CANDELARIA VS. ROMERO Facts: Parties to this case are the heirs of Emilio Candelaria as plaintiff and Luisa Romero, and the heirs of Lucas as defendants. Emilio and Lucas Candelaria bought a lot on an installment basis. Lucas paid the first two installments but because of sickness which caused him to be bedridden, he sold his share to his brother Emilio who continued to pay the purchase price until the obligation to pay had been fully satisfied. The TCT was however issued under the name of Lucas. Nevertheless, Lucas acknowledges that he merely held the title in trust for his brother with the understanding that “the necessary documents of transfer will be made later” and this fact was known not only to him but also to the defendants. However upon his death, his heirs refused to reconvey the lot to plaintiff despite repeated demands. Plaintiff brought an action in the CFI for a complaint for reconveyance of real property. The lower court however dismissed the case on the ground that an express trust, and not an implied trust, was created and that the action had already prescribed. Issue: What kind of trust was created? Express or implied trust? Implied trust.

Held: Where the grantee takes the property under an agreement to convey to another on certain conditions, a trust results for the benefit of such other or his heirs. It is also the rule that there is an implied trust when a person purchases land with his own money and takes conveyance thereof in the name of another. In such a case, the property is held on a resulting trust in favor of the one furnishing the consideration for the transfer. This kind of trust is from equity and arises by implication or operation of law. In the present case, it is apparent that Emilio furnished the consideration intending to obtain a beneficial interest in the property in question. Having supplied the money, it is presumed that he intended to purchase the lot for his own benefit. Moreover, by entering into an agreement with Emilio that “the necessary documents of transfer will be made later,” Lucas acknowledged the he merely held the property in trust for his brother with the understanding that it will eventually be conveyed to the plaintiff’s predecessor in interest. Lastly, by acknowledging the presence of trust, the plaintiff’s action cannot be said to have been barred by lapse of time. The case is therefore remanded for further proceedings.

LAUREANO VS. STEVENSON Facts: In 1912, Felix Laureano sold to Eugenio Kilayco a piece of property situated in the City of Iloilo, and such land was then registered in the latter’s name. Adjoining such property was another property belonging to Laureano. When the cadastral survey was initiated in Iloilo in 1914, Kilayco made proper representations to confirm the title to his property. Thereafter, title was issued to him, but later, for some unknown reason, the certificate was ordered cancelled and a new one was issued. Then, presumably by mistake, the title was made to include not only Kilayco’s property but property belonging to his neighbor, Laureano. The final decree to his effect was issued in 1916. Creditors of Kilayco, becoming aware of the existence of the title to the property, instituted actions and obtained writs of execution in May 1922. The sale of the property was set for October 1922. All the while, Laureano had done nothing to protect his interests in the property. However, he claims to have been absent in Spain at the time of the hearing in the cadastral case and to have known nothing of it. On June 1922, Laureano filed a case against Kilayco to obtain a judgment, declaring him to be the owner of the parcels of land mistakenly included in the latter’s title, and ordering the cancellation of the certificate of title theretofore issued in the name of Kilayco. Issue: When property is acquired through mistake, can the real owner recover such property by virtue of implied trust? Trial Court: Since the creditors were not parties to the action, the cancellation of the annotations on the certificate of title in favor of the creditors of Kilayco cannot be sustained.

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan Held: It is proper to issue the injunction sought by the petitioners to stop the sale of the property at public auction, to annul the levies made on the property, to obtain the cancellation in the registry of property of the annotations made, and to secure a new title for the petitioner without these encumbrances. It is important to note that: 1.

Kilayco never laid a claim to the property;

2.

The two lots covered by the certificate were mistakenly registered in the name of Kilayco; and

3.

The court did not have jurisdiction to confirm the title of the two lots for the reason that no petition for title was filed, no trial was held, no evidence was presented, and no judgment was rendered regarding these two lots in the land registration proceedings.

Kilayco was, in effect, merely holding the title of the property in trust of Laureano. The creditors of Kilayco could acquire no higher or better right than Kilayco had in the property, which, in this case, was nothing. Hence, Laureano can rightfully recover the two parcels of land included in the title of Kilayco through mistake.

GONZALES v. IAC Facts: The land in dispute is registered in the name of Fausto Soy. In 1941, Fausto sold 253 sq. m. to Francisco Landingin. In 1954, pursuant to a Deed of Donation executed by Fausto, Antonio Soy (son of Fausto) and Gregoria Miranda (wife) sold 240 sq. m. to Juanito Gonzales and Coronacion Ganaden. In January 1960, Fausto sold another 240 sq. m. to Gonzales and Ganaden and two days later, a TCT was issued in favor of Gonzales, indicating his share as co-owner of 480 sq. m. and Fausto Soy, 240 sq. m. In 1965, Fausto sold another 140 sq. m. to the Gonzales and Ganaden. April 1965, Respondents Rosita Lopez, Gavino Cayabyab, Agueda and Felipa Ubando, Pedro Soriano, Teosidia Lopez and Federico Ballesteros (nieces and nephews of Fausto) filed the instant complaint for partition against Fausto Soy. On the same day they filed a notice of lis pendens and had it annotated on the OCT. Fausto answered and contested plaintiffs claims, asserting exclusive title in his name. Fausto countered that the questioned land was never registered in the names of his parents Eugenio and Ambrosia, and that he had been the registered owner of the premises since 1932. On the basis of evidence adduced ex-parte, the Trial Court held that respondents and Fausto were coowners of the lot and ordered the partition thereof. Parties were enjoined to partition amongst themselves and were to submit the same to the lower court for confirmation. Upon execution, the sheriff was unable to effect apportionment due to a 3rd party claim of Juanito and Coronacion Gonzales, stating that they were registered owners of 480 sq. m. of the disputed land. The sheriff noted the various

improvements petitioners had introduced (apartment, residential house and piggery). Trial court allowed petitioners to intervene as indispensable parties, vacating its previous judgment and granting a new trial. Trial Court: There is no proof to show that petitioners are co-owners of the property in question because the land has long been covered by an OCT since 1932 in the name of their predecessor in interest, Fausto Soy. CA: Resolved in favor of respondents, declaring that the sale to intervenor-petitioners did not terminate the trust relationship between the appellants and the appellees. The sale in favor of petitioners shall be enforced against the ¼ share of respondents as heirs of Fausto. Issue: Was the disputed land held in trust by Fausto Soy for his sisters, Emilia, Cornelia and Anastacia (mothers of herein respondents)? Ruling: CA decision reversed, order for partition dismissed. Fausto, being predecessor-in-interest, had appeared to be the registered owner of the lot for more than 30 years and his dominical rights can no longer be challenged. Any insinuation as to the existence of an implied or constructive trust should not be allowed. Even assuming there was an implied trust, respondents attempt at reconveyance is barred by prescription, which in this case is 10 years, the period reckoned from the issuance of the adverse title to the property which operates as a constructive notice. The assertion of adverse title, which was an explicit indication of repudiation of the trust for the purpose of the statute of limitations, took place when the OCT was issued in the name of Fausto Soy in 1932, to the exclusion of his 3 sisters. Even if there were no repudiation, the rule is that an action to enforce an implied trust may be circumscribed not only by prescription but also by laches—in which case, repudiation is not required. Respondents had literally slept on their rights presuming they had any and can no longer dispute the conclusive and incontrovertible character of Fausto’s title as they are deemed to have acquiesced therein.

ADAZA V. CA Facts: In 1953, Victor Adaza Sr. executed a Deed of Donation, covering the disputed land in this case, located in Sinonok, Zamboanga del Norte in favor of Respondent Violeta. The land being disposable public land had been held and cultivated by Victor, Sr. With the help of her brother, Horacio, Violeta filed a homestead application over the land and a free patent was issued in 1956. An OCT was issued in 1960. In 1962, Violeta and husband, Lino obtained a loan from PNB by executing a mortgage on the land, while Homero Adaza, brother of Violeta remained administrator of the same.

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan In 1971, Horacio invited his brothers and sisters for a family gathering where he asked Violeta to sign a Deed of Waiver with respect to the property in Sinonok. The Deed stated that the land was owned in common by Violeta and Horacio even though the OCT was in her name only. The Deed also provided for the waiver, transfer and conveyance of Violeta to Horacio of ½ of the property and its improvements. Violeta and Horacio signed the Deed with Homero as a witness. A few months later, Violeta and husband Lino filed a complaint for annulment of the Deed of waiver and for damages against Horacio and wife Felisa. The complaint alleged that (1) she was absolute owner of the land by virtue of an unconditional donation executed by her father in her favor; (2) she was registered owner; (3) she signed the Deed of waiver because of fraud, misrepresentation and undue influence; and (4) because of such malicious acts, she is entitled to damages from Horacio. Trial Court: Declared Deed of Waiver as valid and binding upon Violeta, that Horacio was co-owner of ½ of the land, and odering Violeta to pay Horacion the proceeds of his share. CA: Reversed Trial court decision, declaring that though the deed was signed voluntarily, such Deed was without consideration or cause because the land had been unconditionally donated to Violeta alone. Issue: Who owns the disputed parcel of land? Ruling: Petition granted. Deed of donation had a crossed-out provision: That the donee shall share ½ of the entire property with one of her brothers and sisters after the death of the donor. The record is bereft of any indication of any evil intent or malice on the part of Homero, Victor, Jr. and Teresita (siblings of Violeta) that would suggest deliberate collusion against Violeta. Their father had executed the Deed of Donation with the understanding that the same would be divided between Horacio and Violeta and that Violeta had signed the Deed of Waiver freely and voluntarily. Victor Adaza, Sr. left 4 parcels of land divided among the 6 children through the practice of having the lands acquired by him titled to the name of one of his children. The property involved in the instant case is owned in common by Violeta and brother, Horacio even though the OCT was only in her name. She held half of the land in trust for petitioner Horacio—implied trust based on Article 1449 of the Civil Code: There is also an implied trust when a donation is made to person but It appears that although the legal estate is transmitted to the donee, he nevertheless is either to have no beneficial interest of only a part thereof. The doctrine of laces is not to be applied mechanically as between near relatives.

Facts: This case involves an action for reconveyance or for the declaration of an implied trust on Lot No. 974 and for damages. The disputed land was the subject of 2 Patent Applications: (1) Free patent filed by Defendant on Aug 1 1958, issued Jul 1961, OCT issued Feb 1962 and (2) Homestead Patent filed by Plaintiff on Jul 7 1959, approved Jan 1964. Plaintiff Armamento alleges that he is the possessoractual occupant of and Homestead applicant over the disputed lot. Upon following up his application, he was shocked to discover that Defendant Guerrero, through fraud and misrepresentation obtained a Free Patent over the same land, by falsely stating that he had continuously possessed the lot since July 1945 or prior thereto, when in truth defendant was never in possession. In his Answer, Guerrero denies that he was not in possession claiming that he had been in occupation of said lot and even authorized a certain Macario Caangay to administer the same while he was termporarily away for missionary work in Cagayan de Oro. Trial Court: Dismissed the case on the following grounds: (a) Plaintiff has no personality to file the action for reconveyance—the proper party being the Republic of the Philippines; (b) Plaintiff has no cause of action in the absence of privity of contract between parties; (c) defendant’s title has become indefeasible and cannot be cancelled; and (d) even if based on fraud, the action has prescribed. Issues: Is plaintiff’s action for reconveyance justified? Was there a trust created? Ruling: After the lapse of one year, a decree of registration is no longer open to review or attack, although its issuance is attended with fraud. However, an action for reconveyance is still available for the aggrieved party if the property has not yet passed to an innocent purchaser for value. This is exactly what plaintiff has done. Plaintiff has not been able to prove fraud and misrepresentation because of the trial court dismissal. While plaintiff is not the “owner” of the land, so that, strictly speaking, he has no personality to file this application, he pleads for equity and invokes the doctrine of implied trust under Art. 1456 of the Civil Code: If property is acquired through mistake or fraud, the person obtaining it is, by force of law, considered a trustee of an implied trust for the benefit of the person from whom the property comes. The doctrine of implied trust may be made to operate in plaintiff’s favor, assuming that he can prove his allegation that defendant had acquired legal title by fraud. A constructive trust is a trust raised by construction of law or arising by operation of law. If a person obtains legal title to property by fraud or concealment, courts of equity will impress upon the title a so-called constructive trust in favor of the defrauded part.

ARMAMENTO V. GUERRERO

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan Action for reconveyance has not prescribed—the prescriptive period being 10 years. (Title obtained 1962, Suit commenced 1967)

Plaintiff’s appealed saying that they were grievously prejudiced by the partition and thus res judicata should not bar their action.

Case is remanded to CFI Cotobato.

SC: The plaintiffs have not proven any express trusts neither have they specified the kind of implied trust contemplated in their action. Either way, such action may be barred by laches.

RAMOS v RAMOS Facts: Spouses Martin Ramos and Candida were survived by three legitimate children: Jose, Agustin and Granada. Martin was also survived by 7 natural children. A special proceeding was instituted for the settlement of the estate of said spouses. Rafael, brother of Martin was appointed administrator. A project of partition was submitted and the conjugal hereditary estate was appraised at P74,984.93. It consisted of 18 parcels of land, some head cattle and advances to the legitimate children. It was agreed in the project of partition that Jose and Agustin would pay the cash adjudications to their natural siblings. Only the sum of P 37, 492.46 of the P74k represented the estate of Martin. 1/3 thereof was the free portion out of which the shares of the natural children were to be taken: each would get P1,785.35. The project of partition as well as the intervention of Timoteo as guardian of the five minor heirs was approved by the court. Later on, Judge Nepomuceno asked the administrator to submit a report showing that the shares have been delivered to the heirs as required which the siblings acknowledged in a manifestation. The Himalayan cadastre (8 lots) involved in this case were registed in equal shares in the names of Jose’s widow, Gregoria and her daughter Granada. The Plaintiff’s (natural children) contend that while they were growing up, they had been well supported by Jose and Agustin as they had been receiving their shares from the produce of the Haciendas in varied amounts over the years. Even after the death of Jose, Gregoria had continued giving them money but had stopped in 1951 by reason that lessee Lacson was not able to pay the lease rental. No accounting had ever been made to them by Jose nor Gregoria. Upon the survey of the land, they did not intervene, as Jose and Agustin promised that said lands shall be registered in the names of the heirs. They did not know that the intestate proceedings were instituted for the distribution of the estate of their father. Neither did they have any knowledge that a guardian was assigned to represent their minor siblings, considering that Modesto and Miguel who were claimed to be such were no longer minors at the time of the partition. They never received their share in the estate of their father. Plaintiffs later on discovered that the property had a Torrens title in the name of Gregoria and her daughter when Modesto’s children had inquired from the Register of Deeds. Petitioners now bring the present suit for the reconveyance of the subject parcels of land in their favor. Petitioners claim that in effect, Gregoria and daughter are holding their shares in trust which was denied by defendants. Defendants alledge res judicata and prescription. LOWER COURT: Dismissed the complaint on the basis of res judicata as their shares were already settled in the intestate proceedings. No deed of trust was alledged and proven.

In the cadastral proceedings, Jose and wife claimed the 8 lots of the plaintiffs. After the death of Jose, the said lots were adjudicated to his widow and daughter. In 1932 Gregoria leased the said lots to Yulo, who in 1934 transferred his lease rights over Hacienda Calazato to Bonin and Olmedo, husband of plaintiff Atanacia. Bonin and Olmedo in 1935 sold their lease rights over Hacienda Calaza to Consing. Those transactions prove that the heirs of Jose had repudiated any trust which was supposedly constituted over Hacienda Calaza in favor of the plaintiffs. The period of extinctive prescription is 10 years. Atanacia, Modesto and Manuel, could have brought the action to annul the partition. Maria and Emiliano were both born in 1896. They reached the age of 21 in 1917 and could have brought the action from that year. The instant action was filed only in 1957. As to Atanacia, Modesto and Manuel, the action was filed 43 years after it accrued and, as to Maria and Emiliano, the action was filed 40 years after it accrued. The delay was inexcusable. The instant action is unquestionably barred by prescription and res judicata. It was anomalous that the manifestation should recite that they received their shares from their administrator, when in the project of partition it was indicated that said shares shall be received in cash from brothers Jose and Agustin. Thus due to this irregularities as well as those of the intestate proceedings, the plaintiffs contend that the partition was not binding on them (except for Timoteo who considered himself bound by the partition). They ask that the case be remanded to the lower court for the determination and adjudication of their rightful shares. However, due to the fact that the plaintiffs slept on their rights, the courts can no longer afford them relief

VARSITY HILLS, INC v NAVARRO Facts: The present action began from a previous civil case wherein a petition was filed by herein respondents Mejia as heirs of Quintin Mejia and by Elpidio Tiburcio as assignee of a portion of the estate left by the latter as plaintiff against petitioners Tuason et. al. The complaint alleged that Quintin Mejia had obtained a Spanish title to the land and that he and his successors in interest had occupied the land without interruption until they were forcibly rejected therefrom and their houses demolished in 1934 through a writ of execution. In 1914, the defendants Tuason had obtained a decree of registration covering 35,403 hectares and that they had fraudulently and insidiously included plaintiff’s

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan land in the area covered by the Certificate of Transfer by inserting fake and false technical descriptions. UP et al. as subsequent acquirers whose titles are derived from the original fraudulent certificates should likewise be annulled. Herein Petitioners contend that the decision in a civil case wherein the Respondents were declared as without title to the land and ejected by a writ of execution was affirmed by the Supreme Court. The Petitioners contend in the present case that the causes of action averred by the Respondents were barred by the LRA and the statute of limitations over 51 years having elapsed since the decree of registration was issued, barred by laches as 32 years have elapsed since the ejectment and that the court had no jurisdiction to review and revise the decree of registration. They also maintain as affirmative defenses that they had in possession for over 30 years of the land thus acquiring title by acquisitive prescription and that claims for ownership were extinguished by the decree and that they are purchasers for value and in good faith of the lands standing in their names. A motion to dismiss was filed yet was denied by the lower court. The Petitioners resorted to the SC for a special proceeding for writs of certiorari and prohibition thus the trial court was enjoined from proceeding with the trial until further orders. Mejia and Tiburcio claim that appeal in due time was the proper remedy. Issue: Can the present action prosper based on claims of implied/constructive trust? SC: The court below gravely abused its discretion in denying petitioners motion to dismiss based on their affirmative defenses. The action by Tiburcio and Mejias was already barred by res judicata and extinctive prescription. A previous case was decided wherein Quintin Mejia had been found without title and thus ejected. The action in the court below was definitely barred as while the present respondents were not parties to the cause which Quintin Mejia was such a party, the final judgment against him concludes and bars his predecessors and privies as well. Since the respondents failed to file a petition for review of the decree within one year after the entry thereof despite claims that there was fraud in the inclusion of their land in the title, they are barred by the LRA. However if the fraud had been committed after the issuance of the decree, they should have pleaded when Quintin was made a defendant in Civil Case 4420. Nevertheless, their cause of action is barred by res judicata. With or without judgment against Quintin, their action had been extinguished by the lapse of 30 years from the time he was ejected from the land in question. An action to recover is also foreclosed by the statute of limitations. Actions on implied trusts are extinguished by laches or prescription of 10 years. Respondents have presented no cause of action. The lower court by denying the motion to dismiss constituted GADLEJ since they prolonged a litigation that was unmeritorious on its face.

GERONA v DE GUZMAN Facts: Petitioner Gerona heirs are the legitimate children of Domingo Gerona and Placida de Guzman.

Placida was a legitimate daughter of Marcelo de Guzman and his first wife Teodora de la Cruz. After the death of Teodora, Marcelo married Camila Ramos. Their children are herein respondents de Guzman heirs. Marcelo died some time in Septermber 1945 and respondents executed a deed of extra-judicial settlement of his estate. They fraudulently stipulated therein that they were the only surviving heirs of Marcelo although knowing that petitioners were also his forced heirs. They were able to cause the transfer the certificates of 7 parcels of land each in their names. The petitioners discovered the fraud only the year before the institution of the case. Petitioners seek to annul the extra-judicial settlement as well as have their shares in the said properties reconveyed to them. Contentions: Defendants argue that Placida de Guzman was not entitled to share in the estate of Marcelo as she was an illegitimate child and that the action of the Petitioners is barred by the statute of limitations. Rulings: TRIAL COURT: The trial court dismissed the case after finding that Placida was a legitimate child of Marcelo and that the properties described herein belonged to the conjugal partnership of Marcelo and Camila. It also ruled that Petitioners action had already prescribed. CA: affirmed ruling of the trial court Contentions: Petitioners assert that since they are co-heirs of Marcelo, the action for partition is not subject to the statue of limitations; that if affected, the period of 4 years did not begin to run until discovery of the fraud. They claim that the fraud done by respondents took place in 1956 or 1957 and that it had not prescribed when the present action was commenced. SC: The rule holds true only when the defendants do not hold the property in question under an adverse title. The statute of limitations operates from the time the adverse title is asserted by the possessor of the property. The defendants excluded the petitioners from the estate of Marcelo when they executed the deed of extra-judicial settlement claiming that they are the sole heirs thus setting up an adverse title to the estate. An action for reconveyance of real property based upon a constructive or implied trust, resulting from fraud may be barred by the statute of limitations and the action may only be filed within 4 years from the discovery of the fraud. In the case at bar, the discovery was made on June 25, 1948 when the deed was filed with the Register of Deeds and new certificates of title were issued in the names of the respondents exclusively. Plaintiff’s complaint was not filed until November 4, 1958 or more than 10 years after. Ignacio Gerona as well as Maria Concepcion attained the age of majortity in 1948 thus had 4 years from date of discovery within which to file an action. Francisco and Delfin attained the age of majority in 1952 and 1954, thus had 2 years after removal of

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan “legal incapacity” within which to commence their action.

CALADIAO v VDA DE BLAS FACTS: Prudencio Limpin sold, ceded, and transferred to Simeon Blas an unregistered fishpond for the P4440 with the right to repurchase the property within one year from Sept. 30, 1932 and with the express stipulation that the sale would automatically become absolute and irrevocable if no repurchase was made within the agreed period. Maxima Santos, (Blas’ wife) took over upon the death of Blas and paid taxes until 1955. The fishpond together with the other properties was adjudicated to her by the court in an estate proceeding. Despite such, Limpin obtained a judicial registration of the fishpond in favor of his conjugal partnership with Caladiao and secured a new title in their names. A TCT was issued in the name of Caladiao when Limpin died. Unaware of such, Santos Vda de Blas applied for the registration of the fishpond which was adjudicated to her as it was proven that Limpin sold the property to Blas and had failed to repurchase the same. While this registration case was pending, Caladiao filed a complaint for the return of the fishpond and the annulment of the sale a retro executed by Limpin. This was however, dismissed. The court ordered an issuance of decree in favor of Vda de Blas but subsequently dismissed the proceedings in finding that the said fishpond was registered previously in favor of Limpin. Rosalina Santos substituted Maxima upon death. CFI: in favor of Santos, ordered reconveyance and was awarded P3000. CA: affirmed. Defendants claim that the action for reconveyance had prescribed as it was filed more than 20 years since Limpin had acquired a CTC in their name over the fishpond. SC: The existence of a decree of registration in favor of one party is no bar to an action to compel reconveyance of the property to the true owner, which is an action in personam, even if such action be instituted after the year fixed by Section 38 of the LRA as a limit to the review of the registration decree, provided it is shown that the registration is wrongful and the property sought to be reconveyed has not passed to an innocent third party holder for value. Limpin obtained the decree of registration fraudulently and in utter bad faith thus he and his heirs may be compelled to reconvey it to the true owner. The registration of the property did not annul the conveyance in favor of Blas and after the registration, the Limpins held the property in trust for the true owners. The application for registration was in bad faith, with the result that the certificate of title issued to Limpin in 1934 was in law issued to and held by him in behalf and in trust for the benefit of Blas. Under the old code of civil procedure, prescription does not apply to “continuing and subsisting trusts”; so that actions against a trustee to recover trust property held by him are imprescriptible. Actions for the

reconveyance of property wrongfully registered are of this category. The possession of the property has been with Blas and his successors since the sale thus, their action cannot be deemed extinguished by prescription as under the old civil procedure, an action by the vendee of real property in possession thereof to obtain the conveyance of it is not subject to prescription.

DIAZ, ET.AL. VS. GORRICHO AND AGUADO Facts: Spouses Francisco Diaz and Maria Sevilla owned two parcels of lots (Lots Nos. 1941 and 3073) in Cabanatuan. Sometime later, Francisco died, and the properties were left in the hands of her wife and three children. Sometime in 1935, the appellee Carmen Gorricho filed an action against Maria Sevilla and in connection therewith, a writ of attachment was issued upon the shares of the latter in the two parcels of land. Since Maria Sevilla failed to redeem it within one year, a final deed of sale in favor of Carmen Gorricho was issued. In the said deed, however, the sheriff conveyed to Gorricho the whole of the two parcels instead of only the half-interest of Maria Sevilla therein. Pursuant to the said deed, Carmen Gorricho obtained the titles of the two parcels of land in her name in the year 1937, and has been possessing the said lands as owner ever since. In 1952, the children of Maria Sevilla (who died a year before) filed an action against the respondents to compel the latter to execute in their favor a deed of reconveyance over an undivided one-half interest of the lots in question, which the respondents were allegedly holding in trust for them. The respondents raised the defense that the petitioners’ action has long prescribed. Issue: Do implied trust prescribe or may they be defeated by laches? Ruling of the CFI of Nueva Ecija: While a constructive trust in plaintiff’s favor arose when Gorricho took advantage of the error of the provincial yepquestion and obtained title in herself, the action of the plaintiff was, however, barred by laches and prescription. Petitioners: The disputed property was acquired by Gorricho through an error of the provincial sheriff; that having been acquired through error, it was subject to an implied trust, as provided by Article 1456 of the New Civil Code; and therefore, since the trust is continuing and subsisting, the appellants may compel reconveyance of the property despite the lapse of time, specially because prescription does not run against titles registered under Article 496. Held: The petitioners are in error in believing that like express trusts, such constructive trusts may not be barred by lapse of time. The American law on trusts has always maintained a distinction between express trusts created by intention of parties, and the implied/constructive trusts that are exclusively created by law, the later not being trusts in their technical sense. The express trusts disable the trustee from acquiring for his own benefit the

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan property committed to his management or custody, at least while he does not openly repudiate the trust, and makes such repudiation known to the beneficiary or cestui que trust. Also, in express trusts, the delay of the beneficiary is directly attributable to the trustee who undertakes to hold the property for the former, or who is linked to the beneficiary by confidential or fiduciary relations. The trustee’s possession is, therefore, not adverse to the beneficiary, until and unless the latter is made aware that the trust has been repudiated. But in constructive trusts, there is neither promise nor fiduciary relation. The so-called trustee does not recognize any trust and has no intent to hold for the beneficiary; therefore, the latter is not justified in delaying action to recover his property. It is his fault if he delays; hence, he may be estopped by his own laches. Thus, the judgment of dismissal (of the CFI) should be upheld, because the petitioners’ cause of action to attack the deed and cancel the transfer certificates of title issued to the respondents accrued from the year of issuance and recording, 1937, and the petitioners have allowed 15 years to elapse before taking remedial action in 1952. Under the old Code of Civil Procedure, in force at the time, the longest period of extinctive prescription was only 10 years.

EVANGELISTA, ET. AL. VS. COLLECTOR OF INTERNAL REVENUE, ET. AL. Facts: The petitioners borrowed from their father PhP59,140.00 which amount together with their personal monies was used by them for the purpose of buying and selling real properties. From 1943 to 1944, they bought 24 parcels of land (including the improvements thereon) on four different occasions. In 1945, they appointed their brother Simeon to manage their properties with full power to lease; to collect and receive rents; to issue receipts therefore; in default of such payment, to bring suits against the defaulting tenant; and to endorse and deposit all notes and checks for them. In 1948, their net rental income amounted to PhP12,615.35.

Petitioners: 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. Held: The petitioners are liable to pay the tax on corporations provided for in Sec. 24 of the Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code. According to Sec. 84 of the same statute, “the term ‘corporation’ includes partnerships, no matter how created or organized, joint-stock companies, joint accounts, associations or insurance companies, but does not include duly registered general co-partnerships.” Also, Article 1767 of the Civil Code provides: “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.” Pursuant to this article, the essential elements of a partnership are two, namely: (1) an agreement to contribute money, property or industry to a common fund; and (2) intent to divide the profits among the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly, the petitioners have agreed to, and did, contribute money and property to a common fund. Also, it can be said that their purpose was to engage in real estate transactions for monetary gain and then divide the same among themselves because: (1) they created the common fund purposely; (2) they invested the same, not merely in one transaction, but in a series of transactions; (3) the parcels of land that they bought were not devoted to residential purposes, or to other personal uses of the petitioners but were leased separately to several persons; (4) the properties have been under the management of one person, namely Simeon Evangelista, making the affairs relative to the said properties appear to have been handled as if the same belonged to a corporation or business enterprise operated for profit; and (5) the 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. Hence, the petitioners herein constitute a partnership, and in so far as the National Internal Revenue Code is concerned, they are subject to the income tax for corporations.

I.

On September 1954, the respondent Collector of Internal Revenue demanded the payment of (1) income tax on corporations, (2) real estate dealer’s fixed tax, and (3) corporation residence tax for the years 1945-1949, computed according to the assessments made on their properties. Because of this, the petitioners filed a case against the respondents in the Court of Tax Appeals, praying that the decision of the respondent contained in its letter of demand be reversed and that they be absolved from the payment of the taxes in question.

1

As regards to the residence tax for corporations provided Sec. 2 of Commonwealth Act No. 4651, 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.

Entities liable to residence tax—Every corporation, no matter how created or Issue: Whether the petitioners are subject to the organized, whether domestic or resident tax on corporations, real estate dealer’s fixed tax, foreign, engaged in or doing business in the and corporation residence tax. Philippines shall pay an annual residence tax of five pesos and an annual additional tax, which Court of Tax Appeals: The petitioners are liable. in no case, shall exceed one thousand pesos, (No explanation for such in the case) in accordance with the following schedule: * * * Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan II.

Lastly, the records show that the petitioners have habitually engaged in leasing the properties for a period of 12 years, and that the yearly gross rentals of the said properties from 1945 to 1948 ranged from PhP9,599.00 to PhP 17,453.00. 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 dealers include any person engaged in the business of buying, selling, exchanging, leasing, or renting property of his own account as principal and holding himself out as full ro 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. * * *”

Defendant’s Position: The real agreement between plaintiff and defendant was one of lease and not of partnership; that the partnership was adopted as a subterfuge to get around the prohibition contained in the contract of lease between the owners and the plaintiff against the sublease of the property. Trial Court: Dismissal. It is not true that a partnership was created between them because defendant has not actually contributed the sum mentioned in the Articles of Partnership or any other amount. The agreement is a lease because plaintiff didn’t share either in the profits or in the losses of the business as required by Art 1769 (CC) and because plaintiff was granted a “guaranteed participation” in the profits belies the supposed existence of a partnership. Issue: Was the agreement a contract a lease or a partnership?

YULO V. YANG CHIAO SENG Facts: Yang Chiao Seng proposed to form a partnership with Rosario Yulo to run and operate a theatre on the premises occupied by Cine Oro, Plaza Sta. Cruz, Manila, the principal conditions of the offer being (1) Yang guarantees Yulo a monthly participation of P3,000 (2) partnership shall be for a period of 2 years and 6 months with the condition that if the land is expropriated, rendered impracticable for business, owner constructs a permanent building, then Yulo’s right to lease and partnership even if period agreed upon has not yet expired; (3) Yulo is authorized to personally conduct business in the lobby of the building; and (4) after Dec 31, 1947, all improvements placed by partnership shall belong to Yulo but if partnership is terminated before lapse of 1 and ½ years, Yang shall have right to remove improvements. Parties established, “Yang and Co. Ltd.”, to exist from July 1, 1945 – Dec 31, 1947. In June 1946, they executed a supplementary agreement extending the partnership for 3 years beginning Jan 1, 1948 to Dec 31, 1950. The land on which the theater was constructed was leased by Yulo from owners, Emilia Carrion and Maria Carrion Santa Marina for an indefinite period but that after 1 year, such lease may be cancelled by either party upon 90-day notice. In Apr 1949, the owners notified Yulo of their desire to cancel the lease contract come July. Yulo and husband brought a civil action to declare the lease for a indefinite period. Owners brought their own civil action for ejectment upon Yulo and Yang. CFI: Two cases were heard jointly; Complaint of Yulo and Yang dismissed declaring contract of lease terminated. CA: Affirmed the judgment. In 1950, Yulo demanded from Yang her share in the profits of the business. Yang answered saying he had to suspend payment because of pending ejectment suit. Yulo filed present action in 1954, alleging the existence of a partnership between them and that Yang has refused to pay her shares.

Ruling: Dismissal. The agreement was a sublease not a partnership. The following are the requisites of partnership: (1) two or more persons who bind themselves to contribute money, property or industry to a common fund; (2) the intention on the part of the partners to divide the profits among themselves (Article 1761, CC) Plaintiff did not furnish the supposed P20,000 capital nor did she furnish any help or intervention in the management of the theatre. Neither has she demanded from defendant any accounting of the expenses and earnings of the business. She was absolutely silent with respect to any of the acts that a partner should have done; all she did was to receive her share of P3,000 a month which cannot be interpreted in any manner than a payment for the use of premises which she had leased from the owners.

ESTANISLAO, JR. VS. COURT OF APPEALS Facts: The petitioner and private respondents are brothers and sisters who are co-owners of certain lots at the in Quezon City which were then being leased to SHELL. They agreed to open and operate a gas station thereat to be known as Estanislao Shell Service Station with an initial investment of PhP15,000.00 to be taken from the advance rentals due to them from SHELL for the occupancy of the said lots owned in common by them. A joint affidavit was executed by them on April 11, 1966. The respondents agreed to help their brother, petitioner therein, by allowing him to operate and manage the gasoline service station of the family. In order not to run counter to the company’s policy of appointing only one dealer, it was agreed that petitioner would apply for the dealership. Respondent Remedios helped in co-managing the business with petitioner from May 1966 up to February 1967. On May 1966, the parties entered into an Additional Cash Pledge Agreement with SHELL wherein it was reiterated that the P15,000.00 advance rental shall be deposited with SHELL to cover advances of fuel to petitioner as dealer with a proviso that said agreement “cancels and supersedes the Joint Affidavit.”

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan For sometime, the petitioner submitted financial statement regarding the operation of the business to the private respondents, but thereafter petitioner failed to render subsequent accounting. Hence , the private respondents filed a complaint against the petitioner praying among others that the latter be ordered: (1) To execute a public document embodying all the provisions of the partnership agreement they entered into; (2) To render a formal accounting of the business operation veering the period from May 6, 1966 up to December 21, 1968, and from January 1, 1969 up to the time the order is issued and that the same be subject to proper audit;

Furthermore, there are other evidences in the record which show that there was in fact such partnership agreement between parties. The petitioner submitted to the private respondents periodic accounting of the business and gave a written authority to the private respondent Remedios Estanislao to examine and audit the books of their “common business” (aming negosyo). The respondent Remedios, on the other hand, assisted in the running of the business. Indeed, the parties hereto formed a partnership when they bound themselves to contribute money in a common fund with the intention of dividing the profits among themselves.

(3) To pay the plaintiffs their lawful shares and participation in the net profits of the business; and

IN THE MATTER OF THE PETITION FOR AUTHORITY TO CONTINUE USE OF THE FIRM NAME ‘OZAETA, ROMULO, ETC.

(4) To pay the plaintiffs attorney’s fees and costs of the suit.

Facts: Two petitions were filed, one by the surviving partners of Atty. Herminio Ozaeta and the other by the surviving partners of Atty. Alexander Sycip praying that they be allowed to continue using the names of partners who had passed away in their firm names. Both petitions were consolidated.

Issue: Can a partnership exist between members of the same family arising from their joint ownership of certain properties? Trial Court: The complaint (of the respondents) was dismissed. But upon a motion for reconsideration of the decision, another decision was rendered in favor of the respondents.

Petitioners Arguments: •

CA: Affirmed in toto Petitioner: The CA erred in interpreting the legal import of the Joint Affidavit vis-à-vis the Additional Cash Pledge Agreement. Because of the stipulation cancelling and superseding the Joint Affidavit, whatever partnership agreement there was in said previous agreement had thereby been abrogated. Also, the CA erred in declaring that a partnership was established by and among the petitioner and the private respondents as regards the ownership and /or operation of the gasoline service station business. Held: There is no merit in the petitioner’s contention that because of the stipulation cancelling and superseding the previous joint affidavit, whatever partnership agreement there was in said previous agreement had thereby been abrogated. Said cancelling provision was necessary for the Joint Affidavit speaks of P15,000.00 advance rental starting May 25, 1966 while the latter agreement also refers to advance rentals of the same amount starting May 24, 1966. There is therefore a duplication of reference to the P15,000.00 hence the need to provide in the subsequent document that it “cancels and supercedes” the previous none. Indeed, it is true that the latter document is silent as to the statement in the Join Affidavit that the value represents the “capital investment” of the parties in the business and it speaks of the petitioner as the sole dealer, but this is as it should be for in the latter document, SHELL was a signatory and it would be against their policy if in the agreement it should be stated that the business is a partnership with private respondents and not a sole proprietorship of the petitioner.

•

•

•

•

Under the law, a partnership is not prohibited from continuing its business under a firm name which includes the name of a deceased partner. In fact, art. 1840 of the civil code explicitly sanctions the practice. In regulating other professions, such as accountancy and engineering, the legislature has authorized the adoption of firm names without any restriction as to the use, in such firm name, of the name of the deceased partner, the legislative authorization given to those engaged in the practice of accountancy – a profession requiring the same degree of trust and confidence in respect of clients as that implicit in the relationship of attorney and client – to acquire and use a trade name, strongly indicates that there us no fundamental policy that is offended by the continued use by a firm of professionals of a firm name which included the name of a deceased partner, at least where such firm name has acquired the characteristics of a ‘trade name’ The Canon of Professional Ethics are not transgressed by the continued use of the name of a deceased partner in the firm name of a law partnership as declared by Canon 33 adopted by American Bar Association declaring that ‘The continued use of the name of a deceased or former partner when permissible by local custom, is not unethical, but care should be taken that no imposition or deception is practiced through this use.’ There is no possibility of imposition or deception because the deaths of their respective deceased partners were well – publicized in all newspapers of general circulation for several days. No local custom prohibits the continued use of a deceased partner’s name in a professional firm name; and

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan •

The continued use of a deceased partner’s name in the firm name of law partnerships has been consistently allowed by U.S. Courts and is an accepted practice in legal profession of most countries in the world.

Issue: Whether or not a firm name engaged in the legal profession should continue using the name of partners who had passed away. SC ruling: No. •

•

•

•

custom is properly established by competent evidence like any other fact. Merely because something is done as a matter of practice does not mean that Courts can rely on the same for purposes of adjudication as a juridical custom. Juridical custom must be differentiated from social custom. The former can supplement statutory law or be applied in the absence of such statute. Not so with the latter.

BASTIDA VS. MENZI CO.

The use in partnership names of the names of deceased partners will run counter to Article 1825 of the CC which provides that names in a firm name of a partnership must either be those of living partners and, in the case of non – partners, should be living persons who can be subjected to liability. In fact, art. 1825 prohibits a third person from including his name in the firm name under pain of assuming the liability of a partner. The heirs of a deceased partner in a law firm cannot be held liable as the old members to the creditors of a firm particularly where they are non-lawyers. With regard to art. 1840, it treats more of a commercial partnership with a good will to protect rather than a professional partnership, with no saleable good will but whose reputation depends on the personal qualifications of its individual members. Thus, it has been held that a saleable goodwill can exist only in a commercial partnership and cannot arise in a professional partnership consisting of lawyers. A partnership for the practice of law cannot be likened to partnerships formed by other professionals or for business. For one thing, the law on accountancy specifically allows the use of a trade name in connection with the practice of accountancy. ‘A partnership for the practice of law is not a legal entity. It is a mere relationship or association for a particular purpose.’ It is not a partnership formed for the purpose of carrying in a trade or business or of holding property. Thus, it has been stated that the used of an assumed or trade name in law practice is improper. The right to practice law is not a natural or constitutional right but is in the nature of a privilege or franchise. It is limited to persons of good moral character with special qualifications duly ascertained and certified. The right does not only presuppose in its possessor integrity, legal standing and attainment but also the exercise of a special privilege, highly personal and partaking of the nature of a public trust. The continued use of a deceased or former partner’s name in the firm names of law partnerships not sanctioned by local custom due to the possibility of deception upon the public where the name of a deceased partner continues to be used. The possibility of deception upon the public, real or consequential, where the name of a deceased partner continues to be used cannot be ruled out. A person in search of legal counsel might be guided by the familiar ring of a distinguished name appearing in a firm title. In addition, there’s no local custom within our jurisdiction that sanctions the practice of continued use of a deceased partner’s name. Courts take no judicial notice of custom. A local custom as a source of right cannot be considered by a court of justice unless such

Facts: Menzi Co. was organized in 1921 for the purpose of importing and selling general merchandise, including fertilizers and fertilizer ingredients. Sometime in November of that year, the plaintiff, who had had some experience in mixing and selling fertilizer, went to see Toehl, the manager of the sundries department of Menzi & Co. (through which the fertilizer business was carried out) and told him that he had a written contract with the Philippine Sugar Centrals Agency for 1,250 tons of mixed fertilizers, and that he could obtain other contracts, including one from Calamba Sugar Estates for 450 tons, but that he did not have the money to buy the ingredients to fill the order and carry on the business. He offered to assign to Menzi & Co. his contract with Phil Sugar Centrals Agency and to supervise the mixing of the fertilizer and to obtain other orders for 50 % of the net profit that Menzi & Co., Inc., might derive therefrom. J. M. Menzi (gen. manager of Menzi & Co.) accepted the offer. The agreement between the parties was verbal and was confirmed by the letter of Menzi to the plaintiff on January 10, 1922. Menzi & Co. continued to carry on its fertilizer business under this arrangement with the plaintiff. It ordered ingredients from the US and other countries, and the interest on the drafts for the purchase of these materials was charged to the business as a part of the cost of the materials. The mixed fertilizers were sold by Menzi & Co. between January 19 and April 1, 1922 under its “Corona” brand. Pursuant to the verbal agreement, the defendant corporation on April 27, 1922 entered into a written contract with the plaintiff, marked Exhibit A, which is the basis of the present action. Still, the fertilizer business as carried on in the same manner as it was prior to the written contract, but the net profit that the plaintiff herein shall get would only be 35%. The intervention of the plaintiff was limited to supervising the mixing of the fertilizers in the bodegas of Menzi. The trademarks used in the sale of the fertilizer were registered in the Bureau of Commerce & Industry in the name of Menzi & Co., Inc. and the fees were paid by that company. Prior to the expiration of the contract (April 27, 1927), the manager of Menzi notified the plaintiff that the contract for his services would not be renewed. Subsequently, when the contract expired, Menzi proceeded to liquidate the fertilizer business in question. The plaintiff refused to agree to this. It argued, among others, that the written contract entered into by the parties is a contract of general regular commercial partnership, wherein Menzi was the capitalist and the plaintiff the industrial partner. Issue: Is the relationship between the petitioner and Menzi that of partners?

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan Held: The relationship established between the parties was not that of partners, but that of employer and employee, whereby the plaintiff was to receive 35% of the net profits of the fertilizer business of Menzi in compensation for his services for supervising the mixing of the fertilizers. Neither the provisions of the contract nor the conduct of the parties prior or subsequent to its execution justified the finding that it was a contract of co-partnership. The written contract was, in fact, a continuation of the verbal agreement between the parties, whereby the plaintiff worked for the defendant corporation for one-half of the net profits derived by the corporation form certain fertilizer contracts.

Issue: W/N petitioners are deemed to have formed an unregistered partnership subject to tax under sections 24 and 84(b) of the National Internal Revenue code. Ruling: YES •

According to Art. 116 of the Code of Commerce, articles of association by which two or more persons obligate themselves to place in a common fund any property, industry, or any of these things, in order to obtain profit, shall be commercial, no matter what it class may be, provided it has been established in accordance with the provisions of the Code. However in this case, there was no common fund. The business belonged to Menzi & Co. The plaintiff was working for Menzi, and instead of receiving a fixed salary, he was to receive 35% of the net profits as compensation for his services. The phrase in the written contract “en sociedad con”, which is used as a basis of the plaintiff to prove partnership in this case, merely means “en reunion con” or in association with. It is also important to note that although Menzi agreed to furnish the necessary financial aid for the fertilizer business, it did not obligate itself to contribute any fixed sum as capital or to defray at its own expense the cost of securing the necessary credit.

OÑA VS. COMMSSIONER OF INTERNAL REVENUE Facts: Lorenzo Oña and his five children are the surviving heirs of Julia Buñales. Lorenzo, the surviving spouse was appointed administrator of Julia’s estate. He submitted the project of partition which was approved by the court and since 3 of the 5 children were still minors, he was appointed by the court as guardian of said minors. Despite the approval of the project of partition, no attempt was made to divide the properties therein listed and remained under the management of Lorenzo who used said properties in business by leasing or selling them and investing the income derived therefrom and proceeds form the sales thereof in real properties and securities. Respondent CIR decided that petitioners formed an ‘unregistered partnership’ and therefore subject to corporate tax pursuant to Sec. 24 of the Tax Code. Accordingly he assessed against the petitioners the amounts of P8,092.00 and P13.899.00 as corporate income taxes for 1955 and 1956 respectively. Petitioners protested against the assessment and asked for reconsideration which was denied. Petitioners’ Argument: Petitioners are considered as co – owners of the properties inherited by them from the deceased Julia Buñales and the profits derived from transactions involving the same, they cannot be considered as an unregistered partnership and cannot be subject to corporate tax.

•

•

For tax purposes, the co – ownership of inherited properties is automatically converted into unregistered partnership the moment the said common properties and/or incomes derived therefrom are use as a common fund with the intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition. This is because from the moment of such partition, the heirs are entitled already to their respective definite shares of 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. 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 know 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 part of the taxable income of an unregistered partnership. For purposes of the tax on corporations, the National Internal Revenue Code, includes partnerships with the exception only of duly registered general co-partnerships within the purview of the term ‘corporation.’

LYONS VS. ROSENSTOCK Facts: During his lifetime, Henry Elser got engaged in the real estate business. Petitioner Lyons, on the other hand, joined Elser in some of his ventures and they equally divided profits gained from these. In 1919, Lyons needed to go back to the United States for a year and a half and by reason of which he executed a general power of attorney in favor of Elser, empowering the latter to manage and dispose the properties owned by them. In 1920, Elser was drawn to a piece of land, the San Juan Estate, and he perceived an opportunity to develop it into a suburban community. The Estate was offered by its owners for P570,000 with an initial payment of P150,000. In May 1920, Elser wrote a letter to Lyons inducing the latter to join him in this venture and to likewise supply the means necessary for the fulfillment of this project. In the meantime, Elser raised P120,000 from his own funds and loaned P50,000 from Uy Siolong to pay for the initial payment. However in order to obtain the loan he had to give a personal note signed by himself, by his other associates and by the Fidelity and Surety

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan Company. Then again, in order to obtain the signature of the Fidelity and Surety Company Elser had to execute a mortgage on one of the properties owned by him and Lyons on Carriedo Street. Lyons replied to the letter of Elser only in July 1920 and he expressed in it his unwillingness to join the latter in this venture. Because of this Elser relieved the Carriedo property of the encumbrance which he had placed upon it and requested the Fidelity and Surety Company to allow him to substitute another property for it. However the release of the old mortgage and the recording of the new were never registered because in September 1920, when Lyons returned to Manila, he allowed the mortgage to remain on the Carriedo property. But in January 1921, Elser was able to pay the note executed by him to Uy Siolong which enabled the release of the Carriedo Property. Issue: W/N Lyons, as half owner of the Carriedo property, involuntarily became the owner or a copartner of an undivided interest in the San Juan Estate, which was acquired partly by the money obtained through an encumbrance placed on the Carriedo property. No. Held: Under our law, a trust does not necessarily attach with respect to property acquired by a person who uses money belonging to another. In the case at bar, there was clearly no general relation of partnership between Lyons and Elser and the most that can be said is that they had been co-participants in various transactions involving real estate. It is clear the Elser, in buying the San Juan Estate, was not acting for any partnership composed for himself and Lyons, especially that the latter expressly communicated his desire not to participate in this venture. Lastly, it should be noted that no money belonging to Lyons or any partnership composed by Lyons and Elser was in fact used by the latter in the purchase of the San Juan Estate.

FERNANDEZ VS. DE LA ROSA Facts: On the part of plaintiff Fernandez, he claims that he entered into a verbal agreement with defendant De la Rosa to form a partnership for the purchase of cascoes with the undertaking that the defendant will buy the cascoes and that each partner will furnish such amount as he could, while the profits will be divided proportionately. Plaintiff furnished P300 for casco No. 1515 and P825 for casco No. 2089, both of which were placed under the name of the defendant only. In April 1900, the parties undertook to draw up articles of their partnership for the purpose of embodying it in an authentic document. The agreement however did not materialize because defendant proposed articles which were materially different from their verbal agreement, and he was also unwilling to include casco No. 2089 in the partnership. Because the cascoes were under the management of the defendant, the plaintiff demanded an accounting over it to which the defendant refused claiming that no partnership existed between them. De la Rosa, on the other hand, admits that he desired to form a partnership with the plaintiff but denies that any agreement was ever consummated. Moreover, he denied receiving any money furnished

by plaintiff for casco No. 1515, but claims that he merely borrowed the P300 on his individual account from the bakery business in which plaintiff was a copartner. And as for the P825 furnished by the plaintiff, the defendant claims that it was actually for casco No. 1515 and not for casco No. 2089. He also added that the repairs made on the two cascoes were exclusively borne by him, and that he returned a sum of P1,125 to plaintiff with an express reservation on his part of all his rights as a partner. Issue: a) W/N a partnership existed between the parties. Yes. b) W/N the partnership was terminated when the defendant returned the P1,125 to plaintiff. No. Held: a) The essential points upon which the minds of the parties must meet in a contract of partnership are 1) mutual contribution and 2) joint interest in the profits. The fact that the defendant received money furnished by the plaintiff for the purpose of using it to purchase the cascoes establishes the first element of the partnership, mutual contribution to a common stock. For the second element, the fact that the formation of partnership had been a subject of negotiation between them, even before the purchase of the first casco, and that both parties intended to purchase the cascoes in common satisfies the requirement that there should be an intention on the part of both parties to share the profits. With these, a complete and perfect contract of partnership was entered into by the parties. It must be noted however that this partnership was subject to a suspensive condition which is the execution of a written agreement regarding the distribution of profits, character of partnership, etc. But since the defendant actually purchased the cascoes, it would seem that the partnership already existed. And as furthermore provided by the Civil Code, a written agreement was not necessary in order to give efficacy to the verbal agreement of the partnership because the contributions of the partners to the partnership were not in the form of immovables. b) During trial, the court was able to prove that plaintiff actually furnished some amount for the repair of the cascoes and that it was presumed that a profit has been obtained by the defendant prior to the return of the money. With these, the return of the P1,125 fell short of the amount which the plaintiff has actually contributed to the partnership. For these reasons, the acceptance by the plaintiff of the amount returned by the defendant did not have the effect of terminating the legal existence of the partnership by converting it into a societas leonina. The court also proved that there was no intention on the part of the plaintiff, in accepting the money, to relinquish his rights as a partner. On the contrary he notified defendant that he waived none of his rights in the partnership. Also the lack of recognition on the part of the defendant of the plaintiff’s right in the partnership property and in the profits does not give the former the right to force a dissolution upon the later upon the terms which the plaintiff is unwilling to accept. A partnership therefore existed between the two and cascoes No. 1515 and 2089 are partnership properties.

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan WOODHOUSE VS. HALILI Facts: Defendant Halili informed Woodhouse, plaintiff, of his desire to invest half a million dollars in the bottling and distribution of Mission Soft Drinks. Woodhouse then relayed this message to Mission Dry Corporation of Los Angeles, USA. Mission Dry Corporation then gave plaintiff a thirty day option on exclusive bottling and distribution rights in the Philippines (Exhibit J). Thereafter, plaintiff and defendant entered into a written agreement with the ff. pertinent provisions: 1) they shall organize a partnership for the bottling and distributing of Mission soft drinks, with plaintiff, Woodhouse, as industrial partner or manager, and defendant, Halili, as capitalist; 2)defendant was to decide matters of general policy regarding the business, while plaintiff was to attend the operation and development of the bottling plant; 3) plaintiff was to secure Mission soft drinks franchise for and in behalf of the proposed partnership; and 4) plaintiff was to receive 30 percent of the net profits of the business. This contract was signed and the parties to this case then went to the United States to finalize the franchising agreement. Mission Dry Corporation then granted the defendant the exclusive right, license, and authority to produce, bottle, distribute and sell Mission beverages in the Philippines. When both parties went back to the Philippines, the bottling plant began its operation. At first, plaintiff was given advances, on account of the profits, and allowances which however ceased after two months. Moreover, when plaintiff demanded that the partnership papers be executed, defendant refused to do so and instead suggested that they just enter into a settlement. As no settlement was reached, the plaintiff filed a complaint in the CFI. In the CFI, plaintiff asks for execution of the contract of partnership, accounting of the profits and a share thereof of 30 percent. Defendant on his defense claims that plaintiff misrepresented himself that he was about to become the owner of an exclusive bottling franchise when in fact franchise was exclusively given to defendant, and that the plaintiff failed to contribute to the exclusive franchise of the partnership. CFI ordered defendant to render an accounting of the profits of the business and to pay plaintiff 15 percent thereof. But it held that the execution of the contract could not be enforced and the defense of fraud was not proved. Unsatisfied with this ruling, both parties appealed to the SC. Issue: a) W/N plaintiff falsely represented that he had an exclusive franchise to bottle Mission beverages. Yes. b) W/N this false representation amounts to fraud and may annul the agreement to form a partnership Held: a) As found by the SC, Exhibit J was used by plaintiff as an instrument with which to bargain with the defendant and to close a deal with him, because if plaintiff claimed that all he had was an option to exclusively bottle and distribute Mission soft drinks in the Philippines, he would have probably lost the deal itself. This is further supported by the fact that when defendant learned that plaintiff did not have an exclusive franchise, he reduced plaintiff’s participation in the profit to 15 percent, to which the plaintiff agreed.

b) Article 1270 of the Spanish Civil Code distinguished two kinds of fraud, causal fraud, which may be a ground for the annulment of a contract, and the incidental fraud, which only renders the party who employs it liable for damages. As founded by the SC the misrepresentation of plaintiff does not amount to causal fraud because it was not the principal inducement that led the plaintiff to enter into the partnership agreement. As it was already noted, both parties expressly agreed that they shall form a partnership. Lastly, the SC upheld the ruling of the trial court that the defendant may not be compelled against his will to carry out the partnership. The law recognizes the individual’s freedom or liberty to do an act he has promised to do or not to do it as he pleases.

ROJAS VS. MAGLANA FACTS: Maglana and Rojas executed their Articles of Co-partnership called “Eastcoast Development Enterpises” which had an indefinite term of existence and was registered with the SEC and had a Timber License. One of the EDE’s purposes was to apply or secure timber and/or private forest lands and to operate, develop and promote such forests rights and concessions. M shall manage the business affairs while R shall be the logging superintendent. All profits and losses shall be divided share and share alike between them. Later on, the two availed the services of Pahamotang as industrial partner and executed another articles of co-partnership with the latter. The purpose of this second partnership was to hold and secure renewal of timber license and the term of which was fixed to 30 years. Still later on, the three executed a conditional sale of interest in the partnership wherein M and R shall purchase the interest, share and participation in the partnership of P. It was also agreed that after payment of such including amount of loan secured by P in favor of the partnership, the two shall become owners of all equipment contributed by P. After this, the two continued the partnership without any written agreement or reconstitution of their articles of partnership. Subsequently, R entered into a management contract with CMS Estate Inc. M wrote him re: his contribution to the capital investments as well as his duties as logging superintendent. R replied that he will not be able to comply with both. M then told R that the latter’s share will just be 20% of the net profits. Such was the sharing from 1957 to 1959 without complaint or dispute. R took funds from the partnership more than his contribution. M notified R that he dissolved the partnership. R filed an action against M for the recovery of properties and accounting of the partnership and damages. CFI: the partnership of M and R is after P retired is one of de facto and at will; the sharing of profits and losses is on the basis of actual contributions; there is no evidence these properties were acquired by the

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan partnership funds thus it should not belong to it; neither is entitled to damages; the letter of M in effect dissolved the partnership; sale of forest concession is valid and binding and should be considered as M’s contribution; R must pay or turn over to the partnership the profits he received from CMS and pay his personal account to the partnership; M must be paid 85k which he should’ve received but was not paid to him and must be considered as his contribution. ISSUE: what is the nature of the partnership and legal relationship of M-R after P retired from the second partnership? May M unilaterally dissolve the partnership? SC: There was no intention to dissolve the first partnership upon the constitution of the second as everything else was the same except for the fact that they took in an industrial partner: they pursued the same purposes, the capital contributions call for the same amounts, all subsequent renewals of Timber License were secured in favor of the first partnership, all businesses were carried out under the registered articles. M and R agreed to purchase the interest, share and participation of P and after, they became owners of the equipment contributed by P. Both considered themselves as partners as per their letters. It is not a partnership de facto or at will as it was existing and duly registered. The letter of M dissolving the partnership is in effect a notice of withdrawal and may be done by expressly withdrawing even before expiration of the period with or without justifiable cause. As to the liquidation of the partnership it shall be divided “share and share alike” after an accounting has been made. R is not entitled to any profits as he failed to give the amount he had undertaken to contribute thus, had become a debtor of the partnership. M cannot be liable for damages as R abandoned the partnership thru his acts and also took funds in an amount more than his contribution.

ORTEGA VS CA FACTS: The law firm of R,L,S and C was duly registered in the Mercantile Registry and reconstituted with the SEC. There were several amendments to its articles of partnership. Respondent-Appellees senior and junior partners associated themselves together. Ortega informed them through a letter that he is retiring from the firm of Bito, Misa and Lozada regarding the liquidation of his participation in it. He later on filed with the SICD a petition for dissolution and liquidation of partnership. Hearing Officer: said withdrawal of O did not dissolve the law partnership and both parties to the case are enjoined to abide by the provisions of the Agreement re: the liquidation of the shares of any retiring or withdrawing partner. SEC: reversed the decision ruling that the withdrawal had in fact dissolved the partnership of BML as a partnership at will, the law firm can be dissolved by any partner at anytime by his withdrawal regardless

of good faith or bad faith. Remanded the case to the HO to determine rights and obligations of parties. CA: affirmed in toto the SEC decision and that there is no need for the appointment of a receiver as no sufficient proof had been shown to indicate that the partnership assets were in any such danger of being lost, removed or materially impaired. ISSUES: whether it was a partnership at will; whether M’s withdrawal dissolved the partnership; whether such withdrawal was made in bad faith. SC: It was a partnership at will as it had not fixed a specified period for its undertaking. It may be dissolved at will by any of the partners but if it was done in bad faith, such partner shall be liable for damages. Upon dissolution, the partnership continues and its legal personality is retained until the complete winding up of its business culminating in its termination. The liquidation of assets is governed by the CC but an agreement between parties is binding upon them. It was not done out of bad faith as it was spurred by an interpersonal conflict among the partners.

ANGELES VS SEC of JUSTICE Facts: Angeles spouses filed a criminal complaint of estafa against Mercado as they claim that M convinced them to enter into a contract of antichresis covering 8 parcels of land. Said contract was to last for 5 years with PHP210k as consideration. It was agreed that M was to administer the lands and complete the paperwork. After 3 years, the A spouses asked for an accounting. M explained that the land earned PHP46k + in 1993, trees bore no fruit in 1994 and had not given and accounting in 1995. Only after this demand had they discovered that M had put the contract of antichresis over the land under his and his spouse’s names. M insists that there exists an industrial partnership between him and his spouse as industrial partners and the A spouses as financiers. This had existed since 1991 before the contract of antichresis over the land. M used his earnings as part of the business capital which he entered into, under his name, in behalf of the A spouses. M attached bank receipts showing deposits in behalf of E. Angeles and contracts under his name for the A spouses. O. Angeles stated that there was a written industrial partnership agreement wherein capital would come from A spouses while profit would be divided evenly between M and the A spouses. PROVINCIAL PROSECUTION: dismissed estafa complaint On appeal to the SOJ, the A spouses insist that the document evidencing the contract of antichresis was executed in the name of the M spouses instead of the A spouses. This document alone proves M’s misappropriation of their PHP210k. SOJ: Dismissed appeal. A spouses failed to show sufficient proof that M deliberately deceived them in the antichresis transaction. The document alone in the name of the M spouses failed to convince the SOJ

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan that there was deceit of false representation on the part of M to induce the A spouses to part with their money. [A partnership truly existed and it is clear from the fact that they contributed money to a common fund and divided the profits among themselves. M was able to make deposits for the account of A spouses, these represented their share in the profits of their business venture. During the barangay conciliation A spouses acknowledged their joint business ventures with M.] There is no estafa when money is delivered by a partner to his copartner on the representation that such shall be applied to the business of their partnership. ISSUES: whether a partnership existed even without documentary proof; whether there was a misappropriation by M of the proceeds; whether a filing information of estafa should be ordered. SC: The A spouses contributed money to the partnership and not to the land. Mere failure to register the contract of partnership with SEC does not invalidate it as long as it has the essential requisites of a contract. Registration is mere notice to third parties. A spouses admit to facts that prove existence of a partnership: a contract showing an industrial partnership, contribution of money and industry to a common fund, and division of profits between A spouses and M. M satisfactorily explained that the documents were in his name as the A spouses do not want to be revealed as financiers. A spouses were not able to prove that there was deceit or false representation on his part for them to part with their money. Accounting of proceeds not proper subject in this case. SOJ did not abuse his discretion in dismissing the appeal of the A spouses.

TORRES VS. COURT OF APPEALS Facts: Petitioners Antonia Torres and Emeteria Baring entered into a Joint Venture Agreement (JVA) with respondent Manuel Torres for the development of a parcel of land into a subdivision. The executed a Deed of Sale in favor of respondent, who had it registered in his name. Respondent mortgaged the property to Equitable and obtained a P40,000 loan to be used for the subdivision dev’t. Petitioners and Respondent agreed to share the proceeds form the sale of the subdivided lots. The project did not push through and the land was foreclosed. Petioners filed a criminal case of estafa against respondent and his wife, alleging that the project failed because of respondent’s lack of funds or means and skills and because respondent used the loan to fund his company, Universal Umbrella Co. Respondent alleged that that he used the loan to effect a survey over the lots, secure city council approval, construct curbs, roads and gutters and enter in to a contract with an engineering firm to build houses all at an expense of P85,000. Respondents were acquitted from the criminal case and petitioners filed the present civil case. The trial court dismissed the case, but the same, on appeal, was remanded for further proceedings. CA: Petitioners and Respondents had formed a partnership for the subdivision dev’t. They must bear the loss suffered by the partnership in the same proportion as their share in the profits stipulated in

the contract (Art. 1797). In the absence of stipulation the share of each partner in profits and losses shall be in proportion to what he may have contributed BUT the industrial partner shall not be liable for losses. As for profits, the industrial partner shall receive such share as may be just and equitable. If besides his services he contributed capital, he shall also receive a share in the profits proportionate to his capital. Petitioners: JVA and partnership is void under Art 1773, because the parties didn’t make, sign or attach to the public instrument and inventory of the real property. JVA is void under Art 1422 because it is the direct result of an earlier illegal contract which was for the sale of the land without valid consideration. Respondent is liable for failure to implement the project. ISSUE: Should the partnership be declared void? SC: Petition Denied. CA Affirmed. The Agreement indubitably shows the existence of a partnership pursuant to Art. 1767. Petitioners would contribute land, respondents would provide the industry and expenses and the income would be divided. Contracts bind the parties to the stipulations and necessary consequences. Courts are not authorized the extricate parties from the consequences of their acts should the stipulations turn out to be financially disadvantageous. Art 1773 was intended primarily to protect 3rd persons who may be defrauded when contracting with the partnership. The case at bar does not involve 3rd parties who may be prejudiced. Petitioners invoke the allegedly void contract to claim for 60% of the value of the property thus they can’t deny the contract in one breath and in another recognize it. The courts may consider the JVA as an ordinary contract from which the parties’ rights and obligations may be inferred and enforced. JVA is not void under Art 1422. The consideration for the sale was the expectation of profits from the project—60% of which would go to petitioners.

PIONEER INSURANCE & SURETY CORP VS. CA Facts: Petitioner Jacob Lim, owner-operator of Southern Airlines (SAL) entered in to a contract with Japan Domestic Airlines (JDA) for the sale and purchase of 2 aircrafts and 1 set of spare parts for $109k to be paid in installments. Pioneer Insurance as surety executed and issued its surety bond in favor of JDA on behalf of its principal Lim for the balance. Border Machinery and Heavy Equip. Co. (BorMaHeCo), Francisco and Modesto Cervantes and Maglana gave some funds used in the purchase or aircrafts and spare parts as contribution to new corporation proposed by Lim to expand his airline business. They executed 2 indemnity agreements stipulating that the indemnitors principally agree and bind themselves solidarily to indemnify, hold and save Pioneer from damages, losses, costs, taxes,

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan penalties, etc. which Pioneer may incur from becoming surety. Lim, (acting under SAL), executed in favor of pioneer a deed of chattel mortgage as security, stipulating that Lim was to transfer and convey to the surety the 2 aircrafts. Lim defaulted on installment payments and JDA asked Pioneer to pay, which Pioneer did in the amount of P298k. Pioneer filed for extrajudicial foreclosure of chattel mortgage (to which Cervanteses and Maglana filed a 3rd party claim alleging co-ownership over aircrafts) and judicial foreclosure with writ of prelim attachment against Lim, Cervanteses, Bormaheco and Maglana. Trial Court held that Lim was liable and dismissed Pioneer’s claim against all other defendants. CA: Pioneer reinsured its risk of liability under the surety bond in favor of JDA and collected proceeds of such reinsurance. Pioneer is no longer real party in interest to institute action as it does not stand to be benefited. ISSUES: IS Pioneer a real party in interest? Was there a de facto partnership created among Cervantes, Maglana and Lim as a result of their failure to incorporate? SC: Petitioner is not the real party in interest and has no cause of action against respondents. Pioneer, having foreclosed the chattel mortgage on the planes and spare parts no longer has any further action against defendants as indemnitors to recover any unpaid balance of the price. Persons who attempt but fail to form a corporation and who carry on business under the corporate name occupy the position of partners inter se. HOWEVER, such relation does not necessarily exist, for ordinarily, persons cannot be made to assume the relation of partners as between themselves when their purpose is that no partnership shall exist. In the instant case, it is clear that Lim never intended to form a corporation with respondents despite his representations to them, giving credence to the cross-claims of respondents saying that they were induced and lured to make contributions to a proposed corporation which was never formed because petitioner reneged on their agreement. No de facto partnership was created among the parties which would entitle the petitioner to a reimbursement of the supposed losses of the proposed corporation. Petitioner was acting on his own and not in behalf of his other would be incorporators in transacting the sale of aircrafts and spare parts.

LIM TONG LIM VS. PHILIPPINE FISHING GEAR INDUSTRIES INC FACTS: On behalf of “Ocean Quest Fishing Corp” Antonio Chua and Peter Yao entered into a contract with Phil. Fishing Gear (PFGI) for the purchase of fishing nets. They claimed they were engaged in a business venture with petitioner Lim who was not a signatory to the agreement. Chua and Yao failed to pay for the nets and floats. PFGI filed a collection suit against Chua, Yao and Lim as general partners alleging that Ocean Quest was nonexistent. Chua

filed a Manifestation admitting liability and requesting reasonable time to pay. Yao filed an answer waiving his right to cross-ex and present evidence. Lim filed an answer with counterclaim and crossclaim. Trial Court ordered sale of nets at auction which were bought by PFGI. Trial Court ruled that a partnership existed between Lim, Chua and Yao based on testimonies, Compromise Agreement, declaration of ownership of fishing boats. CA: Lim was a partner of Chua and Yao in a fishing business and may be liable for the fishing nets and floats purchased for partnership’s use. ISSUE: Whether by their acts, Lim Chua and Yao could be deemed to have entered into a partnership SC: Petition denied. CA affirmed. There existed a partnership between Chua, Yao and Lim pursuant to Art 1767 based on factual findings of the lower courts which established that they had decided to engage in a fishing business for which they bought boats worth P3.35M financed by a loan from Jesus Lim, Lim’s brother. In the Compromise Agreement, they were to pay the loan with the proceeds of the sales of the boats and losses or excess were to be divided equally. The boats, purchase and repair financed by borrowed money fell under “common fund”. Contribution to such fund need not be cash or fixed assets—it could be an intangible like credit or industry. The partnership extended not only to purchase of the boat but also to the nets and floats. The Compomise Agreement was not the sole basis of the partnership. It was but an embodiment of the relationship extant among the parties prior to execution. Petitioner was a partner and not merely a lessor as he entered into a business agreement with Chua and Yao in which debts were undertaken to finance the acquisition and upgrading of vessels to be used in their fishing business. The boat, F/B Lourdes, though registered in Lim’s name was an asset of the of the partnership. Petitioner benefited from the use of the nets found inside the boat. 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, Lim did not act on behalf of a corporation. However, having reaped the benefits of the contract entered into by persons whom he previously had an existing relationship, he is deemed part of the association and covered by the scope of the doctrine of corporation by estoppel. A 3rd party who knowing an association to be uinincorporated, 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 corporation.

CAMPOS RUEDA & CO. VS. PACIFIC COMMERCIAL CO. ET. AL. Facts: This case involves the application by the petitioner for a judicial decree adjudging itself insolvent. The limited partnership of Campos Rueda & Co. was, and is, indebted to Pacific Commercial Co., the Asiatic Petroleum Co. and the International

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan Banking Corporation in various sums amounting to not less than Php1000.00, payable in the Philippines, which were not paid more than thirty days prior to the date of their filing of the application for involuntary insolvency. The lower court denied the petition because it was not proven, nor alleged, that the members of the aforesaid firm were insolvent at the time of the application was filed; and that as said partners are personally and solidarily liable for the consequences of the transaction of 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 the Supreme Court. Issue: Whether or not a limited partnership, such as the petitioner, which has failed to pay its obligations 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. Held: In the Philippines, a limited partnership duly organized in accordance with law has a personality distinct from that of its members. If it commits an act of bankruptcy, such as that of failing for more than 30 days to pay debts amounting to PhP1000.000 or more, it may be adjudged insolvent on the petition of three of its creditors although its members may not be insolvent. Under our Insolvency Law, one of the acts of bankruptcy upon which an adjudication of involuntary insolvency is predicated is the failure of a partnership to pay its obligations with three creditors for a period of more than 30 days. On the contrary, 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. Nevertheless, it must be borne in mind that under American common law, partnerships have no juridical personality independent from that of its members. Therefore, it having been proven that the partnership Campos Rueda & Co. failed for more than 30 days to pay its obligations to the herein respondents, the partnership have the right to a judicial decree declaring the involuntary insolvency of said partnership.

AGUILA, JR. VS. CA Facts: The petitioner herein is the manager of A.C. Aguila & Sons, Co., a partnership engaged in lending activities, while the private respondent and her late husband were the registered owners of a house and lot, covered by a transfer certificate of title. Sometime in 1991, the private respondent and A.C. Aguila & Sons, Co., represented by the petitioner, entered into a Memorandum of Agreement. In this agreement, a deed of absolute sale shall be executed by the private respondent in favor of A.C. Aguila & Sons, Co., giving the former an option to repurchase and obliging the same to deliver peacefully the possession of the property to A.C. Aguila & Sons, Co., within 15 days after the expiration of the said 90 days grace period. When the private respondent failed to redeem the property within the grace period, the petitioner

caused the cancellation of the transfer certificate of title under the private respondent’s name and the issuance of a new certificate of title in the name of A.C. Aguila & Sons, Co. Subsequently, the private respondent was asked to vacate the premises, however she refused. Because of this refusal, A.C. Aguila & Sons, Co. filed an ejectment case against her. The MTC ruled in favor of A.C. Aguila & Sons, Co., on the ground that the private respondent did not redeem the subject property before the expiration of the 90-day period provided in the MOA. She filed an appeal before the RTC, but failed again. Then, she filed a petition for declaration of nullity of a deed of sale with the RTC. She alleged that the signature of her husband on the deed of sale was a forgery because he was already to be dead when the deed was supposed to have been executed. It appears however that the she filed a criminal complaint for falsification against the petitioner. RTC: DENIED. The plaintiff never questioned receiving from A.C. Aguila & Sons, Co. the sum of P200,000.00 representing her loan from the defendant. Common sense dictates that an established lending and realty firm like Aguila would not part with Php200,000.00 to the spouses, who are virtual strangers to it, without simultaneous accomplishment and signing of all the required documents, more particularly the Deed of Absolute Salem to protect its interest. CA: REVERSED. The transaction between the parties is indubitably an equitable mortgage. Considering that the private respondent (vendor) was paid the price which is unusually inadequate (240 sq. m. subdivision lot for only Php200,000.00 in the year 1991), has retained possession of the property and has continued paying real taxes over the subject property. Petitioner: 1.

He is not the real party in interest but A.C. Aguila & Sons, Co.;

2.

The judgment in the ejectment case is a bar to the filing of the complaint for declaration of nullity of a deed of sale in this case; and

3.

The contract between the parties is a pacto de retro sale and not an equitable mortgage.

Held: The petition is meritorious. A real party in interest is one who would be benefited or injured by the judgment, or who is entitled to the avails of the suit. Moreover, under Article 1768 of the New Civil Code, a partnership “has a juridical personality separate and distinct from that of each of the partners.” The partners cannot be held liable for the obligations of the partnership unless it is shown that the legal fiction of a different juridical personality is being used for fraudulent, unfair, or illegal purposes. In this case, the private respondent ahs not shown that A.C. Aguila & Sons, Co., as a separate juridical entity, is being used for fraudulent, unfair or illegal purposes. Moreover, the title to the subject property is in the name of A.C. Aguila & Sons, Co. and the MOA was executed between the private respondent, with the consent of her husband, and A.C. Aguila & Sons, Co., represented by the petitioner. Hence, it is

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan the partnership, not its officers or agents, which should be impleaded in any litigation involving property registered in its name. We cannot understand why both the RTC and the CA sidestepped this issue when it was squarely raised before them by the petitioner. The court’s conclusion is that the petitioner is not the real party in interest against whom this action should be prosecuted. It is unnecessary to discuss the other issues raised by him in his appeal.

United States vs. Clarin

Facts: Pedro Larin had an agreement to form a partnership and the divide the profits equally to Pedro Tarug, Eusebia Clarin, and Carlos De Guzman. Larin delivered to Tarug P172, as his contribution to the partnership, to buy and sell mangoes. Tarug, Clarin, and De Guzman were able to obtain P203 from the business of buying and selling mangoes but the three did not comply with the terms of the contract of delivering to Larin his half of the profits neither did they render him any account of the capital. Larin charged them with the crime of estafa but the provincial fiscal filed an information only against Eusebio Clarin in which the trial court sentenced the defendant to six months arresto mayor and return Pedro Larin P172 and P30.50 which is his share of the profits. The defendant appealed.

Villareal vs. Ramirez

Facts: Petitioners Luzviminda Villareal, Carmelito Jose and Jesus Jose formed a partnership for the operation of a restaurant and catering business under the name Aquarius Food House and Catering Services. Villareal was appointed general manager while Carmelito Jose was the operations manager. Respondent Donaldo Ramirez joined as partner later on, his capital contribution of P250,000 was paid by his parents, respondents Cesar and Carmelita Ramirez. Jesus Jose decided to withdrew from the partnership and his capital contribution of P250,000 was refunded to him in cash by agreement of the partners. Without prior knowledge of respondents, petitioners closed down the restaurant due to increased rental and deposited the restaurant’s furniture and equipments to respondents’ house for storage. The respondent spouses wrote the petitioners that they no longer want to continue their partnership or in reopening the restaurant and that they were accepting the latter’s offer to return their capital contribution. Several demand letters were sent but the same were left unheeded. The spouses Ramirez’ filed a complaint for a collection of sum of money from petitioners.

RTC’s Ruling: Ruled that parties had voluntarily entered into a partnership which could be dissolved at any time. Petitioners clearly intended to dissolve it when they stopped operating the restaurant and held them liable to pay respondent his capital contribution of P250,000, attorney’s fee and cost of suit.

Issue: W/N a partner in a partnership may be charged with estafa. – NO.

Held: The failure on the part of the industrial partners to return to the capitalist partner the capital brought into the partnership by the latter is not an act constituting the crime of estafa as defined in the RPC. When Larin put the P172 into the partnership which her formed with Tarug et. al., he invested his capital in the risks or benefits of the business of the purchase and sale of mangoes, and, even though he had reserved the capital and conveyed only the usufruct of his money, it would not devolve upon one of his three partners to return the his capital to him, but upon the partnership of which he himself formed part, or if it were to be done by one of the three specifically, it would be Tarug, who according to the evidence was the person who received the money directly from Larin. The P172 having been received by the partnership, the business commenced and profits accrued, the action that lies with the partner who furnishes the capital for the recovery of his money is not a criminal action for estafa, but a civil one arising from the partnership contract for a liquidation of the partnership and a levy on its assets if there should be any.

CA Ruling: 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 liabilities, petitioners were made liable to respondents in the amount of P253,114.00.

Issue: W/N petitioners are liable to respondents for the latter’s share in the partnership and W/N the CA’s computation as to the respondents’ share is correct.

Held: 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 capital was contributed to the partnership, not the petitioners, it is the partnership that must refund the equity of the retiring partners. And since it is the partnership, as a separate and distinct entity, that must refund the shares of

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan 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 which consists of all its assets. However, before the partners can be paid their shares, the creditors of the partnership must first be compensated. After all the creditors have been paid, whatever is left of the partnership assets becomes available for the payment of the partners’ shares. CA’s computation of the amount to be refunded to respondents as their share was erroneous as the exact amount of refund equivalent to respondents’ share in the partnership cannot be determined until all the partnership assets will have been liquidated, sold and converted to cash, and all partnership creditors, if any, paid. No liquidation of assets is made.

EVANGELISTA & CO. VS. ABAD SANTOS Facts: A co - partnership was formed under the name of ‘Evangelista & Co.’ Its articles of copartnership was later on amended to include Estrella Abad Santos (a judge in a City Court in Manila) as an industrial partner. She subsequently filed a suit against the partnership to pay her the share of the profits owing to her. She alleged that the partnership is paying dividends to the partners except her. The partners denied that Abad Santos was an industrial partner and that the articles of co – partnership do not express the true agreement of the parties and that Abad Santos was a mere profit sharer, not a partner. Issue: W/N Abad Santos is a partner. Held: Yes, Abad Santos is a partner. The partners are estopped from denying the articles of partnership because they admitted its genuiness and due execution. Even if it were erroneous, they failed to assail it for 8 years. Such failure shows their assent to the said articles. In addition, the partners alleged that being a judge, she cannot be an industrial partner since industrial partners are not allowed to engage in another business or profession. The SC held that such allegation has no merit because Abad Santos complied with her obligation to the partnership. The partners also failed to exercise their right of exclusion for 9 years. This shows that the argument of engaging in another profession is a mere afterthought and that the partnership actually allowed Abad Santos to exercise her profession. (Please take note of Art. 1789 of Civil Code: An industrial partner cannot engage in business for himself, unless the partnership expressly permits him to do so; and if he should do so, the capitalist partners may either exclude him from the firm or avail themselves of the benefits which he may have obtained in violation of this provision, with a right to damages in either case.)

LITTON VS. HILL

Facts: Litton sold to Ceron, a partner in a partnership called ‘Hill & Ceron,’ lumber mining claims for P1870 less half percent proliferage. Litton received only P720 leaving a balance of P1150. He then sued the partnership. The partnership now contends that it is not bound by Ceron’s acts because the other partners did not consent to such sale. It was stated in the articles of co – partnership that a contract can be signed by only one partner, provided that other partners consented to it. Issue: W/N the partnership is bound by Ceron’s acts? Held: Yes. It is true that Ceron needs consent of the partners to bind the partnership. But such agreement between partners does not affect third persons who, acting in good faith, had no knowledge of it. The SC held that a third person has no duty to inquire the authority of a person held out in public to be a partner by a partnership. A contrary interpretation to the contrary will cause hindrance in transactions. (Note Art. 1818 [par.1]: Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with whom he is dealing has knowledge of the fact that he has no such authority.)

GOQUIOLAY, ET. AL. VS. SYCIP, ET. AL. Facts: Tan Sin An and Antonio Goquiolay entered into a general commercial partnership which was to last for 10 years for the purpose of dealing in real estate. The agreement lodged upon Tan Sin An the sole management of the partnership affairs and his co – partner, Goquiolay, has no voice or participation in the management of the affairs of the co – partnership. They further agreed upon that in the event of the death of any of the partners at any time before the expiration of the 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 the said co – partnership. A general power of attorney (GPA) was executed by Goquiolay in favor of Tan Sin An which included buy, sell, alienate and convey properties of the partnership as well as obtain loans as he may deem advisable for the best interest of the co – partnership. With the authority of the GPA, the partnership through Tan Sin An purchased 3 parcels of land which was mortgaged to La Urbana Sociedad and another 46 parcels of land which which were purchased by Tan Sin An in his individual capacity, and assumed mortgaged debt thereon. The downpayment for the 46 parcels of land was advanced by Yutivo and Co. The two separate obligations were consolidated in an instrument executed by the partnership and Tan Sin An, whereby the entire 49 lots were mortgaged in favor of the Banco Hipotecario de Filipinas (as successor to La Urbana). When Tan Sin An died, his wife Kong Chia Pin was appointed administratix of the intestate estate of her deceased husband. Repeated demands for payment were made by Banco Hipotecario on the partnership and on Tan Sin An which was initially paid by Yutivo and Co. and Sing Yee Cuan and Co. (at

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan the request of Yutivo and Co.) The mortgage was eventually cancelled. Now Yutivo and Sing Yee Cuan Company filed their claims in the intestate proceedings of Tan Sin An. Kong Chai Pin filed a petition with the probate court for authority to sell all the 49 parcels of land to Washington Sycip and Betty Lee for the purpose primarily of settling the aforesaid debts of her husband and the partnership. The court ordered the execution of deed of sale in favor of Sycip and Lee in consideration of P37,000.00 and assuming payment of the claims filed by Yutivo & Co. and Sing Yee Co. Later, Sycip and Lee executed in favor of the Insular Dev’t. Co. a deed of transfer covering said 49 parcels of land.

IDOS VS. CA Facts: Irma Idos, petitioner, formed a short-lived partnership with Eddie Alarilla, respondent, for a leather tanning business. Upon the business’ liquidation, it had receivables and stocks worth P1,800,000. For the share of Alarilla, Idos issued four post-dated checks of which only three out of four checks were encashed. This impelled Alarilla to file for a BP 22 case against Idos when the latter refused to pay the value of the check after the former has demanded for it.

Upon learning the sale, the surviving partner Goquiolay filed a petition to set aside the decision of the probate court and annul the sale of the parcels of land by Kong Chai Pin in favor of Sycip and Lee and their subsequent conveyance in favor of Insular Devt. Co. in so far as the 3 lots owned by the partnership is concerned. Kong Chai Pin averred the validity of the sale as successor partner, in lieu of the late Tan Sin An. The complaint was dismissed by the lower court and appeal was directly taken to the SC by Goquiolay.

On her defense, Idos claimed that the check served only as an “assurance” of Alarilla’s share in the partnership and that it was not supposed to be deposited until the stocks have been sold. This was refuted by Alarilla and subsequently Idos was convicted by the trial court of the offense charged. The CA affirmed the decision of the trial court.

Issue: 1. W/N Kong Chai Pin acquired the managerial rights of her late husband Tan Sin An – NO. 2. W/N there was a valid sale of property to Sycip and Lee – YES. 3. W/N the consent of the other partner was necessary to perfect the sale of the partnership properties to Sycip and Betty – NO.

Held: One of the elements of the offense penalized under BP 22 is “the making, drawing and issuance of any check to apply for any account or for value.” In this case Idos showed enough evidence that the check was to be funded from receivables to be collected and goods to be sold by the partnership. First, only one of the fours check were not encashed and second, even Alarilla himself admitted that there was no consideration for the issuance of the check. Hence the check in question was not issued for any debt of or any account due and payable by the petitioner.

Held: 1. The right of exclusive management conferred upon Tan Sin An, being premised upon trust and confidence, was a mere personal right that terminated upon Tan’s demise. The provision in the articles of partnership stating that the deceased partner shall be represented by his heirs could not have referred to the managerial rights given to Tan Sin An but it more appropriately relates to the succession in the propriety interest of each partner (heir becomes limited partner only). 2. However, consonant with the articles of co – partnership providing for the continuation of the firm notwithstanding the death of one of the partners, the heir of the deceased, by never repudiating or refusing to be bound under said provision, became individual partner with Goquiolay upon Tan’s demise. By allowing Kong Chai Pin to retain control of the partnership properties from 1942 to 1949, Goquiolay is estopped from denying her legal representation of the partnership, with the power to bind it with proper contracts. By authorizing the widow of the managing partner to manage partnership property (which a limited partner could not be authorized to do), the other general partner recognized her as a general partner, and is now in estoppel to deny her position as a general partner, with authority to administer and alienate partnership property. 3. Strangers dealing with a partnership have the right to assume, in the absence of restrictive clauses in the co – partnership agreement, that every general partner has the power to bind the partnership and has the requisite authority from his co – partners.

Issue: W/N Idos violated BP 22? No

Moreover, Idos and Alarilla were still in the “winding up” of the affairs of the partnership hen the check was issued as evidenced by the fact that they still had to sell the goods on hand and collect the receivables from debtors. As provided by the Civil Code: winding-up is the process of settling business affairs after dissolution, i.e. collecting of assets previously demandable; termination is the point in time after all the partnership affairs have been wound up. Thus, since that partnership has not been terminated, the petitioner and private complainant remained as co-partners. The check was thus issued by the petitioner to complainant as would a partner to another and not as payment from a debtor to a creditor. Idos did not violate BP 22.

VILLAREAL VS. RAMIREZ Facts: In 1984, Villareal, Carmelito Jose and Jesus Jose formed a partnership with a capital of P750,000 for the operation of a restaurant and catering business. Respondent Ramirez joined as a partner in the business with the capital contribution of P250,000. In 1987, Jesus Jose withdrew from the partnership and within the same time, Villareal and Carmelito Jose, petitioners closed the business without prior knowledge of respondents.

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan In March 1987, respondents wrote a letter to petitioners stating that they were no longer interested in continuing the partnership and that they were accepting the latter’s offer to return their capital contribution. This was left unheeded by the petitioners, and by reason of which respondents filed a complaint in the RTC. RTC ruled that the parties had voluntarily entered into a partnership, which could be dissolved at any time, and this dissoution was showed by the fact that petitioners stopped operating the restaurant. On appeal, CA upheld RTC’s decision that the partnership was dissolved and it added that respondents had no right to demand the return of their capital contribution. However since petitioners did not give the proper accounting for the liquidation of the partnership, the CA took it upon itself to compute their liabilities and the amount that is proper to the respondent. The computation of which was: (capital of the partnership – outstanding obligation) / remaining partners = amount due to private respondent

Issue: Whether or not Judge Zandueta exceeded his jurisdiction and abused his discretion when he appointed the receiver in civil case 51510? No. Held: In order that a receiver may be appointed in a case, an application under oath must be filed, alleging all the facts necessary to convince the court to grant the same, for the purpose of preserving the property which is the subject of litigation and protecting thereby the rights of all the parties interested therein. Moreover the consequences or effects of such appointment should be considered in order to avoid causing irreparable injustice or injury. In the complaint for the application of the appointment of the receiver, it was evident that the plaintiff did not include the 279 members of the Association nor did they show that they were acting on behalf of the interest of the Association. Therefore the judge exceeded his jurisdiction and abused his discretion because he should have required the inclusion therein of the necessary members of the Association. Moreover, he should have also considered the fact that in the respondents’ pleadings, they did not bring the action for themselves and in the name of the Association, or for the benefit of the other members, or for the persons who might be affected by the remedy applied for.

Issue: W/N petitioners are liable to respondents for the latter’s share in the partnership? Nope. Held: Respondents have no right to demand from petitioner the return of their equity share. As found by the court 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 capital was contributed to the partnership, not to petitioners, it is the partnership that must refund the equity of the retiring partners. However, before the partners can be paid their shares, the creditors of the partnership must first be compensated. Therefore, the exact amount of refund equivalent to respondents’ onethird share in the partnership cannot be determined until all the partnership assets will have been liquidated and all partnership creditors have been paid. CA’s computation of the amount to be refunded to respondents as their share was thus erroneous.

CLAUDIO VS. ZANDUETA Facts: Petitioners Claudio, Goyena and Flores organized the “Cotabato & Cagayan Mining Association” (Association) together with the respondents Neuffer, Meyer, Skiles, Araneta and Cowper. The respondents in this case filed in CFI a civil case no. 51510 for the dissolution of the Association. One of their prayers was for the court to appoint a receiver to take charge of the properties of the association after its dissolution. The court thrugh Judge Zandueta granted the prayer of the respondents in civil case 51510 and appointed J.C. Cowper as a receiver even if the latter was not made a party to the case.

SINGSONG v ISABELLA SAWMILL Facts: Defendants Garibay, Margarita Saldajeno and Tubungbanua entered into a contract of partnership under the firm name ‘Isabela Sawmill’. Said partnership owed unpaid balances to plaintiffs. A civil case for the dissolution was filed by the spouses Saldajeno against Isabela Sawmill, Garibay and Tubungbanua. Later on said parties entered into a memorandum agreement wherein Garibay and Tubungbanua have bound themselves to answer for any and all obligations of the defunct partnership to its creditors and third persons. Defendants Garibay and Tubungbanua did not divide the assets and properties of the “Isabella Sawmill” between them, but they continued the business of said partnership under the same firm name. The remaining partners executed an “Assignment of Rights with Chattel Mortgage” in favor of Saldajeno in order to secure the performance of their obligations. However, since they defaulted in their payment a judgment was rendered in favor of Saldejano which caused the foreclosure of the CM. The Provincial Sheriff published notices that he would sell at a public auction certain properties (of the partnership) mortgaged by Garibay and Tubungbanua in favor of Saldejano and later on executed a sale in the latter’s favor, selling for 38K the assets of the partnership. Saldejano in turn sold to Pan Oriental lumber company for 45K part of the said properties she had bought at the public auction. The plaintiffs, in a civil action, sought to restrain the Sheriff from proceeding with the sales and to have the chattel mortgage declared null and void in fraud of creditors. Defendant M. Saldajeno claims that all the plaintiffs save for Oppan are creditors of Garibay and Tubungbanua and not of the defunct partnership and that said creditors had knowledge and notice that the former partnership had been dissolved.

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan The trial court ruled in favor of the plaintiffs thus, the herein defendants appealed. The court ruled that there was no CM over the properties as such were owned by the partnership and that the plaintiffs have a preferred right over it as against Saldejano. As such, the latter must pay the plaintiffs the respective amounts for which the partnership is indebted to them. Garibay and Tubungbanua are also liable to pay to the plaintiffs whatever amount that they may not collect from Saldajeno. The defendants appealed to the CA but the latter transferred the records of the case to the SC. SC: The remaining partners did not terminate the business of the partnership. It is expressly stipulated in the memorandum agreement that the remaining partners had constituted themselves as the partnership entity, the “Isabella Sawmill”. There was no liquidation of the assets of the partnership. The remaining partners continued doing business of the partnership in the name of “Isabella Sawmill”. They used the properties of the partnership. The properties mortgaged to M. Saldajeno by the remaining partners belonged to the partnership. It does not appear that the withdrawal of M. Saldajeno was published in the newspapers. The appellees and the public in general had a right to expect that whatever credit they extended to the remaining partners doing business in the name of “Isabela sawmill” could be enforced against the properties of said partnership. The judicial foreclosure executed in favor of Saldajeno did not relieve her from liability to the creditors of the partnership. Technically speaking the partnership was dissolved by the withdrawal of Saldajeno but not terminated and it continued doing business through the two remaining partners. The plaintiffs were prejudiced in their rights by the execution of the chattel mortgage over the properties of the partnership in favor of Saldajeno by the remaining partners and they had a right to file the action to nullify the chattel mortgage in question. The spouses Saldejano have a right to be reimbursed whatever amounts they shall pay the appellees by their Garibay and Tubungbanua as in the memorandum agreement, they undertook to release Saldejano from any obligation of the partnership to third persons.

YU VS. NLRC Facts: Yu was formerly the Assistant General Manager of a registered partnership, Jade Mountain. The partnership was originally composed of Bendal siblings as general partners and others who were limited partners. The partnership business consisted of exploiting marble deposit found on the land of the Cruz spouses by virtue of a memorandum agreement. Yu was hired by virtue of a Partnership Resolution as Assistant General Manager with a monthly salary. He, however, only received half of his monthly salary since he had accepted the promise of the partners that the balance would be paid when the firm shall have secured additional operating funds from abroad. Yu managed the operations and finances of the business, had overall supervision of the workers at the marble quarry and took charge of the preparation of papers relation to the exportation of the firm’s products. Without knowledge of Yu, the general partners transferred their interests while some of the limited

partners sold and transferred their interests in the partnership to respondents Co and Zapanta. Respondents continued to use the old firm name but moved the firm’s main office. A supplement to the memorandum agreement relating to the operation of the marble quarry was entered into with the Cruz spouses. The actual operations of the business continued as before. All the employees continued working in the business. Yu, however, was informed by Co that he had bought the business from the original partners and that it was up to him to decide whether or not he was responsible for the obligations of the old partnership including Yu’s salary. Yu was no longer allowed to work for the business and his salary remained unpaid. Yu filed a complaint for illegal dismissal and recovery of unpaid salary against the partnership, Co and other partners. Defendants contended that the new partnership never hired Yu as an employee. The labor arbiter found in favor of Yu and decreed his reinstatement and payment of unpaid salaries as well as backwages. The NLRC reversed the decision, ruling that the new partnership had not retained Yu in his original position and there was no law requiring the new partnership to absorb the employees of the old partnership. The claim for unpaid wages must be asserted against the old partners but they have not been served with summons. Issues: Whether the old partnership had been extinguished and replaced by a new partnership. If a new partnership was created could Yu assert his rights under his employment contract as against it? SC: The acquisition by the new partners of 82% of the partnership interest was enough to constitute a new partnership. However, dissolution does not automatically result in the termination of the legal personality of the old partnership. The legal personality of the expiring partnership persists for the limited purpose of winding up and closing of the affairs of the partnership. The new partnership simply took over the business enterprise owned by the preceding partnership and continued using the old name without winding up the business affairs of the latter, paying off its debts, liquidating and distributing its assets and the re-assembling the assets and opening a new business enterprise. Therefore, not only the retiring partners but also the new partnership itself which continued the business of the old, dissolved one are liable for the debts of the preceding partnership. The creditors of the old partnership are also the creditors of the new. Yu is entitled to enforce his claim for unpaid salaries, as well as other claims relating to his employment with the previous partnership, against the new one. The non-retention of Yu did not constitute unlawful or unjust termination as the new partnership is entitled to hire new managers. The new partnership had Co as its own new manager and the basis for Yu’s termination was redundancy. Yu is entitled to his unpaid wages and separation pay.

AMES V. DOWNING (N.Y. Surr. Cit.) [TAKEN FROM CLV BLOG] Bautista quoted from the New York decision in Ames v. Downing, 1 Brad.

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan (N.Y. Surr. Cit.) 321,[4] to describe the origin and development of limited partnerships, thus -The system of limited partnership, which was introduced by statute into this state, and subsequently very generally adopted in many other states of the Union, was borrowed from the French Code. (3 Kent. 36; Code de Commerce, 12, 23, 24.) Under the name of la societe en commandite, it has existed in France from most authentic commercial records, and in the early mercantile regulations of Maseilles and Montpelier. In the vulgar latinity of the middle ages it was styled commanda, and in Italy accomenda. In the states of Pisa and Florence, it is recognized so far back as the year 1166; also in the ordinance of Louise-le Hutin, of 1315; the statutes of Marseilles, 1253; of Geneva, of 1588. In the middle ages it was one of the most frequent combinations of trade, and was the basis of the active and widely extended commerce of the opulent maritime cities of Italy. It contributed largely to the support of the great and prosperous trade carried on along the shores of the Mediterranean, was known in Laguedoc, Provence, and Lombardy, entered into most of the industrial occupations and pursuits of the age, and even traveled under the protection of the arms of the Crusaders to the city of Jerusalem. At a period when capital was in the hands of nobles and clergy, who, from pride of caste, or cannonical regulations, could not engage directly in trade, it afforded the means of secretly embarking in commercial enterprises, and reaping the profits of such lucrative pursuits, without personal risk; and thus the vast wealth, which otherwise could have lain dormant in the coffers of the rich, became the foundation, by means of this ingenious idea, of the great commerce which made princes of the merchants, elevated to the trading class, and brought the Commons into position as an influential estate in the Commonwealth. Independent of the interest naturally attaching to the history of a mercantile contract, of such ancient origin, but so recently introduced where the general partnership, known to the common law has hitherto existed alone, I have been led to refer to the facts just stated, for the purpose of showing that the special partnership is, in fact, no novelty, but an institution of considerable antiquity, well known, understood and regulated. Ducange defines it to be: "Societas mercatorem qua uni sociorum tota negotiationis cura commendatur, certis conditionibus." It was always considered a proper partnership, societas, with certain reserves and restrictions; and in the ordinance of Louis XIV., of 1793, it is ranked as a regular partnership. In the Code of Commerce it is classed in the same manner. I may add, as an important fact, for the explanation of the distinction to which I shall shortly advert, that the French Code permits a special partnership, of which the capital may be divided into shares, or stock, transmissible from hand to hand. In such a case, the death of the special partner does not dissolve the firm, the creation of transmissible shares being a proof that the association is formed respectu negotii, and not respectu peronsarum; but even in such a partnership the death of the general partner effects a dissolution, unless it is expressly stipulated otherwise. But, says M. Troplong, in would be wrong to extend the rule that a partnership, of which the capital is divided into transmissible shares, is not dissolved by the death of a stockholder, to a special partnership, the capital of which is not so divided. The statute of New York recognizes only the latter kind of partnership, the names of the parties being required to be registered, and any change in the name working a dissolution, and turning the firm into a general partnership. Such

a partnership has always been held to be dissolved by the death of the special partner. *** The partnership remains under the dominion of the common law. It has created between the special and general partner a tie, which is not subjected to the caprice of unforseen changes; it has produced mutual relations of confidence, which the general partner cannot be forced to extend to strangers.

COMMISSIONER OF INTERNAL REVENUE VS. SUTER Facts: In 1947, A limited partnership, “William J. Suter ‘Morcoin’ Co., Ltd.”, was formed with William Suter as general partner, Julia Spirig and Gustav Carlson as limited partners, each contributing to the partnership. In 1948, Suter married Spirig and thereafter, Carlson sold his share in the partnership to Suter and his wife. The limited partnership had been filing its income tax returns (ITRs) as a corporation w/o objection from the CIR. Later in an assessment, the CIR consolidated the income of the firm and the individual incomes of partner-spouses resulting in a determination of a deficiency income tax against Suter. Suter protested and requested cancellation and withdrawal but was denied by the CIR. Suter appealed to the Court of Tax Appeals w/c reversed CIR’s decision. Issues: (1) Should the corporate personality of the partnership be disregarded for income tax purposes since partner-spouses form a single taxable unit? (2)Was the partnership dissolved after the marriage of partner-spuses and subsequent sale of Carlson of his participation in the partnership? Held: CTA decision affirmed. The limited partnership was not a universal partnership but a particular one. 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”. In the instant case, all of the contributions were fixed sums of money and neither of them were industrial partners. Thus it was not a partnership that spouses were forbidden to enter under the 1889 Civil Code. The capital contributions of partner-spouses 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. Thus, the individual interest of each did not become common property of both after their marriage. In this case the limited partnership is not a mere business conduit of the partner-spouses; it was organized for legitimate business purposes, The change in its membership brought about by the marriage is not a ground for withdrawing the partnership from coverage under §24 of the tax code

Partnership & Agency | 2B 2008-2009

PARTNERSHIP Digests  Atty. Cochingyan requiring it to pay income tax. What is taxable is the income of both spouses in their individual capacities.

JO CHUNG CANG vs. PACIFIC COMMERCIAL Co. Facts: In an insolvency proceedings of petitionerestablishment, “Sociedad Mercantil, Teck Seing & Co., Ltd.”, creditors, Pacific Commercial and others filed a motion with the Court to declare the individual partners parties to the proceeding, for each to file an inventory, and for each to be adjudicated as insolvent debtors. Issue: What is the nature of the mercantile establishment, Teck Seing & Co., Ltd.?

Held: The contract of partnership established a general partnership. By process of elimination, Teck Seing & Co., Ltd. Is not a corporation nor an accidental partnership (joint account association). 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. This requirement has not been fulfilled. Those who seek to avail themselves of the protection of laws permitting the creation of limited partnerships must the show a substantially full compliance with such laws. It must be noted that all the requirements of the Code have been met w/ the sole exception of that relating to the composition of the firm name. 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 w/c in law constitutes a partnership, they are partners although their very purpose was to avoid the creation of such relation. Here the intention of the persons making up, Teck Seing & Co., Ltd. Was to establish partnership w/c they erroneously denominated as a limited partnership.

Partnership & Agency | 2B 2008-2009