Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

July 30, 1979

PETITION FOR AUTHORITY TO CONTINUE USE OF THE FIRM NAME "SYCIP, SALAZAR, FELICIANO, HERNANDEZ & CASTILLO." LUCIANO E. SALAZAR, FLORENTINO P. FELICIANO, BENILDO G. HERNANDEZ. GREGORIO R. CASTILLO. ALBERTO P. SAN JUAN, JUAN C. REYES. JR., ANDRES G. GATMAITAN, JUSTINO H. CACANINDIN, NOEL A. LAMAN, ETHELWOLDO E. FERNANDEZ, ANGELITO C. IMPERIO, EDUARDO R. CENIZA, TRISTAN A. CATINDIG, ANCHETA K. TAN, and ALICE V. PESIGAN, petitioners.

IN THE MATTER OF THE PETITION FOR AUTHORITY TO CONTINUE USE OF THE FIRM NAME "OZAETA, ROMULO, DE LEON, MABANTA & REYES." RICARDO J. ROMULO, BENJAMIN M. DE LEON, ROMAN MABANTA, JR., JOSE MA, REYES, JESUS S. J. SAYOC, EDUARDO DE LOS ANGELES, and JOSE F. BUENAVENTURA, petitioners.

R E S O L U T I O N

MELENCIO-HERRERA, J.:ñé+.£ªwph!1

Two separate Petitions were filed before this Court 1) by the surviving partners of Atty. Alexander Sycip, who died on May 5, 1975, and 2) by the surviving partners of Atty. Herminio Ozaeta, who died on February 14, 1976, praying that they be allowed to continue using, in the names of their firms, the names of partners who had passed away. In the Court's Resolution of September 2, 1976, both Petitions were ordered consolidated.

Petitioners base their petitions on the following arguments:

1. 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, Article 1840 of the Civil Code explicitly sanctions the practice when it provides in the last paragraph that: têñ.£îhqwâ£

The use by the person or partnership continuing the business of the partnership name, or the name of a deceased partner as part thereof, shall not of itself make the individual property of the deceased partner liable for any debts contracted by such person or partnership. 1

2. 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 a deceased partner; 2 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 is no fundamental policy that is offended by the continued use by a firm of professionals of a firm name which includes the name of a deceased partner, at least where such firm name has acquired the characteristics of a "trade name." 3

3. The Canons 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 because Canon 33 of the Canons of Professional Ethics adopted by the American Bar Association declares that: têñ.£îhqwâ£

... 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. ... 4

4. 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; the stationeries now being used by them carry new letterheads indicating the years when their respective deceased partners were connected with the firm;

petitioners will notify all leading national and international law directories of the fact of their respective deceased partners' deaths. 5

5. No local custom prohibits the continued use of a deceased partner's name in a professional firm's name; 6 there is no custom or usage in the Philippines, or at least in the Greater Manila Area, which recognizes that the name of a law firm necessarily Identifies the individual members of the firm. 7

6. 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 the legal profession of most countries in the world. 8

The question involved in these Petitions first came under consideration by this Court in 1953 when a law firm in Cebu (the Deen case) continued its practice of including in its firm name that of a deceased partner, C.D. Johnston. The matter was resolved with this Court advising the firm to desist from including in their firm designation the name of C. D. Johnston, who has long been dead."

The same issue was raised before this Court in 1958 as an incident in G. R. No. L-11964, entitled Register of Deeds of Manila vs. China Banking Corporation. The law firm of Perkins & Ponce Enrile moved to intervene asamicus curiae. Before acting thereon, the Court, in a Resolution of April 15, 1957, stated that it "would like to be informed why the name of Perkins is still being used although Atty. E. A. Perkins is already dead." In a Manifestation dated May 21, 1957, the law firm of Perkins and Ponce Enrile, raising substantially the same arguments as those now being raised by petitioners, prayed that the continued use of the firm name "Perkins & Ponce Enrile" be held proper.

On June 16, 1958, this Court resolved: têñ.£îhqwâ£

After carefully considering the reasons given by Attorneys Alfonso Ponce Enrile and Associates for their continued use of the name of the deceased E. G. Perkins, the Court found no reason to depart from the policy it adopted in June 1953 when it required Attorneys Alfred P. Deen and Eddy A. Deen of Cebu City to desist from including in their firm designation, the name of C. D. Johnston, deceased. The Court believes that, in view of the personal and confidential nature of the relations between attorney and client, and the high standards demanded in the canons of professional ethics, no practice should be allowed which even in a remote degree could give rise to the possibility of deception. Said attorneys are accordingly advised to drop the name "PERKINS" from their firm name.

Petitioners herein now seek a re-examination of the policy thus far enunciated by the Court.

The Court finds no sufficient reason to depart from the rulings thus laid down.

A. Inasmuch as "Sycip, Salazar, Feliciano, Hernandez and Castillo" and "Ozaeta, Romulo, De Leon, Mabanta and Reyes" are partnerships, the use in their partnership names of the names of deceased partners will run counter to Article 1815 of the Civil Code which provides: têñ.£îhqwâ£

Art. 1815. Every partnership shall operate under a firm name, which may or may not include the name of one or more of the partners.

Those who, not being members of the partnership, include their names in the firm name, shall be subject to the liability, of a partner.

It is clearly tacit in the above provision 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, Article 1825 of the Civil Code 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. Thus, Canon 34 of the Canons of Professional Ethics "prohibits an agreement for the payment to the widow and heirs of a deceased lawyer of a percentage, either gross or net, of the fees received from the future business of the deceased lawyer's clients, both because the recipients of such division are not lawyers and because such payments will not represent service or responsibility on the part of the recipient. " Accordingly, neither the widow nor the heirs can be held liable for transactions entered into after the death of their lawyer-predecessor. There being no benefits accruing, there ran be no corresponding liability.

Prescinding the law, there could be practical objections to allowing the use by law firms of the names of deceased partners. The public relations value of the use of an old firm name can tend to create undue advantages and disadvantages in the practice of the profession. An able lawyer without connections will have to make a name for himself starting from scratch. Another able lawyer, who can join an old firm, can initially ride on that old firm's reputation established by deceased partners.

B. In regards to the last paragraph of Article 1840 of the Civil Code cited by petitioners, supra, the first factor to consider is that it is within Chapter 3 of Title IX of the Code entitled "Dissolution and Winding Up." The Article primarily deals with the exemption from liability in cases of a dissolved partnership, of the individual property of the deceased partner for debts contracted by the person or partnership which continues the business using the partnership name or the name of the deceased partner as part thereof. What the law contemplates therein is a hold-over situation preparatory to formal reorganization.

Secondly, Article 1840 treats more of a commercial partnership with a good will to protect rather than of aprofessional 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. 9têñ.£îhqwâ£

As a general rule, upon the dissolution of a commercial partnership the succeeding partners or parties have the right to carry on the business under the old name, in the absence of a stipulation forbidding it, (s)ince the name of a commercial partnership is a partnership asset inseparable from the good will of the firm. ... (60 Am Jur 2d, s 204, p. 115) (Emphasis supplied)

On the other hand, têñ.£îhqwâ£

... a professional partnership the reputation of which depends or; the individual skill of the members, such as partnerships of attorneys or physicians, has no good win to be distributed as a firm asset on its dissolution, however intrinsically valuable such skill and reputation may be, especially where there is no provision in the partnership agreement relating to good will as an asset. ... (ibid, s 203, p. 115) (Emphasis supplied)

C. 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. 10 têñ.£îhqwâ£

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 on trade or business or of holding property." 11 Thus, it has been stated that "the use of a nom de plume, assumed or trade name in law practice is improper. 12

The usual reason given for different standards of conduct being applicable to the practice of law from those pertaining to business is that the law is a profession.

Dean Pound, in his recently published contribution to the Survey of the Legal Profession, (The Lawyer from Antiquity to Modern Times, p. 5) defines a profession as "a group of men pursuing a learned art as a common calling in the spirit of public service, — no less a public service because it may incidentally be a means of livelihood."

xxx xxx xxx

Primary characteristics which distinguish the legal profession from business are:

1. A duty of public service, of which the emolument is a byproduct, and in which one may attain the highest eminence without making much money.

2. A relation as an "officer of court" to the administration of justice involving thorough sincerity, integrity, and reliability.

3. A relation to clients in the highest degree fiduciary.

4. A relation to colleagues at the bar characterized by candor, fairness, and unwillingness to resort to current business methods of advertising and encroachment on their practice, or dealing directly with their clients. 13

"The right to practice law is not a natural or constitutional right but is in the nature of a privilege or franchise. 14 It is limited to persons of good moral character with special qualifications duly ascertained and certified. 15 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." 16

D. Petitioners cited Canon 33 of the Canons of Professional Ethics of the American Bar Association" in support of their petitions.

It is true that Canon 33 does not consider as unethical the continued use of the name of a deceased or former partner in the firm name of a law partnership when such a practice is permissible by local custom but the Canon warns that care should be taken that no imposition or deception is practiced through this use.

It must be conceded that in the Philippines, no local custom permits or allows the continued use of a deceased or former partner's name in the firm names of law partnerships. Firm names, under our custom, Identify the more active and/or more senior members or partners of the law firm. A glimpse at the history of the firms of petitioners and of other law firms in this country would show how their firm names have evolved and changed from time to time as the composition of the partnership changed. têñ.£îhqwâ£

The continued use of a firm name after the death of one or more of the partners designated by it is proper only where sustained by local custom and not where by custom this purports to Identify the active members. ...

There would seem to be a question, under the working of the Canon, as to the propriety of adding the name of a new partner and at the same time retaining that of a deceased partner who was never a partner with the new one. (H.S. Drinker, op. cit., supra, at pp. 207208) (Emphasis supplied).

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.

E. Petitioners argue that U.S. Courts have consistently allowed the continued use of a deceased partner's name in the firm name of law partnerships. But that is so because it is sanctioned by custom.

In the case of Mendelsohn v. Equitable Life Assurance Society (33 N.Y.S. 2d 733) which petitioners Salazar, et al. quoted in their memorandum, the New York Supreme Court sustained the use of the firm name Alexander & Green even if none of the present ten partners of the firm bears either name because the practice was sanctioned by custom and did not offend any statutory provision or legislative policy and was adopted by agreement of the parties. The Court stated therein: têñ.£îhqwâ£

The practice sought to be proscribed has the sanction of custom and offends no statutory provision or legislative policy. Canon 33 of the Canons of Professional Ethics of both the American Bar Association and the New York State Bar Association provides in part as follows: "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 question as to local custom. Many firms in the city use the names of deceased members with the approval of other attorneys, bar associations and the courts. The Appellate Division of the First Department has considered the matter and reached The conclusion that such practice should not be prohibited. (Emphasis supplied)

xxx xxx xxx

Neither the Partnership Law nor the Penal Law prohibits the practice in question. The use of the firm name herein is also sustainable by reason of agreement between the partners. 18

Not so in this jurisdiction where there is no local custom that sanctions the practice. Custom has been defined as a rule of conduct formed by repetition of acts, uniformly observed (practiced) as a social rule, legally binding and obligatory. 19 Courts take no judicial notice of custom. A custom must be proved as a fact, according to the rules of evidence. 20 A local custom as a source of right cannot be considered by a court of justice unless such custom is properly established by competent evidence like any other fact. 21 We find such proof of the existence of a local custom, and of the elements requisite to constitute the same, wanting herein. 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.

Moreover, judicial decisions applying or interpreting the laws form part of the legal system. 22 When the Supreme Court in the Deen and Perkins cases issued its Resolutions directing lawyers to desist from including the names of deceased partners in their firm designation, it laid down a legal rule against which no custom or practice to the contrary, even if proven, can prevail. This is not to speak of our civil law which clearly ordains that a partnership is dissolved by the death of any partner. 23 Custom which are contrary to law, public order or public policy shall not be countenanced. 24

The practice of law is intimately and peculiarly related to the administration of justice and should not be considered like an ordinary "money-making trade." têñ.£îhqwâ£

... It is of the essence of a profession that it is practiced in a spirit of public service. A trade ... aims primarily at personal gain; a profession at the exercise of powers beneficial to mankind. If, as in the era of wide free opportunity, we think of free competitive self assertion as the highest good, lawyer and grocer and farmer may seem to be freely competing with their fellows in their calling in order each to acquire as much of the world's good as he may within the allowed him by law. But the member of a profession does not regard himself as in competition with his professional brethren. He is not bartering his services as is the artisan nor exchanging the products of his skill and learning as the farmer sells wheat or corn. There should be no such thing as a lawyers' or physicians' strike. The best service of the professional man is often rendered for no equivalent or for a trifling equivalent and it is his pride to do what he does in a way worthy of his profession even if done with no expectation of reward, This spirit of public service in which the profession of law is and ought to be exercised is a prerequisite of sound administration of justice according to law. The other two elements of a profession, namely, organization and pursuit of a learned art have their justification in that they secure and maintain that spirit. 25

In fine, petitioners' desire to preserve the Identity of their firms in the eyes of the public must bow to legal and ethical impediment.

ACCORDINGLY, the petitions filed herein are denied and petitioners advised to drop the names "SYCIP" and "OZAETA" from their respective firm names. Those names may, however, be included in the listing of individuals who have been partners in their firms indicating the years during which they served as such.

SO ORDERED.

Teehankee, Concepcion, Jr., Santos, Fernandez, Guerrero and De Castro, JJ., concur

Fernando, C.J. and Abad Santos, J., took no part.

 

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. 413            February 2, 1903

JOSE FERNANDEZ, plaintiff-appellant, vs.FRANCISCO DE LA ROSA, defendant-appellee.

Vicente Miranda, for appellant.Simplicio del Rosario, for appellee.

LADD, J.:

The object of this action is to obtain from the court a declaration that a partnership exists between the parties, that the plaintiff has a consequent interested in certain cascoes which are alleged to be partnership property, and that the defendant is bound to render an account of his administration of the cascoes and the business carried on with them.

Judgment was rendered for the defendant in the court below and the plaintiff appealed.

The respective claims of the parties as to the facts, so far as it is necessary to state them in order to indicate the point in dispute, may be briefly summarized. The plaintiff alleges that in January, 1900, he entered into a verbal agreement with the defendant to form a partnership for the purchase of cascoes and the carrying on of the business of letting the same for hire in Manila, the defendant to buy the cascoes and each partner to furnish for that purpose such amount of money as he could, the profits to be divided proportionately; that in the same January the plaintiff furnished the defendant 300 pesos to purchase a casco designated as No. 1515, which the defendant did purchase for 500 pesos of Doña Isabel Vales, taking the title in his own name; that the plaintiff furnished further sums aggregating about 300 pesos for repairs on this casco; that on the fifth of the following March he furnished the defendant 825 pesos to purchase another casco designated as No. 2089, which the defendant did purchase for 1,000 pesos of Luis R. Yangco, taking the title to this casco also in his own name; that in April the parties undertook to draw up articles of partnership for the purpose of embodying the same in an authentic document, but that the defendant having proposed a draft of such articles which differed materially from the terms of the earlier verbal agreement, and being unwillingly to include casco No. 2089 in the partnership, they were unable to come to any understanding and no written agreement was executed; that the defendant having in the meantime had the control and management of the two cascoes, the plaintiff made a demand for an accounting upon him, which the defendant refused to render, denying the existence of the partnership altogether.

The defendant admits that the project of forming a partnership in the casco business in which he was already engaged to some extent individually was discussed between himself and the plaintiff in January, 1900, and earlier, one Marcos Angulo, who was a partner of the plaintiff in a bakery business, being also a party to the negotiations, but he denies that any agreement was ever consummated. He denies that the plaintiff furnished any money in January, 1900, for the purchase of casco No. 1515, or for repairs on the same, but claims that he borrowed 300 pesos on his individual account in January from the bakery firm, consisting of the plaintiff, Marcos Angulo, and Antonio Angulo. The 825 pesos, which he admits he received from the plaintiff March 5, he claims was for the purchase of casco No. 1515, which he alleged was bought March 12, and he alleges that he never received anything from the defendant toward the purchase of casco No. 2089. He claims to have paid, exclusive of repairs, 1,200 pesos for the first casco and 2,000 pesos for the second one.

The case comes to this court under the old procedure, and it is therefore necessary for us the review the evidence and pass upon the facts. Our general conclusions may be stated as follows:

(1) Doña Isabel Vales, from whom the defendant bought casco No. 1515, testifies that the sale was made and the casco delivered in January, although the public document of sale was not executed till some time afterwards. This witness is apparently disinterested, and we think it is safe to rely upon the truth of her testimony, especially as the

defendant, while asserting that the sale was in March, admits that he had the casco taken to the ways for repairs in January.

It is true that the public document of sale was executed March 10, and that the vendor declares therein that she is the owner of the casco, but such declaration does not exclude proof as to the actual date of the sale, at least as against the plaintiff, who was not a party to the instrument. (Civil Code, sec. 1218.) It often happens, of course, in such cases, that the actual sale precedes by a considerable time the execution of the formal instrument of transfer, and this is what we think occurred here.

(2) The plaintiff presented in evidence the following receipt: "I have this day received from D. Jose Fernandez eight hundred and twenty-five pesos for the cost of a casco which we are to purchase in company. Manila, March 5, 1900. Francisco de la Rosa." The authenticity of this receipt is admitted by the defendant. If casco No. 1515 was bought, as we think it was, in January, the casco referred to in the receipt which the parties "are to purchase in company" must be casco No. 2089, which was bought March 22. We find this to be the fact, and that the plaintiff furnished and the defendant received 825 pesos toward the purchase of this casco, with the understanding that it was to be purchased on joint account.

(3) Antonio Fernandez testifies that in the early part of January, 1900, he saw Antonio Angulo give the defendant, in the name of the plaintiff, a sum of money, the amount of which he is unable to state, for the purchase of a casco to be used in the plaintiff's and defendant's business. Antonio Angulo also testifies, but the defendant claims that the fact that Angulo was a partner of the plaintiff rendered him incompetent as a witness under the provisions of article 643 of the then Code of Civil Procedure, and without deciding whether this point is well taken, we have discarded his testimony altogether in considering the case. The defendant admits the receipt of 300 pesos from Antonio Angulo in January, claiming, as has been stated, that it was a loan from the firm. Yet he sets up the claim that the 825 pesos which he received from the plaintiff in March were furnished toward the purchase of casco No. 1515, thereby virtually admitting that casco was purchased in company with the plaintiff. We discover nothing in the evidence to support the claim that the 300 pesos received in January was a loan, unless it may be the fact that the defendant had on previous occasions borrowed money from the bakery firm. We think all the probabilities of the case point to the truth of the evidence of Antonio Fernandez as to this transaction, and we find the fact to be that the sum in question was furnished by the plaintiff toward the purchase for joint ownership of casco No. 1515, and that the defendant received it with the understanding that it was to be used for this purposed. We also find that the plaintiff furnished some further sums of money for the repair of casco.

(4) The balance of the purchase price of each of the two cascoes over and above the amount contributed by the plaintiff was furnished by the defendant.

(5) We are unable to find upon the evidence before us that there was any specific verbal agreement of partnership, except such as may be implied from the fact as to the purchase of the casco.

(6) Although the evidence is somewhat unsatisfactory upon this point, we think it more probable than otherwise that no attempt was made to agree upon articles of partnership till about the middle of the April following the purchase of the cascoes.

(7) At some time subsequently to the failure of the attempt to agree upon partnership articles and after the defendant had been operating the cascoes for some time, the defendant returned to the plaintiff 1,125 pesos, in two different sums, one of 300 and one of 825 pesos. The only evidence in the record as to the circumstances under which the plaintiff received these sums is contained in his answer to the interrogatories proposed to him by the defendant, and the whole of his statement on this point may properly be considered in determining the fact as being in the nature of an indivisible admission. He states that both sums were received with an express reservation on his part of all his rights as a partner. We find this to be the fact.

Two questions of law are raised by the foregoing facts: (1) Did a partnership exist between the parties? (2) If such partnership existed, was it terminated as a result of the act of the defendant in receiving back the 1,125 pesos?

(1) "Partnership is a contract by which two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves." (Civil Code, art. 1665.)

The essential points upon which the minds of the parties must meet in a contract of partnership are, therefore, (1) mutual contribution to a common stock, and (2) a joint interest in the profits. If the contract contains these two

elements the partnership relation results, and the law itself fixes the incidents of this relation if the parties fail to do so. (Civil Code, secs. 1689, 1695.)

We have found as a fact that money was furnished by the plaintiff and received by the defendant with the understanding that it was to be used for the purchase of the cascoes in question. This establishes the first element of the contract, namely, mutual contribution to a common stock. The second element, namely, the intention to share profits, appears to be an unavoidable deduction from the fact of the purchase of the cascoes in common, in the absence of any other explanation of the object of the parties in making the purchase in that form, and, it may be added, in view of the admitted fact that prior to the purchase of the first casco the formation of a partnership had been a subject of negotiation between them.

Under other circumstances the relation of joint ownership, a relation distinct though perhaps not essentially different in its practical consequence from that of partnership, might have been the result of the joint purchase. If, for instance, it were shown that the object of the parties in purchasing in company had been to make a more favorable bargain for the two cascoes that they could have done by purchasing them separately, and that they had no ulterior object except to effect a division of the common property when once they had acquired it, theaffectio societatis would be lacking and the parties would have become joint tenants only; but, as nothing of this sort appears in the case, we must assume that the object of the purchase was active use and profit and not mere passive ownership in common.

It is thus apparent that a complete and perfect contract of partnership was entered into by the parties. This contract, it is true, might have been subject to a suspensive condition, postponing its operation until an agreement was reached as to the respective participation of the partners in the profits, the character of the partnership as collective or en comandita, and other details, but although it is asserted by counsel for the defendant that such was the case, there is little or nothing in the record to support this claim, and that fact that the defendant did actually go on and purchase the boat, as it would seem, before any attempt had been made to formulate partnership articles, strongly discountenances the theory.

The execution of a written agreement was not necessary in order to give efficacy to the verbal contract of partnership as a civil contract, the contributions of the partners not having been in the form of immovables or rights in immovables. (Civil Code, art. 1667.) The special provision cited, requiring the execution of a public writing in the single case mentioned and dispensing with all formal requirements in other cases, renders inapplicable to this species of contract the general provisions of article 1280 of the Civil Code.

(2) The remaining question is as to the legal effect of the acceptance by the plaintiff of the money returned to him by the defendant after the definitive failure of the attempt to agree upon partnership articles. The amount returned fell short, in our view of the facts, of that which the plaintiff had contributed to the capital of the partnership, since it did not include the sum which he had furnished for the repairs of casco No. 1515. Moreover, it is quite possible, as claimed by the plaintiff, that a profit may have been realized from the business during the period in which the defendant have been administering it prior to the return of the money, and if so he still retained that sum in his hands. For these reasons the acceptance of the money by the plaintiff did not have the effect of terminating the legal existence of the partnership by converting it into a societas leonina, as claimed by counsel for the defendant.

Did the defendant waive his right to such interest as remained to him in the partnership property by receiving the money? Did he by so doing waive his right to an accounting of the profits already realized, if any, and a participation in them in proportion to the amount he had originally contributed to the common fund? Was the partnership dissolved by the "will or withdrawal of one of the partners" under article 1705 of the Civil Code? We think these questions must be answered in the negative.

There was no intention on the part of the plaintiff in accepting the money to relinquish his rights as a partner, nor is there any evidence that by anything that he said or by anything that he omitted to say he gave the defendant any ground whatever to believe that he intended to relinquish them. On the contrary he notified the defendant that he waived none of his rights in the partnership. Nor was the acceptance of the money an act which was in itself inconsistent with the continuance of the partnership relation, as would have been the case had the plaintiff withdrawn his entire interest in the partnership. There is, therefore, nothing upon which a waiver, either express or implied, can be predicated. The defendant might have himself terminated the partnership relation at any time, if he had chosen to do so, by recognizing the plaintiff's right in the partnership property and in the profits. Having failed to do this he can not be permitted to force a dissolution upon his co-partner upon terms which the latter is unwilling to accept. We see nothing in the case which can give the transaction in question any other aspect than that of the withdrawal by one partner with the consent of the other of a portion of the common capital.

The result is that we hold and declare that a partnership was formed between the parties in January, 1900, the existence of which the defendant is bound to recognize; that cascoes No. 1515 and 2089 constitute partnership property, and that the plaintiff is entitled to an accounting of the defendant's administration of such property, and of the profits derived therefrom. This declaration does not involve an adjudication as to any disputed items of the partnership account.

The judgment of the court below will be reversed without costs, and the record returned for the execution of the judgment now rendered. So ordered.

Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. 5837           September 15, 1911

CATALINO GALLEMIT, plaintiff-appellant, vs.CEFERINO TABILIRAN, defendant-appellee.

Troadio Galicano, for appellant.Emilio Pineda, for appellee.

TORRES, J.:

This is an appeal raised by the plaintiff from the judgment rendered by the Honorable Judge Ramon Avanceña.

On March, 10, 1908, the plaintiff filed a written complaint, twice amended with the permission of the court, wherein, after its second amendment, he alleged that the plaintiff and the defendant, while residents of the municipality of Dapitan, had acquired, in joint tenancy, in or about the month of January, 1904, a parcel of land from its original owner, Lui Ganong, under a verbal, civil contract of partnership, for the price of P44; that it was stipulated that each of the said purchasers should pay one-half of the price, or P22, and that an equal division should be made between them of the land thus purchased, situate in the place called Tangian, of the barrio of Dohinob, municipality of Dapitan, sub-district of the same name, Moro Province, and bounded on the north and east by the Tangian river, on the south and west by government forests, and containing 19.968 square meters, approximately, planted with 200 abaca plants; that, notwithstanding the demands he had repeatedly made upon the defendant to divide the said land, the latter, after having promised him on several occasions that he would make such partition, finally refused, without good reason, and still continued to refuse to divide the land and, moreover, without the knowledge and consent of the plaintiff, gathered the abaca crops of the years 1904, 1905 and 1906, produced on the land in question, and extracted the hemp therefrom in the amount of about 12 arrobas to each crop, he being the sole beneficiary of the fiber obtained; that the plaintiff, relying upon the several promises made him by the defendant to divide the said land, took to the latter 1,500 seeds to be planted in the part thereof which would have fallen to the plaintiff in the division, all of which seeds died, as an indirect result of the defendant's never having made the partition he offered to make; and, that since the year 1904, up to the time of the complaint, he alone had been paying the taxes on the land, without the defendant's having contributed to their payment. There fore the plaintiff petitioned the court render judgment in his favor by ordering a partition to be made of the said land through the mediation of commissioners appointed for the purpose, and by sentencing the defendant to pay to the plaintiff, as damages, the total value of the seed lost, amounting to P50, to restore to him one-half of the abaca harvested or the value thereof, and to the payment of the costs of the case. Defendant's counsel received a copy of this amended complaint.

The defendant, Ceferino Tabiliran, having been notified and summoned, in his answer to the preceding amended complaint denied each and all of the facts alleged in each and all of the paragraphs thereof and asked that he be absolved from the complaint, with the costs against the plaintiff.

After the hearing of the case and the production of oral evidence by the parties thereto, the court, on the 10th of the same month, rendered judgment by absolving the defendant from the complaint, with the costs against the plaintiff. Counsel for the latter excepted to this judgment and by a written motion asked for its annulment, and the holding of a new trial on the ground that the findings of the court were contrary to law. This motion was denied by an order of March 11, 1909, excepted to by the plaintiff's counsel, and the proper bill of exceptions having been duly filed, the same was certified and forwarded to the clerk of this court.

This suit concerns the partition of a piece of land held pro indiviso which the plaintiff and the defendant had acquired in common from its original owner. By the refusal of the defendant to divide the property, the plaintiff was compelled to bring the proper action for the enforcement of partition, referred to in section 181 and following of the Code of Civil Procedure.

The record shows it to have been duly proved that Catalino Gallemit and Ceferino Tabiliran by mutual agreement acquired by purchase the land concerned, situate in Tangian, municipality of Dapitan, from its original owner, Luis Ganong, for the sum of P44. It was stipulated between the purchasers that they each should pay one-half of the price and that the property should be divided equally between them. The vendor testified under oath that the plaintiff Gallemit paid him the sum of P22, one-half of the price that it was incumbent upon him to pay, and that four months afterwards the defendant paid his part of the price, although, owing to the refusal of the defendant, who was then the justice of the peace of the pueblo, to comply with the stipulation made, the deed of sale was not executed, nor was a partition effected of the land which they had acquired. The defendant, instead of delivering to the plaintiff the share that belonged to the latter, the proportionate price for which the plaintiff had already paid, kept all the land which belonged to them in common, in violation of the stipulations agreed upon, notwithstanding that he paid the vendor only one-half of the price thereof.

There is community of property when the ownership of a thing belongs to different persons undividedly. (Art. 392, Civil Code.) No coownership shall be obliged to remain a party to the community. Each of them may ask at any time the division of the thing owned in common. (Art. 400 of the same code.)

Considering the terms of the claim made by the plaintiff and those of the defendant's answer, and the relation of facts contained in the judgment appealed from, it does not appear that any contract of partnership whatever was made between them for the purposes expressed in article 1665 of the Civil Code, for the sole transaction performed by them was the acquisition jointly by mutual agreement of the land in question, since it was undivided, under the condition that they each should pay one-half of the price thereof and that the property so acquired should be divided between the two purchasers; and as, under this title, the plaintiff and the defendant are the coowners of the said land, the partition or division of such property held in joint tenancy must of course be allowed, and the present possessor of the land has no right to deny the plaintiff's claim on grounds or reasons unsupported by proof.

The circumstance of the plaintiff's to present any document whatever to prove that he and the defendant did actually purchase jointly the land in litigation can not be a successful defense in the action for partition, notwithstanding the provision contained in paragraph 5 of section 335 of the Code of Civil Procedure, inasmuch as the trial record discloses that testimony was adduced, unobjected to on the part of the defendant, to prove that the purchase was actually made by both litigants of the land in question from its original owner, Luis Ganong; furthermore, it was proved that after the contract was made the deed of sale was not drawn up on account of the opposition of the defendant, Tabiliran, to this being done, with the indubitable purpose, as has been seen, of his keeping the whole of the land purchased, though he paid but one-half of its price.

In the decision rendered in the case of Conlu et al. vs. Araneta and Guanko (15 Phil. Rep., 387), the following appears in the syllabus:

The decision in the case of Thunga Chui vs. Que Bentec (1 Phil. Rep., 561) and Couto vs. Cortes (8 Phil. Rep., 459) followed to the extent of holding that "an oral contract for the sale of real estate, made prior to the enactment of the Code of Civil Procedure in Civil Actions, is binding between the parties thereto." The contract exists and is valid though it may not be clothed with the necessary form, and the effect of a noncompliance with the provisions of the statute (sec. 335 of the Code of Civil Procedure in Civil Actions) is simply complied with; but a failure to except to the evidence because it does not conform with the statute, is a waiver of the provisions of the law. If the parties to the action, during the trial, made no objection to the admissibility of oral evidence to support the contract of sale of real property, thus permitting the contract to be proved, it will be just as binding upon the parties as if it had been reduced to writing.

So that, once it has been proven by the testimony of witnesses that the purchase of a piece of real estate was made by a verbal contract between the interested parties, if the oral evidence was taken at the petition of one of them without opposition on the part of the other, such proven verbal contract, as the one herein concerned, must be held to be valid. On these premises it is, therefore, not indispensable that a written instrument be presented in order to prove a contract of purchase and sale of real estate; neither it is necessary that the record show proof of a contract of partnership, in order that a demand may be made for the division of a real property acquired jointly and undividedly by two or more interested parties, inasmuch as the land was acquired by the two purchasers, not for the purpose of undertaking any business, nor for its cultivation in partnership, but solely to divide it equally between themselves. Therefore, it is sufficient to show proof of the fact that a real property was actually purchased by them jointly, in order to insure a successful issue of an action brought to enforce partition, in accordance with the provisions of sections 181 to 196 of the Code of Civil Procedure in Civil Actions, since the plaintiff is really a coowner of the undivided land.

It is neither just nor permissible for the defendant to violate a contract made, even though verbally, with the plaintiff, and to keep without good reason, for his exclusive benefit and to the prejudice only of his coowner, the plaintiff, the whole of the land belonging to both of them in common, because each paid a half of the value thereof.

"Contracts shall be binding," prescribes article 1278 of the Civil Code, "whatever may be the form in which they may have been executed, provided the essential conditions required for their validity exist." These conditions are enumerated in article 1261 of the same code, and they are also requisite in a verbal contract that has been proved.

As the plaintiff suffered damage through the loss of the seed which could not be planted in the part of the land belonging to him, on account of the refusal of the defendant to accede to division of the property, in accordance with the agreement made, it is right and just that the latter be compelled to make indemnity for the amount of the damage occasioned through his fault.

With respect to the abaca obtained by the defendant, to his exclusive benefit, from the land of joint ownership: inasmuch as the amount and value of the fiber gathered is not shown in the trial record, there are no means available in law whereby a proper determination may be reached in the matter.

Therefore, we are of opinion that the judgment appealed from should be, as it is hereby, reversed. It is held to be proper to effect the partition of the land in question, and the judge of the Court of First Instance is directed to decree, through the proceedings prescribed by law, the division of the said land in conformity with the petition made by the plaintiff, and an indemnity, in behalf of the latter, in the sum of P50, the value of the seed lost. The delivery to the plaintiff of one-half of the abaca harvested on the land, or the value thereof, can not be ordered, on account of the lack of proof in the premises. No special finding is made as to costs. So ordered.

Mapa, Johnson, Carson and Moreland, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

 

G.R. No. 109248 July 3, 1995

GREGORIO F. ORTEGA, TOMAS O. DEL CASTILLO, JR., and BENJAMIN T. BACORRO, petitioners, vs.HON. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and JOAQUIN L. MISA,respondents.

 

VITUG, J.:

The instant petition seeks a review of the decision rendered by the Court of Appeals, dated 26 February 1993, in CA-G.R. SP No. 24638 and No. 24648 affirming in toto that of the Securities and Exchange Commission ("SEC") in SEC AC 254.

The antecedents of the controversy, summarized by respondent Commission and quoted at length by the appellate court in its decision, are hereunder restated.

The law firm of ROSS, LAWRENCE, SELPH and CARRASCOSO was duly registered in the Mercantile Registry on 4 January 1937 and reconstituted with the Securities and Exchange Commission on 4 August 1948. The SEC records show that there were several subsequent amendments to the articles of partnership on 18 September 1958, to change the firm [name] to ROSS, SELPH and CARRASCOSO; on 6 July 1965 . . . to ROSS, SELPH, SALCEDO, DEL ROSARIO, BITO & MISA; on 18 April 1972 to SALCEDO, DEL ROSARIO, BITO, MISA & LOZADA; on 4 December 1972 to SALCEDO, DEL ROSARIO, BITO, MISA & LOZADA; on 11 March 1977 to DEL ROSARIO, BITO, MISA & LOZADA; on 7 June 1977 to BITO, MISA & LOZADA; on 19 December 1980, [Joaquin L. Misa] appellees Jesus B. Bito and Mariano M. Lozada associated themselves together, as senior partners with respondents-appellees Gregorio F. Ortega, Tomas O. del Castillo, Jr., and Benjamin Bacorro, as junior partners.

On February 17, 1988, petitioner-appellant wrote the respondents-appellees a letter stating:

I am withdrawing and retiring from the firm of Bito, Misa and Lozada, effective at the end of this month.

"I trust that the accountants will be instructed to make the proper liquidation of my participation in the firm."

On the same day, petitioner-appellant wrote respondents-appellees another letter stating:

"Further to my letter to you today, I would like to have a meeting with all of you with regard to the mechanics of liquidation, and more particularly, my interest in the two floors of this building. I would like to have this resolved soon because it has to do with my own plans."

On 19 February 1988, petitioner-appellant wrote respondents-appellees another letter stating:

"The partnership has ceased to be mutually satisfactory because of the working conditions of our employees including the assistant attorneys. All my efforts to ameliorate the below subsistence level of the pay scale of our employees have been thwarted by the other partners. Not only have they refused to give meaningful increases to the employees, even

attorneys, are dressed down publicly in a loud voice in a manner that deprived them of their self-respect. The result of such policies is the formation of the union, including the assistant attorneys."

On 30 June 1988, petitioner filed with this Commission's Securities Investigation and Clearing Department (SICD) a petition for dissolution and liquidation of partnership, docketed as SEC Case No. 3384 praying that the Commission:

"1. Decree the formal dissolution and order the immediate liquidation of (the partnership of) Bito, Misa & Lozada;

"2. Order the respondents to deliver or pay for petitioner's share in the partnership assets plus the profits, rent or interest attributable to the use of his right in the assets of the dissolved partnership;

"3. Enjoin respondents from using the firm name of Bito, Misa & Lozada in any of their correspondence, checks and pleadings and to pay petitioners damages for the use thereof despite the dissolution of the partnership in the amount of at least P50,000.00;

"4. Order respondents jointly and severally to pay petitioner attorney's fees and expense of litigation in such amounts as maybe proven during the trial and which the Commission may deem just and equitable under the premises but in no case less than ten (10%) per cent of the value of the shares of petitioner or P100,000.00;

"5. Order the respondents to pay petitioner moral damages with the amount of P500,000.00 and exemplary damages in the amount of P200,000.00.

"Petitioner likewise prayed for such other and further reliefs that the Commission may deem just and equitable under the premises."

On 13 July 1988, respondents-appellees filed their opposition to the petition.

On 13 July 1988, petitioner filed his Reply to the Opposition.

On 31 March 1989, the hearing officer rendered a decision ruling that:

"[P]etitioner's withdrawal from the law firm Bito, Misa & Lozada did not dissolve the said law partnership. Accordingly, the petitioner and respondents are hereby enjoined to abide by the provisions of the Agreement relative to the matter governing the liquidation of the shares of any retiring or withdrawing partner in the partnership interest." 1

On appeal, the SEC en banc reversed the decision of the Hearing Officer and held that the withdrawal of Attorney Joaquin L. Misa had dissolved the partnership of "Bito, Misa & Lozada." The Commission ruled that, being a partnership at will, the law firm could be dissolved by any partner at anytime, such as by his withdrawal therefrom, regardless of good faith or bad faith, since no partner can be forced to continue in the partnership against his will. In its decision, dated 17 January 1990, the SEC held:

WHEREFORE, premises considered the appealed order of 31 March 1989 is hereby REVERSED insofar as it concludes that the partnership of Bito, Misa & Lozada has not been dissolved. The case is hereby REMANDED to the Hearing Officer for determination of the respective rights and obligations of the parties. 2

The parties sought a reconsideration of the above decision. Attorney Misa, in addition, asked for an appointment of a receiver to take over the assets of the dissolved partnership and to take charge of the winding up of its affairs. On 4 April 1991, respondent SEC issued an order denying reconsideration, as well as rejecting the petition for receivership, and reiterating the remand of the case to the Hearing Officer.

The parties filed with the appellate court separate appeals (docketed CA-G.R. SP No. 24638 and CA-G.R. SP No. 24648).

During the pendency of the case with the Court of Appeals, Attorney Jesus Bito and Attorney Mariano Lozada both died on, respectively, 05 September 1991 and 21 December 1991. The death of the two partners, as well as the admission of new partners, in the law firm prompted Attorney Misa to renew his application for receivership (in CA G.R. SP No. 24648). He expressed concern over the need to preserve and care for the partnership assets. The other partners opposed the prayer.

The Court of Appeals, finding no reversible error on the part of respondent Commission, AFFIRMED in toto the SEC decision and order appealed from. In fine, the appellate court held, per its decision of 26 February 1993, (a) that Atty. Misa's withdrawal from the partnership had changed the relation of the parties and inevitably caused the dissolution of the partnership; (b) that such withdrawal was not in bad faith; (c) that the liquidation should be to the extent of Attorney Misa's interest or participation in the partnership which could be computed and paid in the manner stipulated in the partnership agreement; (d) that the case should be remanded to the SEC Hearing Officer for the corresponding determination of the value of Attorney Misa's share in the partnership assets; and (e) that the appointment of a receiver was unnecessary 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.

In this petition for review under Rule 45 of the Rules of Court, petitioners confine themselves to the following issues:

1. Whether or not the Court of Appeals has erred in holding that the partnership of Bito, Misa & Lozada (now Bito, Lozada, Ortega & Castillo) is a partnership at will;

2. Whether or not the Court of Appeals has erred in holding that the withdrawal of private respondent dissolved the partnership regardless of his good or bad faith; and

3. Whether or not the Court of Appeals has erred in holding that private respondent's demand for the dissolution of the partnership so that he can get a physical partition of partnership was not made in bad faith;

to which matters we shall, accordingly, likewise limit ourselves.

A partnership that does not fix its term is a partnership at will. That the law firm "Bito, Misa & Lozada," and now "Bito, Lozada, Ortega and Castillo," is indeed such a partnership need not be unduly belabored. We quote, with approval, like did the appellate court, the findings and disquisition of respondent SEC on this matter; viz:

The partnership agreement (amended articles of 19 August 1948) does not provide for a specified period or undertaking. The "DURATION" clause simply states:

"5. DURATION. The partnership shall continue so long as mutually satisfactory and upon the death or legal incapacity of one of the partners, shall be continued by the surviving partners."

The hearing officer however opined that the partnership is one for a specific undertaking and hence not a partnership at will, citing paragraph 2 of the Amended Articles of Partnership (19 August 1948):

"2. Purpose. The purpose for which the partnership is formed, is to act as legal adviser and representative of any individual, firm and corporation engaged in commercial, industrial or other lawful businesses and occupations; to counsel and advise such persons and entities with respect to their legal and other affairs; and to appear for and represent their principals and client in all courts of justice and government departments and offices in the Philippines, and elsewhere when legally authorized to do so."

The "purpose" of the partnership is not the specific undertaking referred to in the law. Otherwise, all partnerships, which necessarily must have a purpose, would all be considered as partnerships for a definite undertaking. There would therefore be no need to provide for articles on partnership at will as none would so exist. Apparently what the law contemplates, is a specific undertaking or "project" which has a definite or definable period of completion. 3

The birth and life of a partnership at will is predicated on the mutual desire and consent of the partners. The right to choose with whom a person wishes to associate himself is the very foundation and essence of that partnership. Its continued existence is, in turn, dependent on the constancy of that mutual resolve, along with each partner's capability to give it, and the absence of a cause for dissolution provided by the law itself. Verily, any one of the partners may, at his sole pleasure, dictate a dissolution of the partnership at will. He must, however, act in good faith, not that the attendance of bad faith can prevent the dissolution of the partnership 4 but that it can result in a liability for damages. 5

In passing, neither would the presence of a period for its specific duration or the statement of a particular purpose for its creation prevent the dissolution of any partnership by an act or will of a partner. 6 Among partners, 7 mutual agency arises and the doctrine of delectus personae allows them to have the power, although not necessarily the right, to dissolve the partnership. An unjustified dissolution by the partner can subject him to a possible action for damages.

The dissolution of a partnership is the change in the relation of the parties caused by any partner ceasing to be associated in the carrying on, as might be distinguished from the winding up of, the business. 8 Upon its dissolution, the partnership continues and its legal personality is retained until the complete winding up of its business culminating in its termination. 9

The liquidation of the assets of the partnership following its dissolution is governed by various provisions of the Civil Code; 10 however, an agreement of the partners, like any other contract, is binding among them and normally takes precedence to the extent applicable over the Code's general provisions. We here take note of paragraph 8 of the "Amendment to Articles of Partnership" reading thusly:

. . . In the event of the death or retirement of any partner, his interest in the partnership shall be liquidated and paid in accordance with the existing agreements and his partnership participation shall revert to the Senior Partners for allocation as the Senior Partners may determine; provided, however, that with respect to the two (2) floors of office condominium which the partnership is now acquiring, consisting of the 5th and the 6th floors of the Alpap Building, 140 Alfaro Street, Salcedo Village, Makati, Metro Manila, their true value at the time of such death or retirement shall be determined by two (2) independent appraisers, one to be appointed (by the partnership and the other by the) retiring partner or the heirs of a deceased partner, as the case may be. In the event of any disagreement between the said appraisers a third appraiser will be appointed by them whose decision shall be final. The share of the retiring or deceased partner in the aforementioned two (2) floor office condominium shall be determined upon the basis of the valuation above mentioned which shall be paid monthly within the first ten (10) days of every month in installments of not less than P20,000.00 for the Senior Partners, P10,000.00 in the case of two (2) existing Junior Partners and P5,000.00 in the case of the new Junior Partner. 11

The term "retirement" must have been used in the articles, as we so hold, in a generic sense to mean the dissociation by a partner, inclusive of resignation or withdrawal, from the partnership that thereby dissolves it.

On the third and final issue, we accord due respect to the appellate court and respondent Commission on their common factual finding, i.e., that Attorney Misa did not act in bad faith. Public respondents viewed his withdrawal to have been spurred by "interpersonal conflict" among the partners. It would not be right, we agree, to let any of the partners remain in the partnership under such an atmosphere of animosity; certainly, not against their will. 12Indeed, for as long as the reason for withdrawal of a partner is not contrary to the dictates of justice and fairness, nor for the purpose of unduly visiting harm and damage upon the partnership, bad faith cannot be said to characterize the act. Bad faith, in the context here used, is no different from its normal concept of a conscious and intentional design to do a wrongful act for a dishonest purpose or moral obliquity.

WHEREFORE, the decision appealed from is AFFIRMED. No pronouncement on costs.

SO ORDERED.

Feliciano, Romero, Melo and Francisco, JJ., concur.

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. 127405            September 20, 2001

MARJORIE TOCAO and WILLIAM T. BELO, petitioners, vs.COURT OF APPEALS and NENITA A. ANAY, respondent.

R E S O L U T I O N

YNARES-SANTIAGO, J.:

The inherent powers of a Court to amend and control its processes and orders so as to make them conformable to law and justice includes the right to reverse itself, especially when in its honest opinion it has committed an error or mistake in judgment, and that to adhere to its decision will cause injustice to a party litigant.1

On November 14, 2001, petitioners Marjorie Tocao and William T. Belo filed a Motion for Reconsideration of our Decision dated October 4, 2000. They maintain that there was no partnership between petitioner Belo, on the one hand, and respondent Nenita A. Anay, on the other hand; and that the latter being merely an employee of petitioner Tocao.

After a careful review of the evidence presented, we are convinced that, indeed, petitioner Belo acted merely as guarantor of Geminesse Enterprise. This was categorically affirmed by respondent's own witness, Elizabeth Bantilan, during her cross-examination. Furthermore, Bantilan testified that it was Peter Lo who was the company's financier. Thus:

Q     -    You mentioned a while ago the name William Belo. Now, what is the role of William Belo with Geminesse Enterprise?

A     -    William Belo is the friend of Marjorie Tocao and he was the guarantor of the company.

Q     -    What do you mean by guarantor?

A     -    He guarantees the stocks that she owes somebody who is Peter Lo and he acts as guarantor for us. We can borrow money from him.

Q     -    You mentioned a certain Peter Lo. Who is this Peter Lo?

A     -    Peter Lo is based in Singapore.

Q     -    What is the role of Peter Lo in the Geminesse Enterprise?

A     -    He is the one fixing our orders that open the L/C.

Q     -    You mean Peter Lo is the financier?

A     -    Yes, he is the financier.

Q     -    And the defendant William Belo is merely the guarantor of Geminesse Enterprise, am I correct?

A     -    Yes, sir2

The foregoing was neither refuted nor contradicted by respondent's evidence. It should be recalled that the business relationship created between petitioner Tocao and respondent Anay was an informal partnership, which was not even recorded with the Securities and Exchange Commission. As such, it was understandable that Belo, who was after all petitioner Tocao's good friend and confidante, would occasionally participate in the affairs of the business, although never in a formal or official capacity.3 Again, respondent's witness, Elizabeth Bantilan, confirmed that petitioner Belo's presence in Geminesse Enterprise's meetings was merely as guarantor of the company and to help petitioner Tocao.4

Furthermore, no evidence was presented to show that petitioner Belo participated in the profits of the business enterprise. Respondent herself professed lack of knowledge that petitioner Belo received any share in the net income of the partnership.5 On the other hand, petitioner Tocao declared that petitioner Belo was not entitled to any share in the profits of Geminesse Enterprise.6 With no participation in the profits, petitioner Belo cannot be deemed a partner since the essence of a partnership is that the partners share in the profits and losses.7

Consequently, inasmuch as petitioner Belo was not a partner in Geminesse Enterprise, respondent had no cause of action against him and her complaint against him should accordingly be dismissed.

As regards the award of damages, petitioners argue that respondent should be deemed in bad faith for failing to account for stocks of Geminesse Enterprise amounting to P208,250.00 and that, accordingly, her claim for damages should be barred to that extent. We do not agree. Given the circumstances surrounding private respondent's sudden ouster from the partnership by petitioner Tocao, her act of withholding whatever stocks were in her possession and control was justified, if only to serve as security for her claims against the partnership. However, while we do not agree that the same renders private respondent in bad faith and should bar her claim for damages, we find that the said sum of P208,250.00 should be deducted from whatever amount is finally adjudged in her favor on the basis of the formal account of the partnership affairs to be submitted to the Regional Trial Court.

WHEREFORE, based on the foregoing, the Motion for Reconsideration of petitioners is PARTIALLY GRANTED. The Regional Trial Court of Makati is hereby ordered to DISMISS the complaint, docketed as Civil Case No. 88-509, as against petitioner William T. Belo only. The sum of P208,250.00 shall be deducted from whatever amount petitioner Marjorie Tocao shall be held liable to pay respondent after the normal accounting of the partnership affairs.

SO ORDERED.

Davide, Jr., Kapunan, and Pardo; JJ., concur.Puno, J., on official leave.

Republic of the PhilippinesSUPREME COURT

Manila

THIRD DIVISION

 

G.R. No. 136448 November 3, 1999

LIM TONG LIM, petitioner, vs.PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

 

PANGANIBAN, J.:

A partnership may be deemed to exist among parties who agree to borrow money to pursue a business and to divide the profits or losses that may arise therefrom, even if it is shown that they have not contributed any capital of their own to a "common fund." Their contribution may be in the form of credit or industry, not necessarily cash or fixed assets. Being partner, they are all liable for debts incurred by or on behalf of the partnership. The liability for a contract entered into on behalf of an unincorporated association or ostensible corporation may lie in a person who may not have directly transacted on its behalf, but reaped benefits from that contract.

The Case

In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998 Decision of the Court of Appeals in CA-GR CV41477, 1 which disposed as follows:

WHEREFORE, [there being] no reversible error in the appealed decision, the same is hereby affirmed. 2

The decretal portion of the Quezon City Regional Trial Court (RTC) ruling, which was affirmed by the CA, reads as follows:

WHEREFORE, the Court rules:

1. That plaintiff is entitled to the writ of preliminary attachment issued by this Court on September 20, 1990;

2. That defendants are jointly liable to plaintiff for the following amounts, subject to the modifications as hereinafter made by reason of the special and unique facts and circumstances and the proceedings that transpired during the trial of this case;

a. P532,045.00 representing [the] unpaid purchase price of the fishing nets covered by the Agreement plus P68,000.00 representing the unpaid price of the floats not covered by said Agreement;

b. 12% interest per annum counted from date of plaintiff's invoices and computed on their respective amounts as follows:

i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated February 9, 1990;

ii. Accrued interest for P27,904.02 on Invoice No. 14413 for P146,868.00 dated February 13, 1990;

iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated February 19, 1990;

c. P50,000.00 as and for attorney's fees, plus P8,500.00 representing P500.00 per appearance in court;

d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the nets counted from September 20, 1990 (date of attachment) to September 12, 1991 (date of auction sale);

e. Cost of suit.

With respect to the joint liability of defendants for the principal obligation or for the unpaid price of nets and floats in the amount of P532,045.00 and P68,000.00, respectively, or for the total amount P600,045.00, this Court noted that these items were attached to guarantee any judgment that may be rendered in favor of the plaintiff but, upon agreement of the parties, and, to avoid further deterioration of the nets during the pendency of this case, it was ordered sold at public auction for not less than P900,000.00 for which the plaintiff was the sole and winning bidder. The proceeds of the sale paid for by plaintiff was deposited in court. In effect, the amount of P900,000.00 replaced the attached property as a guaranty for any judgment that plaintiff may be able to secure in this case with the ownership and possession of the nets and floats awarded and delivered by the sheriff to plaintiff as the highest bidder in the public auction sale. It has also been noted that ownership of the nets [was] retained by the plaintiff until full payment [was] made as stipulated in the invoices; hence, in effect, the plaintiff attached its own properties. It [was] for this reason also that this Court earlier ordered the attachment bond filed by plaintiff to guaranty damages to defendants to be cancelled and for the P900,000.00 cash bidded and paid for by plaintiff to serve as its bond in favor of defendants.

From the foregoing, it would appear therefore that whatever judgment the plaintiff may be entitled to in this case will have to be satisfied from the amount of P900,000.00 as this amount replaced the attached nets and floats. Considering, however, that the total judgment obligation as computed above would amount to only P840,216.92, it would be inequitable, unfair and unjust to award the excess to the defendants who are not entitled to damages and who did not put up a single centavo to raise the amount of P900,000.00 aside from the fact that they are not the owners of the nets and floats. For this reason, the defendants are hereby relieved from any and all liabilities arising from the monetary judgment obligation enumerated above and for plaintiff to retain possession and ownership of the nets and floats and for the reimbursement of the P900,000.00 deposited by it with the Clerk of Court.

SO ORDERED. 3

The Facts

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract dated February 7, 1990, for the purchase of fishing nets of various sizes from the Philippine Fishing Gear Industries, Inc. (herein respondent). They claimed that they were engaged in a business venture with Petitioner Lim Tong Lim, who however was not a signatory to the agreement. The total price of the nets amounted to P532,045. Four hundred pieces of floats worth P68,000 were also sold to the Corporation. 4

The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondents filed a collection suit against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit was brought against the three in their capacities as general partners, on the allegation that "Ocean Quest Fishing Corporation" was a nonexistent corporation as shown by a Certification from the Securities and Exchange Commission. 5 On September 20, 1990, the lower court issued a Writ of Preliminary Attachment, which the sheriff

enforced by attaching the fishing nets on board F/B Lourdes which was then docked at the Fisheries Port, Navotas, Metro Manila.

Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and requesting a reasonable time within which to pay. He also turned over to respondent some of the nets which were in his possession. Peter Yao filed an Answer, after which he was deemed to have waived his right to cross-examine witnesses and to present evidence on his behalf, because of his failure to appear in subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment. 6The trial court maintained the Writ, and upon motion of private respondent, ordered the sale of the fishing nets at a public auction. Philippine Fishing Gear Industries won the bidding and deposited with the said court the sales proceeds of P900,000. 7

On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear Industries was entitled to the Writ of Attachment and that Chua, Yao and Lim, as general partners, were jointly liable to pay respondent. 8

The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the testimonies of the witnesses presented and (2) on a Compromise Agreement executed by the three 9 in Civil Case No. 1492-MN which Chua and Yao had brought against Lim in the RTC of Malabon, Branch 72, for (a) a declaration of nullity of commercial documents; (b) a reformation of contracts; (c) a declaration of ownership of fishing boats; (d) an injunction and (e) damages.10 The Compromise Agreement provided:

a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels sold in the amount of P5,750,000.00 including the fishing net. This P5,750,000.00 shall be applied as full payment for P3,250,000.00 in favor of JL Holdings Corporation and/or Lim Tong Lim;

b) If the four (4) vessel[s] and the fishing net will be sold at a higher price than P5,750,000.00 whatever will be the excess will be divided into 3: 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao;

c) If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever the deficiency shall be shouldered and paid to JL Holding Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao. 11

The trial court noted that the Compromise Agreement was silent as to the nature of their obligations, but that joint liability could be presumed from the equal distribution of the profit and loss. 21

Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed the RTC.

Ruling of the Court of Appeals

In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a fishing business and may thus be held liable as a such for the fishing nets and floats purchased by and for the use of the partnership. The appellate court ruled:

The evidence establishes that all the defendants including herein appellant Lim Tong Lim undertook a partnership for a specific undertaking, that is for commercial fishing . . . . Oviously, the ultimate undertaking of the defendants was to divide the profits among themselves which is what a partnership essentially is . . . . By a contract of partnership, two or more persons bind themselves to contribute money, property or industry to a common fund with the intention of dividing the profits among themselves (Article 1767, New Civil Code). 13

Hence, petitioner brought this recourse before this Court. 14

The Issues

In his Petition and Memorandum, Lim asks this Court to reverse the assailed Decision on the following grounds:

I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE AGREEMENT THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT EXISTED AMONG THEM.

II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR OCEAN QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS FROM PHILIPPINE FISHING, THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONER LIM AS WELL.

III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF PETITIONER LIM'S GOODS.

In determining whether petitioner may be held liable for the fishing nets and floats from respondent, the Court must resolve this key issue: whether by their acts, Lim, Chua and Yao could be deemed to have entered into a partnership.

This Court's Ruling

The Petition is devoid of merit.

First and Second Issues:

Existence of a Partnership

and Petitioner's Liability

In arguing that he should not be held liable for the equipment purchased from respondent, petitioner controverts the CA finding that a partnership existed between him, Peter Yao and Antonio Chua. He asserts that the CA based its finding on the Compromise Agreement alone. Furthermore, he disclaims any direct participation in the purchase of the nets, alleging that the negotiations were conducted by Chua and Yao only, and that he has not even met the representatives of the respondent company. Petitioner further argues that he was a lessor, not a partner, of Chua and Yao, for the "Contract of Lease " dated February 1, 1990, showed that he had merely leased to the two the main asset of the purported partnership — the fishing boat F/B Lourdes. The lease was for six months, with a monthly rental of P37,500 plus 25 percent of the gross catch of the boat.

We are not persuaded by the arguments of petitioner. The facts as found by the two lower courts clearly showed that there existed a partnership among Chua, Yao and him, pursuant to Article 1767 of the Civil Code which provides:

Art. 1767 — By the contract of partnership, two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.

Specifically, both lower courts ruled that a partnership among the three existed based on the following factual findings: 15

(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial fishing to join him, while Antonio Chua was already Yao's partner;

(2) That after convening for a few times, Lim, Chua, and Yao verbally agreed to acquire two fishing boats, the FB Lourdes and the FB Nelson for the sum of P3.35 million;

(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner Lim Tong Lim, to finance the venture.

(4) That they bought the boats from CMF Fishing Corporation, which executed a Deed of Sale over these two (2) boats in favor of Petitioner Lim Tong Lim only to serve as security for the loan extended by Jesus Lim;

(5) That Lim, Chua and Yao agreed that the refurbishing, re-equipping, repairing, dry docking and other expenses for the boats would be shouldered by Chua and Yao;

(6) That because of the "unavailability of funds," Jesus Lim again extended a loan to the partnership in the amount of P1 million secured by a check, because of which, Yao and Chua entrusted the ownership papers of two other boats, Chua's FB Lady Anne Mel and Yao's FB Tracy to Lim Tong Lim.

(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought nets from Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing Corporation," their purported business name.

(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch 72 by Antonio Chua and Peter Yao against Lim Tong Lim for (a) declaration of nullity of commercial documents; (b) reformation of contracts; (c) declaration of ownership of fishing boats; (4) injunction; and (e) damages.

(9) That the case was amicably settled through a Compromise Agreement executed between the parties-litigants the terms of which are already enumerated above.

From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to engage in a fishing business, which they started by buying boats worth P3.35 million, financed by a loan secured from Jesus Lim who was petitioner's brother. In their Compromise Agreement, they subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats, and to divide equally among them the excess or loss. These boats, the purchase and the repair of which were financed with borrowed money, fell under the term "common fund" under Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or industry. That the parties agreed that any loss or profit from the sale and operation of the boats would be divided equally among them also shows that they had indeed formed a partnership.

Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to that of the nets and the floats. The fishing nets and the floats, both essential to fishing, were obviously acquired in furtherance of their business. It would have been inconceivable for Lim to involve himself so much in buying the boat but not in the acquisition of the aforesaid equipment, without which the business could not have proceeded.

Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership engaged in the fishing business. They purchased the boats, which constituted the main assets of the partnership, and they agreed that the proceeds from the sales and operations thereof would be divided among them.

We stress that under Rule 45, a petition for review like the present case should involve only questions of law. Thus, the foregoing factual findings of the RTC and the CA are binding on this Court, absent any cogent proof that the present action is embraced by one of the exceptions to the rule. 16 In assailing the factual findings of the two lower courts, petitioner effectively goes beyond the bounds of a petition for review under Rule 45.

Compromise Agreement

Not the Sole Basis of Partnership

Petitioner argues that the appellate court's sole basis for assuming the existence of a partnership was the Compromise Agreement. He also claims that the settlement was entered into only to end the dispute among them, but not to adjudicate their preexisting rights and obligations. His arguments are baseless. The Agreement was but an embodiment of the relationship extant among the parties prior to its execution.

A proper adjudication of claimants' rights mandates that courts must review and thoroughly appraise all relevant facts. Both lower courts have done so and have found, correctly, a preexisting partnership among the parties. In

implying that the lower courts have decided on the basis of one piece of document alone, petitioner fails to appreciate that the CA and the RTC delved into the history of the document and explored all the possible consequential combinations in harmony with law, logic and fairness. Verily, the two lower courts' factual findings mentioned above nullified petitioner's argument that the existence of a partnership was based only on the Compromise Agreement.

Petitioner Was a Partner,

Not a Lessor

We are not convinced by petitioner's argument that he was merely the lessor of the boats to Chua and Yao, not a partner in the fishing venture. His argument allegedly finds support in the Contract of Lease and the registration papers showing that he was the owner of the boats, including F/B Lourdes where the nets were found.

His allegation defies logic. In effect, he would like this Court to believe that he consented to the sale of his own boats to pay a debt of Chua and Yao, with the excess of the proceeds to be divided among the three of them. No lessor would do what petitioner did. Indeed, his consent to the sale proved that there was a preexisting partnership among all three.

Verily, as found by the lower courts, petitioner entered into a business agreement with Chua and Yao, in which debts were undertaken in order to finance the acquisition and the upgrading of the vessels which would be used in their fishing business. The sale of the boats, as well as the division among the three of the balance remaining after the payment of their loans, proves beyond cavil that F/B Lourdes, though registered in his name, was not his own property but an asset of the partnership. It is not uncommon to register the properties acquired from a loan in the name of the person the lender trusts, who in this case is the petitioner himself. After all, he is the brother of the creditor, Jesus Lim.

We stress that it is unreasonable — indeed, it is absurd — for petitioner to sell his property to pay a debt he did not incur, if the relationship among the three of them was merely that of lessor-lessee, instead of partners.

Corporation by Estoppel

Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to Chua and Yao, and not to him. Again, we disagree.

Sec. 21 of the Corporation Code of the Philippines provides:

Sec. 21. Corporation by estoppel. — All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof: Provided however, That when any such ostensible corporation is sued on any transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality.

One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation.

Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be estopped from denying its corporate existence. "The reason behind this doctrine is obvious — an unincorporated association has no personality and would be incompetent to act and appropriate for itself the power and attributes of a corporation as provided by law; it cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport to act as its representatives or agents do so without authority and at their own risk. And as it is an elementary principle of law that a person who acts as an agent without authority or without a principal is himself regarded as the principal, possessed of all the right and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered into or for other acts performed as such agent. 17

The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. In the first instance, an unincorporated association, which represented itself to be a corporation, will be estopped from denying its corporate capacity in a suit against it by a third person who relied in good faith on such representation. It cannot

allege lack of personality to be sued to evade its responsibility for a contract it entered into and by virtue of which it received advantages and benefits.

On the other hand, a third party who, knowing an association to be unincorporated, nonetheless treated it as a corporation and received benefits from it, may be barred from denying its corporate existence in a suit brought against the alleged corporation. In such case, all those who benefited from the transaction made by the ostensible corporation, despite knowledge of its legal defects, may be held liable for contracts they impliedly assented to or took advantage of.

There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for the nets it sold. The only question here is whether petitioner should be held jointly 18 liable with Chua and Yao. Petitioner contests such liability, insisting that only those who dealt in the name of the ostensible corporation should be held liable. Since his name does not appear on any of the contracts and since he never directly transacted with the respondent corporation, ergo, he cannot be held liable.

Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat which has earlier been proven to be an asset of the partnership. He in fact questions the attachment of the nets, because the Writ has effectively stopped his use of the fishing vessel.

It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a corporation. Although it was never legally formed for unknown reasons, this fact alone does not preclude the liabilities of the three as contracting parties in representation of it. Clearly, under the law on estoppel, those acting on behalf of a corporation and those benefited by it, knowing it to be without valid existence, are held liable as general partners.

Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having reaped the benefits of the contract entered into by persons with whom he previously had an existing relationship, he is deemed to be part of said association and is covered by the scope of the doctrine of corporation by estoppel. We reiterate the ruling of the Court in Alonso v. Villamor: 19

A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the subtle art of movement and position, entraps and destroys the other. It is, rather, a contest in which each contending party fully and fairly lays before the court the facts in issue and then, brushing aside as wholly trivial and indecisive all imperfections of form and technicalities of procedure, asks that justice be done upon the merits. Lawsuits, unlike duels, are not to be won by a rapier's thrust. Technicality, when it deserts its proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves scant consideration from courts. There should be no vested rights in technicalities.

Third Issue:

Validity of Attachment

Finally, petitioner claims that the Writ of Attachment was improperly issued against the nets. We agree with the Court of Appeals that this issue is now moot and academic. As previously discussed, F/B Lourdes was an asset of the partnership and that it was placed in the name of petitioner, only to assure payment of the debt he and his partners owed. The nets and the floats were specifically manufactured and tailor-made according to their own design, and were bought and used in the fishing venture they agreed upon. Hence, the issuance of the Writ to assure the payment of the price stipulated in the invoices is proper. Besides, by specific agreement, ownership of the nets remained with Respondent Philippine Fishing Gear, until full payment thereof.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

 

G.R. No. 127347 November 25, 1999

ALFREDO N. AGUILA, JR., petitioner, vs.HONORABLE COURT OF APPEALS and FELICIDAD S. VDA. DE ABROGAR, respondents.

 

MENDOZA, J.:

This is a petition for review on certiorari of the decision 1 of the Court of Appeals, dated November 29, 1990, which reversed the decision of the Regional Trial Court, Branch 273, Marikina, Metro Manila, dated April 11, 1995. The trial court dismissed the petition for declaration of nullity of a deed of sale filed by private respondent Felicidad S. Vda. de Abrogar against petitioner Alfredo N. Aguila, Jr.

The facts are as follows:

Petitioner is the manager of A.C. Aguila & Sons, Co., a partnership engaged in lending activities. Private respondent and her late husband, Ruben M. Abrogar, were the registered owners of a house and lot, covered by Transfer Certificate of Title No. 195101, in Marikina, Metro Manila. On April 18, 1991, private respondent, with the consent of her late husband, and A.C. Aguila & Sons, Co., represented by petitioner, entered into a Memorandum of Agreement, which provided:

(1) That the SECOND PARTY [A.C. Aguila & Sons, Co.] shall buy the above-described property from the FIRST PARTY [Felicidad S. Vda. de Abrogar], and pursuant to this agreement, a Deed of Absolute Sale shall be executed by the FIRST PARTY conveying the property to the SECOND PARTY for and in consideration of the sum of Two Hundred Thousand Pesos (P200,000.00), Philippine Currency;

(2) The FIRST PARTY is hereby given by the SECOND PARTY the option to repurchase the said property within a period of ninety (90) days from the execution of this memorandum of agreement effective April 18, 1991, for the amount of TWO HUNDRED THIRTY THOUSAND PESOS (P230,000.00);

(3) In the event that the FIRST PARTY fail to exercise her option to repurchase the said property within a period of ninety (90) days, the FIRST PARTY is obliged to deliver peacefully the possession of the property to the SECOND PARTY within fifteen (15) days after the expiration of the said 90 day grace period;

(4) During the said grace period, the FIRST PARTY obliges herself not to file any lis pendens or whatever claims on the property nor shall be cause the annotation of say claim at the back of the title to the said property;

(5) With the execution of the deed of absolute sale, the FIRST PARTY warrants her ownership of the property and shall defend the rights of the SECOND PARTY against any party whom may have any interests over the property;

(6) All expenses for documentation and other incidental expenses shall be for the account of the FIRST PARTY;

(7) Should the FIRST PARTY fail to deliver peaceful possession of the property to the SECOND PARTY after the expiration of the 15-day grace period given in paragraph 3 above, the FIRST PARTY shall pay an amount equivalent to Five Percent of the principal amount of TWO HUNDRED PESOS (P200.00) or P10,000.00 per month of delay as and for rentals and liquidated damages;

(8) Should the FIRST PARTY fail to exercise her option to repurchase the property within ninety (90) days period above-mentioned, this memorandum of agreement shall be deemed cancelled and the Deed of Absolute Sale, executed by the parties shall be the final contract considered as entered between the parties and the SECOND PARTY shall proceed to transfer ownership of the property above described to its name free from lines and encumbrances. 2

On the same day, April 18, 1991, the parties likewise executed a deed of absolute sale, 3 dated June 11, 1991, wherein private respondent, with the consent of her late husband, sold the subject property to A.C. Aguila & Sons, Co., represented by petitioner, for P200,000,00. In a special power of attorney dated the same day, April 18, 1991, private respondent authorized petitioner to cause the cancellation of TCT No. 195101 and the issuance of a new certificate of title in the name of A.C. Aguila and Sons, Co., in the event she failed to redeem the subject property as provided in the Memorandum of Agreement. 4

Private respondent failed to redeem the property within the 90-day period as provided in the Memorandum of Agreement. Hence, pursuant to the special power of attorney mentioned above, petitioner caused the cancellation of TCT No. 195101 and the issuance of a new certificate of title in the name of A.C. Aguila and Sons, Co. 5

Private respondent then received a letter dated August 10, 1991 from Atty. Lamberto C. Nanquil, counsel for A.C. Aguila & Sons, Co., demanding that she vacate the premises within 15 days after receipt of the letter and surrender its possession peacefully to A.C. Aguila & Sons, Co. Otherwise, the latter would bring the appropriate action in court. 6

Upon the refusal of private respondent to vacate the subject premises, A.C. Aguila & Sons, Co. filed an ejectment case against her in the Metropolitan Trial Court, Branch 76, Marikina, Metro Manila. In a decision, dated April 3, 1992, the Metropolitan Trial Court ruled in favor of A.C. Aguila & Sons, Co. on the ground that private respondent did not redeem the subject property before the expiration of the 90-day period provided in the Memorandum of Agreement. Private respondent appealed first to the Regional Trial Court, Branch 163, Pasig, Metro Manila, then to the Court of Appeals, and later to this Court, but she lost in all the cases.

Private respondent then filed a petition for declaration of nullity of a deed of sale with the Regional Trial Court, Branch 273, Marikina, Metro Manila on December 4, 1993. She alleged that the signature of her husband on the deed of sale was a forgery because he was already dead when the deed was supposed to have been executed on June 11, 1991.

It appears, however, that private respondent had filed a criminal complaint for falsification against petitioner with the Office of the Prosecutor of Quezon City which was dismissed in a resolution, dated February 14, 1994.

On April 11, 1995, Branch 273 of RTC-Marikina rendered its decision:

Plaintiff's claim therefore that the Deed of Absolute Sale is a forgery because they could not personally appear before Notary Public Lamberto C. Nanquil on June 11, 1991 because her husband, Ruben Abrogar, died on May 8, 1991 or one month and 2 days before the execution of the Deed of Absolute Sale, while the plaintiff was still in the Quezon City Medical Center recuperating from wounds which she suffered at the same vehicular accident on May 8, 1991, cannot be sustained. The Court is convinced that the three required documents, to wit: the Memorandum of Agreement, the Special Power of Attorney, and the Deed of Absolute Sale were all signed by the parties on the same date on April 18, 1991. It is a common and accepted business practice of those engaged in money lending to prepare an undated absolute deed of sale in loans of money secured by real estate for various reasons, foremost of which is the evasion of taxes and surcharges. The plaintiff never questioned receiving the sum of P200,000.00 representing her loan from the defendant. Common sense dictates that an established lending and realty firm like the Aguila & Sons, Co. would not part with P200,000.00 to the Abrogar spouses, who are virtual strangers to it, without the simultaneous accomplishment and signing of all the required documents, more particularly the Deed of Absolute Sale, to protect its interest.

xxx xxx xxx

WHEREFORE, foregoing premises considered, the case in caption is hereby ORDERED DISMISSED, with costs against the plaintiff.

On appeal, the Court of Appeals reversed. It held:

The facts and evidence show that the transaction between plaintiff-appellant and defendant-appellee is indubitably an equitable mortgage. Article 1602 of the New Civil Code finds strong application in the case at bar in the light of the following circumstances.

First: The purchase price for the alleged sale with right to repurchase is unusually inadequate. The property is a two hundred forty (240) sq. m. lot. On said lot, the residential house of plaintiff-appellant stands. The property is inside a subdivision/village. The property is situated in Marikina which is already part of Metro Manila. The alleged sale took place in 1991 when the value of the land had considerably increased.

For this property, defendant-appellee pays only a measly P200,000.00 or P833.33 per square meter for both the land and for the house.

Second: The disputed Memorandum of Agreement specifically provides that plaintiff-appellant is obliged to deliver peacefully the possession of the property to the SECOND PARTY within fifteen (15) days after the expiration of the said ninety (90) day grace period. Otherwise stated, plaintiff-appellant is to retain physical possession of the thing allegedly sold.

In fact, plaintiff-appellant retained possession of the property "sold" as if they were still the absolute owners. There was no provision for maintenance or expenses, much less for payment of rent.

Third: The apparent vendor, plaintiff-appellant herein, continued to pay taxes on the property "sold". It is well-known that payment of taxes accompanied by actual possession of the land covered by the tax declaration, constitute evidence of great weight that a person under whose name the real taxes were declared has a claim of right over the land.

It is well-settled that the presence of even one of the circumstances in Article 1602 of the New Civil Code is sufficient to declare a contract of sale with right to repurchase an equitable mortgage.

Considering that plaintiff-appellant, as vendor, was paid a price which is unusually inadequate, has retained possession of the subject property and has continued paying the realty taxes over the subject property, (circumstances mentioned in par. (1) (2) and (5) of Article 1602 of the New Civil Code), it must be conclusively presumed that the transaction the parties actually entered into is an equitable mortgage, not a sale with right to repurchase. The factors cited are in support to the finding that the Deed of Sale/Memorandum of Agreement with right to repurchase is in actuality an equitable mortgage.

Moreover, it is undisputed that the deed of sale with right of repurchase was executed by reason of the loan extended by defendant-appellee to plaintiff-appellant. The amount of loan being the same with the amount of the purchase price.xxx xxx xxx

Since the real intention of the party is to secure the payment of debt, now deemed to be repurchase price: the transaction shall then be considered to be an equitable mortgage.

Being a mortgage, the transaction entered into by the parties is in the nature of a pactum commissorium which is clearly prohibited by Article 2088 of the New Civil Code. Article 2088 of the New Civil Code reads:

Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any stipulation to the contrary is null and void.

The aforequoted provision furnishes the two elements for pactum commissorium to exist: (1) that there should be a pledge or mortgage wherein a property is pledged or mortgaged by way of security for the payment of principal obligation; and (2) that there should be a stipulation for an automatic appropriation by the creditor of the thing pledged and mortgaged in the event of non-payment of the principal obligation within the stipulated period.

In this case, defendant-appellee in reality extended a P200,000.00 loan to plaintiff-appellant secured by a mortgage on the property of plaintiff-appellant. The loan was payable within ninety (90) days, the period within which plaintiff-appellant can repurchase the property. Plaintiff-appellant will pay P230,000.00 and not P200,000.00, the P30,000.00 excess is the interest for the loan extended. Failure of plaintiff-appellee to pay the P230,000.00 within the ninety (90) days period, the property shall automatically belong to defendant-appellee by virtue of the deed of sale executed.

Clearly, the agreement entered into by the parties is in the nature of pactum commissorium. Therefore, the deed of sale should be declared void as we hereby so declare to be invalid, for being violative of law.xxx xxx xxx

WHEREFORE, foregoing considered, the appealed decision is hereby REVERSED and SET ASIDE. The questioned Deed of Sale and the cancellation of the TCT No. 195101 issued in favor of plaintiff-appellant and the issuance of TCT No. 267073 issued in favor of defendant-appellee pursuant to the questioned Deed of Sale is hereby declared VOID and is hereby ANNULLED. Transfer Certificate of Title No. 195101 of the Registry of Marikina is hereby ordered REINSTATED. The loan in the amount of P230,000.00 shall be paid within ninety (90) days from the finality of this decision. In case of failure to pay the amount of P230,000.00 from the period therein stated, the property shall be sold at public auction to satisfy the mortgage debt and costs and if there is an excess, the same is to be given to the owner.

Petitioner now contends that: (1) he is not the real party in interest but A.C. Aguila & Co., against which this case should have been brought; (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 A.C. Aguila & Sons, Co. and private respondent is a pacto de retro sale and not an equitable mortgage as held by the appellate court.

The petition is meritorious.

Rule 3, §2 of the Rules of Court of 1964, under which the complaint in this case was filed, provided that "every action must be prosecuted and defended in the name of the real party in interest." 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. 7 This ruling is now embodied in Rule 3, §2 of the 1997 Revised Rules of Civil Procedure. Any decision rendered against a person who is not a real party in interest in the case cannot be executed. 8 Hence, a complaint filed against such a person should be dismissed for failure to state a cause of action. 9

Under Art. 1768 of the 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. 10 In this case, private respondent has 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 Memorandum of Agreement was executed between private respondent, with the consent of her late husband, and A.C. Aguila & Sons, Co., represented by petitioner. Hence, it is the partnership, not its officers or agents, which should be impleaded in any litigation involving property registered in its name. A violation of this rule will result in the dismissal of the complaint. 11 We cannot understand why both the Regional Trial Court and the Court of Appeals sidestepped this issue when it was squarely raised before them by petitioner.

Our conclusion that petitioner is not the real party in interest against whom this action should be prosecuted makes it unnecessary to discuss the other issues raised by him in this appeal.

WHEREFORE, the decision of the Court of Appeals is hereby REVERSED and the complaint against petitioner is DISMISSED.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

SECOND DIVISION

G.R. No. 126881             October 3, 2000

HEIRS OF TAN ENG KEE, petitioners, vs.COURT OF APPEALS and BENGUET LUMBER COMPANY, represented by its President TAN ENG LAY,respondents.

DE LEON, JR., J.:

In this petition for review on certiorari, petitioners pray for the reversal of the Decision1 dated March 13, 1996 of the former Fifth Division2 of the Court of Appeals in CA-G.R. CV No. 47937, the dispositive portion of which states:

THE FOREGOING CONSIDERED, the appealed decision is hereby set aside, and the complaint dismissed.

The facts are:

Following the death of Tan Eng Kee on September 13, 1984, Matilde Abubo, the common-law spouse of the decedent, joined by their children Teresita, Nena, Clarita, Carlos, Corazon and Elpidio, collectively known as herein petitioners HEIRS OF TAN ENG KEE, filed suit against the decedent's brother TAN ENG LAY on February 19, 1990. The complaint,3 docketed as Civil Case No. 1983-R in the Regional Trial Court of Baguio City was for accounting, liquidation and winding up of the alleged partnership formed after World War II between Tan Eng Kee and Tan Eng Lay. On March 18, 1991, the petitioners filed an amended complaint4 impleading private respondent herein BENGUET LUMBER COMPANY, as represented by Tan Eng Lay. The amended complaint was admitted by the trial court in its Order dated May 3, 1991.5

The amended complaint principally alleged that after the second World War, Tan Eng Kee and Tan Eng Lay, pooling their resources and industry together, entered into a partnership engaged in the business of selling lumber and hardware and construction supplies. They named their enterprise "Benguet Lumber" which they jointly managed until Tan Eng Kee's death. Petitioners herein averred that the business prospered due to the hard work and thrift of the alleged partners. However, they claimed that in 1981, Tan Eng Lay and his children caused the conversion of the partnership "Benguet Lumber" into a corporation called "Benguet Lumber Company." The incorporation was purportedly a ruse to deprive Tan Eng Kee and his heirs of their rightful participation in the profits of the business. Petitioners prayed for accounting of the partnership assets, and the dissolution, winding up and liquidation thereof, and the equal division of the net assets of Benguet Lumber.

After trial, Regional Trial Court of Baguio City, Branch 7 rendered judgment6 on April 12, 1995, to wit:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered:

a) Declaring that Benguet Lumber is a joint venture which is akin to a particular partnership;

b) Declaring that the deceased Tan Eng Kee and Tan Eng Lay are joint adventurers and/or partners in a business venture and/or particular partnership called Benguet Lumber and as such should share in the profits and/or losses of the business venture or particular partnership;

c) Declaring that the assets of Benguet Lumber are the same assets turned over to Benguet Lumber Co. Inc. and as such the heirs or legal representatives of the deceased Tan Eng Kee have a legal right to share in said assets;

d) Declaring that all the rights and obligations of Tan Eng Kee as joint adventurer and/or as partner in a particular partnership have descended to the plaintiffs who are his legal heirs.

e) Ordering the defendant Tan Eng Lay and/or the President and/or General Manager of Benguet Lumber Company Inc. to render an accounting of all the assets of Benguet Lumber Company, Inc. so the plaintiffs know their proper share in the business;

f) Ordering the appointment of a receiver to preserve and/or administer the assets of Benguet Lumber Company, Inc. until such time that said corporation is finally liquidated are directed to submit the name of any person they want to be appointed as receiver failing in which this Court will appoint the Branch Clerk of Court or another one who is qualified to act as such.

g) Denying the award of damages to the plaintiffs for lack of proof except the expenses in filing the instant case.

h) Dismissing the counter-claim of the defendant for lack of merit.

SO ORDERED.

Private respondent sought relief before the Court of Appeals which, on March 13, 1996, rendered the assailed decision reversing the judgment of the trial court. Petitioners' motion for reconsideration7 was denied by the Court of Appeals in a Resolution8 dated October 11, 1996.

Hence, the present petition.

As a side-bar to the proceedings, petitioners filed Criminal Case No. 78856 against Tan Eng Lay and Wilborn Tan for the use of allegedly falsified documents in a judicial proceeding. Petitioners complained that Exhibits "4" to "4-U" offered by the defendants before the trial court, consisting of payrolls indicating that Tan Eng Kee was a mere employee of Benguet Lumber, were fake, based on the discrepancy in the signatures of Tan Eng Kee. They also filed Criminal Cases Nos. 78857-78870 against Gloria, Julia, Juliano, Willie, Wilfredo, Jean, Mary and Willy, all surnamed Tan, for alleged falsification of commercial documents by a private individual. On March 20, 1999, the Municipal Trial Court of Baguio City, Branch 1, wherein the charges were filed, rendered judgment9 dismissing the cases for insufficiency of evidence.

In their assignment of errors, petitioners claim that:

I

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP BETWEEN THE LATE TAN ENG KEE AND HIS BROTHER TAN ENG LAY BECAUSE: (A) THERE WAS NO FIRM ACCOUNT; (B) THERE WAS NO FIRM LETTERHEADS SUBMITTED AS EVIDENCE; (C) THERE WAS NO CERTIFICATE OF PARTNERSHIP; (D) THERE WAS NO AGREEMENT AS TO PROFITS AND LOSSES; AND (E) THERE WAS NO TIME FIXED FOR THE DURATION OF THE PARTNERSHIP (PAGE 13, DECISION).

II

THE HONORABLE COURT OF APPEALS ERRED IN RELYING SOLELY ON THE SELF-SERVING TESTIMONY OF RESPONDENT TAN ENG LAY THAT BENGUET LUMBER WAS A SOLE PROPRIETORSHIP AND THAT TAN ENG KEE WAS ONLY AN EMPLOYEE THEREOF.

III

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE FOLLOWING FACTS WHICH WERE DULY SUPPORTED BY EVIDENCE OF BOTH PARTIES DO NOT SUPPORT THE EXISTENCE OF A PARTNERSHIP JUST BECAUSE THERE WAS NO ARTICLES OF PARTNERSHIP DULY RECORDED BEFORE THE SECURITIES AND EXCHANGE COMMISSION:

a. THAT THE FAMILIES OF TAN ENG KEE AND TAN ENG LAY WERE ALL LIVING AT THE BENGUET LUMBER COMPOUND;

b. THAT BOTH TAN ENG LAY AND TAN ENG KEE WERE COMMANDING THE EMPLOYEES OF BENGUET LUMBER;

c. THAT BOTH TAN ENG KEE AND TAN ENG LAY WERE SUPERVISING THE EMPLOYEES THEREIN;

d. THAT TAN ENG KEE AND TAN ENG LAY WERE THE ONES DETERMINING THE PRICES OF STOCKS TO BE SOLD TO THE PUBLIC; AND

e. THAT TAN ENG LAY AND TAN ENG KEE WERE THE ONES MAKING ORDERS TO THE SUPPLIERS (PAGE 18, DECISION).

IV

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP JUST BECAUSE THE CHILDREN OF THE LATE TAN ENG KEE: ELPIDIO TAN AND VERONICA CHOI, TOGETHER WITH THEIR WITNESS BEATRIZ TANDOC, ADMITTED THAT THEY DO NOT KNOW WHEN THE ESTABLISHMENT KNOWN IN BAGUIO CITY AS BENGUET LUMBER WAS STARTED AS A PARTNERSHIP (PAGE 16-17, DECISION).

V

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP BETWEEN THE LATE TAN ENG KEE AND HIS BROTHER TAN ENG LAY BECAUSE THE PRESENT CAPITAL OR ASSETS OF BENGUET LUMBER IS DEFINITELY MORE THAN P3,000.00 AND AS SUCH THE EXECUTION OF A PUBLIC INSTRUMENT CREATING A PARTNERSHIP SHOULD HAVE BEEN MADE AND NO SUCH PUBLIC INSTRUMENT ESTABLISHED BY THE APPELLEES (PAGE 17, DECISION).

As a premise, we reiterate the oft-repeated rule that findings of facts of the Court of Appeals will not be disturbed on appeal if such are supported by the evidence.10 Our jurisdiction, it must be emphasized, does not include review of factual issues. Thus:

Filing of petition with Supreme Court. — A party desiring to appeal by certiorari from a judgment or final order or resolution of the Court of Appeals, the Sandiganbayan, the Regional Trial Court or other courts whenever authorized by law, may file with the Supreme Court a verified petition for review on certiorari. The petition shall raise only questions of law which must be distinctly set forth.11 [emphasis supplied]

Admitted exceptions have been recognized, though, and when present, may compel us to analyze the evidentiary basis on which the lower court rendered judgment. Review of factual issues is therefore warranted:

(1) when the factual findings of the Court of Appeals and the trial court are contradictory;

(2) when the findings are grounded entirely on speculation, surmises, or conjectures;

(3) when the inference made by the Court of Appeals from its findings of fact is manifestly mistaken, absurd, or impossible;

(4) when there is grave abuse of discretion in the appreciation of facts;

(5) when the appellate court, in making its findings, goes beyond the issues of the case, and such findings are contrary to the admissions of both appellant and appellee;

(6) when the judgment of the Court of Appeals is premised on a misapprehension of facts;

(7) when the Court of Appeals fails to notice certain relevant facts which, if properly considered, will justify a different conclusion;

(8) when the findings of fact are themselves conflicting;

(9) when the findings of fact are conclusions without citation of the specific evidence on which they are based; and

(10) when the findings of fact of the Court of Appeals are premised on the absence of evidence but such findings are contradicted by the evidence on record.12

In reversing the trial court, the Court of Appeals ruled, to wit:

We note that the Court a quo over extended the issue because while the plaintiffs mentioned only the existence of a partnership, the Court in turn went beyond that by justifying the existence of a joint venture.

When mention is made of a joint venture, it would presuppose parity of standing between the parties, equal proprietary interest and the exercise by the parties equally of the conduct of the business, thus:

xxx             xxx             xxx

We have the admission that the father of the plaintiffs was not a partner of the Benguet Lumber before the war. The appellees however argued that (Rollo, p. 104; Brief, p. 6) this is because during the war, the entire stocks of the pre-war Benguet Lumber were confiscated if not burned by the Japanese. After the war, because of the absence of capital to start a lumber and hardware business, Lay and Kee pooled the proceeds of their individual businesses earned from buying and selling military supplies, so that the common fund would be enough to form a partnership, both in the lumber and hardware business. That Lay and Kee actually established the Benguet Lumber in Baguio City, was even testified to by witnesses. Because of the pooling of resources, the post-war Benguet Lumber was eventually established. That the father of the plaintiffs and Lay were partners, is obvious from the fact that: (1) they conducted the affairs of the business during Kee's lifetime, jointly, (2) they were the ones giving orders to the employees, (3) they were the ones preparing orders from the suppliers, (4) their families stayed together at the Benguet Lumber compound, and (5) all their children were employed in the business in different capacities.

xxx             xxx             xxx

It is obvious that there was no partnership whatsoever. Except for a firm name, there was no firm account, no firm letterheads submitted as evidence, no certificate of partnership, no agreement as to profits and losses, and no time fixed for the duration of the partnership. There was even no attempt to submit an accounting corresponding to the period after the war until Kee's death in 1984. It had no business book, no written account nor any memorandum for that matter and no license mentioning the existence of a partnership [citation omitted].

Also, the exhibits support the establishment of only a proprietorship. The certification dated March 4, 1971, Exhibit "2", mentioned co-defendant Lay as the only registered owner of the Benguet Lumber and Hardware. His application for registration, effective 1954, in fact mentioned that his business started in 1945 until 1985 (thereafter, the incorporation). The deceased, Kee, on the other hand, was merely an employee of the Benguet Lumber Company, on the basis of his SSS coverage effective 1958, Exhibit "3". In the Payrolls, Exhibits "4" to "4-U", inclusive, for the years 1982 to 1983, Kee was similarly listed only as an employee; precisely, he was on the payroll listing. In the Termination Notice, Exhibit "5", Lay was mentioned also as the proprietor.

xxx             xxx             xxx

We would like to refer to Arts. 771 and 772, NCC, that a partner [sic] may be constituted in any form, but when an immovable is constituted, the execution of a public instrument becomes necessary. This is equally true if the capitalization exceeds P3,000.00, in which case a public instrument is also necessary, and which is to be recorded with the Securities and Exchange Commission. In this case at bar, we can easily assume

that the business establishment, which from the language of the appellees, prospered (pars. 5 & 9, Complaint), definitely exceeded P3,000.00, in addition to the accumulation of real properties and to the fact that it is now a compound. The execution of a public instrument, on the other hand, was never established by the appellees.

And then in 1981, the business was incorporated and the incorporators were only Lay and the members of his family. There is no proof either that the capital assets of the partnership, assuming them to be in existence, were maliciously assigned or transferred by Lay, supposedly to the corporation and since then have been treated as a part of the latter's capital assets, contrary to the allegations in pars. 6, 7 and 8 of the complaint.

These are not evidences supporting the existence of a partnership:

1) That Kee was living in a bunk house just across the lumber store, and then in a room in the bunk house in Trinidad, but within the compound of the lumber establishment, as testified to by Tandoc; 2) that both Lay and Kee were seated on a table and were "commanding people" as testified to by the son, Elpidio Tan; 3) that both were supervising the laborers, as testified to by Victoria Choi; and 4) that Dionisio Peralta was supposedly being told by Kee that the proceeds of the 80 pieces of the G.I. sheets were added to the business.

Partnership presupposes the following elements [citation omitted]: 1) a contract, either oral or written. However, if it involves real property or where the capital is P3,000.00 or more, the execution of a contract is necessary; 2) the capacity of the parties to execute the contract; 3) money property or industry contribution; 4) community of funds and interest, mentioning equality of the partners or one having a proportionate share in the benefits; and 5) intention to divide the profits, being the true test of the partnership. The intention to join in the business venture for the purpose of obtaining profits thereafter to be divided, must be established. We cannot see these elements from the testimonial evidence of the appellees.

As can be seen, the appellate court disputed and differed from the trial court which had adjudged that TAN ENG KEE and TAN ENG LAY had allegedly entered into a joint venture. In this connection, we have held that whether a partnership exists is a factual matter; consequently, since the appeal is brought to us under Rule 45, we cannot entertain inquiries relative to the correctness of the assessment of the evidence by the court a quo.13 Inasmuch as the Court of Appeals and the trial court had reached conflicting conclusions, perforce we must examine the record to determine if the reversal was justified.

The primordial issue here is whether Tan Eng Kee and Tan Eng Lay were partners in Benguet Lumber. A contract of partnership is defined by law as one where:

. . . 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.

Two or more persons may also form a partnership for the exercise of a profession.14

Thus, in order to constitute a partnership, it must be established that (1) two or more persons bound themselves to contribute money, property, or industry to a common fund, and (2) they intend to divide the profits among themselves.15 The agreement need not be formally reduced into writing, since statute allows the oral constitution of a partnership, save in two instances: (1) when immovable property or real rights are contributed,16 and (2) when the partnership has a capital of three thousand pesos or more.17 In both cases, a public instrument is required.18 An inventory to be signed by the parties and attached to the public instrument is also indispensable to the validity of the partnership whenever immovable property is contributed to the partnership.19

The trial court determined that Tan Eng Kee and Tan Eng Lay had entered into a joint venture, which it said is akin to a particular partnership.20 A particular partnership is distinguished from a joint adventure, to wit:

(a) A joint adventure (an American concept similar to our joint accounts) is a sort of informal partnership, with no firm name and no legal personality. In a joint account, the participating merchants can transact business under their own name, and can be individually liable therefor.

(b) Usually, but not necessarily a joint adventure is limited to a SINGLE TRANSACTION, although the business of pursuing to a successful termination may continue for a number of years; a partnership generally relates to a continuing business of various transactions of a certain kind.21

A joint venture "presupposes generally a parity of standing between the joint co-ventures or partners, in which each party has an equal proprietary interest in the capital or property contributed, and where each party exercises equal rights in the conduct of the business."22 Nonetheless, in Aurbach, et. al. v. Sanitary Wares Manufacturing Corporation, et. al.,23 we expressed the view that a joint venture may be likened to a particular partnership, thus:

The legal concept of a joint venture is of common law origin. It has no precise legal definition, but it has been generally understood to mean an organization formed for some temporary purpose. (Gates v. Megargel, 266 Fed. 811 [1920]) It is hardly distinguishable from the partnership, since their elements are similar — community of interest in the business, sharing of profits and losses, and a mutual right of control. (Blackner v. McDermott, 176 F. 2d. 498, [1949]; Carboneau v. Peterson, 95 P.2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P.2d. 12 289 P.2d. 242 [1955]). The main distinction cited by most opinions in common law jurisdiction is that the partnership contemplates a general business with some degree of continuity, while the joint venture is formed for the execution of a single transaction, and is thus of a temporary nature. (Tufts v. Mann. 116 Cal. App. 170, 2 P. 2d. 500 [1931]; Harmon v. Martin, 395 Ill. 595, 71 NE 2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]). This observation is not entirely accurate in this jurisdiction, since under the Civil Code, a partnership may be particular or universal, and a particular partnership may have for its object a specific undertaking. (Art. 1783, Civil Code). It would seem therefore that under Philippine law, a joint venture is a form of partnership and should thus be governed by the law of partnerships. The Supreme Court has however recognized a distinction between these two business forms, and has held that although a corporation cannot enter into a partnership contract, it may however engage in a joint venture with others. (At p. 12, Tuazon v. Bolaños, 95 Phil. 906 [1954]) (Campos and Lopez-Campos Comments, Notes and Selected Cases, Corporation Code 1981).

Undoubtedly, the best evidence would have been the contract of partnership itself, or the articles of partnership but there is none. The alleged partnership, though, was never formally organized. In addition, petitioners point out that the New Civil Code was not yet in effect when the partnership was allegedly formed sometime in 1945, although the contrary may well be argued that nothing prevented the parties from complying with the provisions of the New Civil Code when it took effect on August 30, 1950. But all that is in the past. The net effect, however, is that we are asked to determine whether a partnership existed based purely on circumstantial evidence. A review of the record persuades us that the Court of Appeals correctly reversed the decision of the trial court. The evidence presented by petitioners falls short of the quantum of proof required to establish a partnership.

Unfortunately for petitioners, Tan Eng Kee has passed away. Only he, aside from Tan Eng Lay, could have expounded on the precise nature of the business relationship between them. In the absence of evidence, we cannot accept as an established fact that Tan Eng Kee allegedly contributed his resources to a common fund for the purpose of establishing a partnership. The testimonies to that effect of petitioners' witnesses is directly controverted by Tan Eng Lay. It should be noted that it is not with the number of witnesses wherein preponderance lies;24 the quality of their testimonies is to be considered. None of petitioners' witnesses could suitably account for the beginnings of Benguet Lumber Company, except perhaps for Dionisio Peralta whose deceased wife was related to Matilde Abubo.25 He stated that when he met Tan Eng Kee after the liberation, the latter asked the former to accompany him to get 80 pieces of G.I. sheets supposedly owned by both brothers.26Tan Eng Lay, however, denied knowledge of this meeting or of the conversation between Peralta and his brother.27 Tan Eng Lay consistently testified that he had his business and his brother had his, that it was only later on that his said brother, Tan Eng Kee, came to work for him. Be that as it may, co-ownership or co-possession (specifically here, of the G.I. sheets) is not an indicium of the existence of a partnership.28

Besides, it is indeed odd, if not unnatural, that despite the forty years the partnership was allegedly in existence, Tan Eng Kee never asked for an accounting. The essence of a partnership is that the partners share in the profits and losses.29 Each has the right to demand an accounting as long as the partnership exists.30 We have allowed a scenario wherein "[i]f excellent relations exist among the partners at the start of the business and all the partners are more interested in seeing the firm grow rather than get immediate returns, a deferment of sharing in the profits is perfectly plausible."31 But in the situation in the case at bar, the deferment, if any, had gone on too long to be plausible. A person is presumed to take ordinary care of his concerns.32 As we explained in another case:

In the first place, plaintiff did not furnish the supposed P20,000.00 capital. In the second place, she did not furnish any help or intervention in the management of the theatre. In the third place, it does not appear that

she has even demanded from defendant any accounting of the expenses and earnings of the business. Were she really a partner, her first concern should have been to find out how the business was progressing, whether the expenses were legitimate, whether the earnings were correct, etc. She was absolutely silent with respect to any of the acts that a partner should have done; all that she did was to receive her share of P3,000.00 a month, which cannot be interpreted in any manner than a payment for the use of the premises which she had leased from the owners. Clearly, plaintiff had always acted in accordance with the original letter of defendant of June 17, 1945 (Exh. "A"), which shows that both parties considered this offer as the real contract between them.33 [emphasis supplied]

A demand for periodic accounting is evidence of a partnership.34 During his lifetime, Tan Eng Kee appeared never to have made any such demand for accounting from his brother, Tang Eng Lay.

This brings us to the matter of Exhibits "4" to "4-U" for private respondents, consisting of payrolls purporting to show that Tan Eng Kee was an ordinary employee of Benguet Lumber, as it was then called. The authenticity of these documents was questioned by petitioners, to the extent that they filed criminal charges against Tan Eng Lay and his wife and children. As aforesaid, the criminal cases were dismissed for insufficiency of evidence. Exhibits "4" to "4-U" in fact shows that Tan Eng Kee received sums as wages of an employee. In connection therewith, Article 1769 of the Civil Code provides:

In determining whether a partnership exists, these rules shall apply:

(1) Except as provided by Article 1825, persons who are not partners as to each other are not partners as to third persons;

(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of the property;

(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property which the returns are derived;

(4) The receipt by a person of a share of the profits of a business is a prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment:

(a) As a debt by installment or otherwise;

(b) As wages of an employee or rent to a landlord;

(c) As an annuity to a widow or representative of a deceased partner;

(d) As interest on a loan, though the amount of payment vary with the profits of the business;

(e) As the consideration for the sale of a goodwill of a business or other property by installments or otherwise.

In the light of the aforequoted legal provision, we conclude that Tan Eng Kee was only an employee, not a partner. Even if the payrolls as evidence were discarded, petitioners would still be back to square one, so to speak, since they did not present and offer evidence that would show that Tan Eng Kee received amounts of money allegedly representing his share in the profits of the enterprise. Petitioners failed to show how much their father, Tan Eng Kee, received, if any, as his share in the profits of Benguet Lumber Company for any particular period. Hence, they failed to prove that Tan Eng Kee and Tan Eng Lay intended to divide the profits of the business between themselves, which is one of the essential features of a partnership.

Nevertheless, petitioners would still want us to infer or believe the alleged existence of a partnership from this set of circumstances: that Tan Eng Lay and Tan Eng Kee were commanding the employees; that both were supervising the employees; that both were the ones who determined the price at which the stocks were to be sold; and that both placed orders to the suppliers of the Benguet Lumber Company. They also point out that the families of the brothers

Tan Eng Kee and Tan Eng Lay lived at the Benguet Lumber Company compound, a privilege not extended to its ordinary employees.

However, private respondent counters that:

Petitioners seem to have missed the point in asserting that the above enumerated powers and privileges granted in favor of Tan Eng Kee, were indicative of his being a partner in Benguet Lumber for the following reasons:

(i) even a mere supervisor in a company, factory or store gives orders and directions to his subordinates. So long, therefore, that an employee's position is higher in rank, it is not unusual that he orders around those lower in rank.

(ii) even a messenger or other trusted employee, over whom confidence is reposed by the owner, can order materials from suppliers for and in behalf of Benguet Lumber. Furthermore, even a partner does not necessarily have to perform this particular task. It is, thus, not an indication that Tan Eng Kee was a partner.

(iii) although Tan Eng Kee, together with his family, lived in the lumber compound and this privilege was not accorded to other employees, the undisputed fact remains that Tan Eng Kee is the brother of Tan Eng Lay. Naturally, close personal relations existed between them. Whatever privileges Tan Eng Lay gave his brother, and which were not given the other employees, only proves the kindness and generosity of Tan Eng Lay towards a blood relative.

(iv) and even if it is assumed that Tan Eng Kee was quarreling with Tan Eng Lay in connection with the pricing of stocks, this does not adequately prove the existence of a partnership relation between them. Even highly confidential employees and the owners of a company sometimes argue with respect to certain matters which, in no way indicates that they are partners as to each other.35

In the instant case, we find private respondent's arguments to be well-taken. Where circumstances taken singly may be inadequate to prove the intent to form a partnership, nevertheless, the collective effect of these circumstances may be such as to support a finding of the existence of the parties' intent.36 Yet, in the case at bench, even the aforesaid circumstances when taken together are not persuasive indicia of a partnership. They only tend to show that Tan Eng Kee was involved in the operations of Benguet Lumber, but in what capacity is unclear. We cannot discount the likelihood that as a member of the family, he occupied a niche above the rank-and-file employees. He would have enjoyed liberties otherwise unavailable were he not kin, such as his residence in the Benguet Lumber Company compound. He would have moral, if not actual, superiority over his fellow employees, thereby entitling him to exercise powers of supervision. It may even be that among his duties is to place orders with suppliers. Again, the circumstances proffered by petitioners do not provide a logical nexus to the conclusion desired; these are not inconsistent with the powers and duties of a manager, even in a business organized and run as informally as Benguet Lumber Company.

There being no partnership, it follows that there is no dissolution, winding up or liquidation to speak of. Hence, the petition must fail.

WHEREFORE, the petition is hereby denied, and the appealed decision of the Court of Appeals is herebyAFFIRMED in toto. No pronouncement as to costs.

SO ORDERED.

Republic of the PhilippinesSUPREME COURT

Manila

FIRST DIVISION

G.R. No. 78133 October 18, 1988

MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners, vs.THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

De la Cuesta, De las Alas and Callanta Law Offices for petitioners.

The Solicitor General for respondents

 

GANCAYCO, J.:

The distinction between co-ownership and an unregistered partnership or joint venture for income tax purposes is the issue in this petition.

On June 22, 1965, petitioners bought two (2) parcels of land from Santiago Bernardino, et al. and on May 28, 1966, they bought another three (3) parcels of land from Juan Roque. The first two parcels of land were sold by petitioners in 1968 toMarenir Development Corporation, while the three parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson on March 19,1970. Petitioners realized a net profit in the sale made in 1968 in the amount of P165,224.70, while they realized a net profit of P60,000.00 in the sale made in 1970. The corresponding capital gains taxes were paid by petitioners in 1973 and 1974 by availing of the tax amnesties granted in the said years.

However, in a letter dated March 31, 1979 of then Acting BIR Commissioner Efren I. Plana, petitioners were assessed and required to pay a total amount of P107,101.70 as alleged deficiency corporate income taxes for the years 1968 and 1970.

Petitioners protested the said assessment in a letter of June 26, 1979 asserting that they had availed of tax amnesties way back in 1974.

In a reply of August 22, 1979, respondent Commissioner informed petitioners that in the years 1968 and 1970, petitioners as co-owners in the real estate transactions formed an unregistered partnership or joint venture taxable as a corporation under Section 20(b) and its income was subject to the taxes prescribed under Section 24, both of the National Internal Revenue Code 1 that the unregistered partnership was subject to corporate income tax as distinguished from profits derived from the partnership by them which is subject to individual income tax; and that the availment of tax amnesty under P.D. No. 23, as amended, by petitioners relieved petitioners of their individual income tax liabilities but did not relieve them from the tax liability of the unregistered partnership. Hence, the petitioners were required to pay the deficiency income tax assessed.

Petitioners filed a petition for review with the respondent Court of Tax Appeals docketed as CTA Case No. 3045. In due course, the respondent court by a majority decision of March 30, 1987, 2 affirmed the decision and action taken by respondent commissioner with costs against petitioners.

It ruled that on the basis of the principle enunciated in Evangelista 3 an unregistered partnership was in fact formed by petitioners which like a corporation was subject to corporate income tax distinct from that imposed on the partners.

In a separate dissenting opinion, Associate Judge Constante Roaquin stated that considering the circumstances of this case, although there might in fact be a co-ownership between the petitioners, there was no adequate basis for the conclusion that they thereby formed an unregistered partnership which made "hem liable for corporate income tax under the Tax Code.

Hence, this petition wherein petitioners invoke as basis thereof the following alleged errors of the respondent court:

A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX, AND THAT THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION THERETO RESTS UPON THE PETITIONERS.

B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED THUS IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT WOULD WARRANT THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.

C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA CASE AND THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA CASE.

D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS FROM PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH AMNESTY. (pp. 12-13, Rollo.)

The petition is meritorious.

The basis of the subject decision of the respondent court is the ruling of this Court in Evangelista. 4

In the said case, petitioners borrowed a sum of money from their father which together with their own personal funds they used in buying several real properties. They appointed their brother to manage their properties with full power to lease, collect, rent, issue receipts, etc. They had the real properties rented or leased to various tenants for several years and they gained net profits from the rental income. Thus, the Collector of Internal Revenue demanded the payment of income tax on a corporation, among others, from them.

In resolving the issue, this Court held as follows:

The issue in this case is whether petitioners are subject to the tax on corporations provided for in section 24 of Commonwealth Act No. 466, otherwise known as the National Internal Revenue Code, as well as to the residence tax for corporations and the real estate dealers' fixed tax. With respect to the tax on corporations, the issue hinges on the meaning of the terms corporation and partnership as used in sections 24 and 84 of said Code, the pertinent parts of which read:

Sec. 24. Rate of the tax on corporations.—There shall be levied, assessed, collected, and paid annually upon the total net income received in the preceding taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, no matter how created or organized but not including duly registered general co-partnerships (companies collectives), a tax upon such income equal to the sum of the following: ...

Sec. 84(b). The term "corporation" includes partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participation), associations or insurance companies, but does not include duly registered general co-partnerships (companies colectivas).

Article 1767 of the Civil Code of the Philippines 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: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent to divide the profits among the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to, and did, contribute money and property to a common

fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions for monetary gain and then divide the same among themselves, because:

1. Said common fund was not something they found already in existence. It was not a property inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial portion thereof in order to establish said common fund.

2. They invested the same, not merely in one transaction, but in a series of transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for P18,000.00. This was soon followed, on April 23, 1944, by the acquisition of another real estate for P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24) acquired and transcations undertaken, as well as the brief interregnum between each, particularly the last three purchases, is strongly indicative of a pattern or common design that was not limited to the conservation and preservation of the aforementioned common fund or even of the property acquired by petitioners in February, 1943. In other words, one cannot but perceive a character of habituality peculiar to business transactions engaged in for purposes of gain.

3. The aforesaid lots were not devoted to residential purposes or to other personal uses, of petitioners herein. The properties were leased separately to several persons, who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for petitioners do not even suggest that there has been any change in the utilization thereof.

4. Since August, 1945, the properties have been under the management of one person, namely, Simeon Evangelists, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have been handled as if the same belonged to a corporation or business enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15) years, since the first property was acquired, and over twelve (12) years, since Simeon Evangelists became the manager.

6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set up already adverted to, or on the causes for its continued existence. They did not even try to offer an explanation therefor.

Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, the collective effect of these circumstances is such as to leave no room for doubt on the existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances were present in the cases cited by petitioners herein, and, hence, those cases are not in point. 5

In the present case, there is no evidence that petitioners entered into an agreement to contribute money, property or industry to a common fund, and that they intended to divide the profits among themselves. Respondent commissioner and/ or his representative just assumed these conditions to be present on the basis of the fact that petitioners purchased certain parcels of land and became co-owners thereof.

In Evangelists, there was a series of transactions where petitioners purchased twenty-four (24) lots showing that the purpose was not limited to the conservation or preservation of the common fund or even the properties acquired by them. The character of habituality peculiar to business transactions engaged in for the purpose of gain was present.

In the instant case, petitioners bought two (2) parcels of land in 1965. They did not sell the same nor make any improvements thereon. In 1966, they bought another three (3) parcels of land from one seller. It was only 1968 when they sold the two (2) parcels of land after which they did not make any additional or new purchase. The remaining three (3) parcels were sold by them in 1970. The transactions were isolated. The character of habituality peculiar to business transactions for the purpose of gain was not present.

In Evangelista, the properties were leased out to tenants for several years. The business was under the management of one of the partners. Such condition existed for over fifteen (15) years. None of the circumstances are present in the case at bar. The co-ownership started only in 1965 and ended in 1970.

Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista he said:

I wish however to make the following observation Article 1769 of the new Civil Code lays down the rule for determining when a transaction should be deemed a partnership or a co-ownership. Said article paragraphs 2 and 3, provides;

(2) Co-ownership or co-possession does not itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of the property;

(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived;

From the above it appears that the fact that those who agree to form a co- ownership share or do not share any profits made by the use of the property held in common does not convert their venture into a partnership. Or the sharing of the gross returns does not of itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. This only means that, aside from the circumstance of profit, the presence of other elements constituting partnership is necessary, such as the clear intent to form a partnership, the existence of a juridical personality different from that of the individual partners, and the freedom to transfer or assign any interest in the property by one with the consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-636)

It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain real estate for profit in the absence of other circumstances showing a contrary intention cannot be considered a partnership.

Persons who contribute property or funds for a common enterprise and agree to share the gross returns of that enterprise in proportion to their contribution, but who severally retain the title to their respective contribution, are not thereby rendered partners. They have no common stock or capital, and no community of interest as principal proprietors in the business itself which the proceeds derived. (Elements of the Law of Partnership by Flord D. Mechem 2nd Ed., section 83, p. 74.)

A joint purchase of land, by two, does not constitute a co-partnership in respect thereto; nor does an agreement to share the profits and losses on the sale of land create a partnership; the parties are only tenants in common. (Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)

Where plaintiff, his brother, and another agreed to become owners of a single tract of realty, holding as tenants in common, and to divide the profits of disposing of it, the brother and the other not being entitled to share in plaintiffs commission, no partnership existed as between the three parties, whatever their relation may have been as to third parties. (Magee vs. Magee 123 N.E. 673, 233 Mass. 341.)

In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b) generally participating in both profits and losses; (c) and such a community of interest, as far as third persons are concerned as enables each party to make contract, manage the business, and dispose of the whole property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)

The common ownership of property does not itself create a partnership between the owners, though they may use it for the purpose of making gains; and they may, without becoming partners, agree among themselves as to the management, and use of such property and the application of the proceeds therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.) 6

The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the whole property.

In the present case, there is clear evidence of co-ownership between the petitioners. There is no adequate basis to support the proposition that they thereby formed an unregistered partnership. The two isolated transactions whereby they purchased properties and sold the same a few years thereafter did not thereby make them partners. They shared in the gross profits as co- owners and paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot be considered to have formed an unregistered partnership which is thereby liable for corporate income tax, as the respondent commissioner proposes.

And even assuming for the sake of argument that such unregistered partnership appears to have been formed, since there is no such existing unregistered partnership with a distinct personality nor with assets that can be held liable for said deficiency corporate income tax, then petitioners can be held individually liable as partners for this unpaid obligation of the partnership p. 7 However, as petitioners have availed of the benefits of tax amnesty as individual taxpayers in these transactions, they are thereby relieved of any further tax liability arising therefrom.

WHEREFROM, the petition is hereby GRANTED and the decision of the respondent Court of Tax Appeals of March 30, 1987 is hereby REVERSED and SET ASIDE and another decision is hereby rendered relieving petitioners of the corporate income tax liability in this case, without pronouncement as to costs.

SO ORDERED

Republic of the PhilippinesSUPREME COURT

Manila

SECOND DIVISION

G.R. No. L-68118 October 29, 1985

JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P. OBILLOS and REMEDIOS P. OBILLOS, brothers and sisters, petitioners vs.COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS, respondents.

Demosthenes B. Gadioma for petitioners.

AQUINO, J.:

This case is about the income tax liability of four brothers and sisters who sold two parcels of land which they had acquired from their father.

On March 2, 1973 Jose Obillos, Sr. completed payment to Ortigas & Co., Ltd. on two lots with areas of 1,124 and 963 square meters located at Greenhills, San Juan, Rizal. The next day he transferred his rights to his four children, the petitioners, to enable them to build their residences. The company sold the two lots to petitioners for P178,708.12 on March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrens titles issued to them would show that they were co-owners of the two lots.

In 1974, or after having held the two lots for more than a year, the petitioners resold them to the Walled City Securities Corporation and Olga Cruz Canda for the total sum of P313,050 (Exh. C and D). They derived from the sale a total profit of P134,341.88 or P33,584 for each of them. They treated the profit as a capital gain and paid an income tax on one-half thereof or of P16,792.

In April, 1980, or one day before the expiration of the five-year prescriptive period, the Commissioner of Internal Revenue required the four petitioners to pay corporate income tax on the total profit of P134,336 in addition to individual income tax on their shares thereof He assessed P37,018 as corporate income tax, P18,509 as 50% fraud surcharge and P15,547.56 as 42% accumulated interest, or a total of P71,074.56.

Not only that. He considered the share of the profits of each petitioner in the sum of P33,584 as a " taxable in full (not a mere capital gain of which ½ is taxable) and required them to pay deficiency income taxes aggregating P56,707.20 including the 50% fraud surcharge and the accumulated interest.

Thus, the petitioners are being held liable for deficiency income taxes and penalties totalling P127,781.76 on their profit of P134,336, in addition to the tax on capital gains already paid by them.

The Commissioner acted on the theory that the four petitioners had formed an unregistered partnership or joint venture within the meaning of sections 24(a) and 84(b) of the Tax Code (Collector of Internal Revenue vs. Batangas Trans. Co., 102 Phil. 822).

The petitioners contested the assessments. Two Judges of the Tax Court sustained the same. Judge Roaquin dissented. Hence, the instant appeal.

We hold that it is error to consider the petitioners as having formed a partnership under article 1767 of the Civil Code simply because they allegedly contributed P178,708.12 to buy the two lots, resold the same and divided the profit among themselves.

To regard the petitioners as having formed a taxable unregistered partnership would result in oppressive taxation and confirm the dictum that the power to tax involves the power to destroy. That eventuality should be obviated.

As testified by Jose Obillos, Jr., they had no such intention. They were co-owners pure and simple. To consider them as partners would obliterate the distinction between a co-ownership and a partnership. The petitioners were not engaged in any joint venture by reason of that isolated transaction.

Their original purpose was to divide the lots for residential purposes. If later on they found it not feasible to build their residences on the lots because of the high cost of construction, then they had no choice but to resell the same to dissolve the co-ownership. The division of the profit was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state. It had to be terminated sooner or later. Castan Tobeñas says:

Como establecer el deslinde entre la comunidad ordinaria o copropiedad y la sociedad?

El criterio diferencial-segun la doctrina mas generalizada-esta: por razon del origen, en que la sociedad presupone necesariamente la convencion, mentras que la comunidad puede existir y existe ordinariamente sin ela; y por razon del fin objecto, en que el objeto de la sociedad es obtener lucro, mientras que el de la indivision es solo mantener en su integridad la cosa comun y favorecer su conservacion.

Reflejo de este criterio es la sentencia de 15 de Octubre de 1940, en la que se dice que si en nuestro Derecho positive se ofrecen a veces dificultades al tratar de fijar la linea divisoria entre comunidad de bienes y contrato de sociedad, la moderna orientacion de la doctrina cientifica señala como nota fundamental de diferenciacion aparte del origen de fuente de que surgen, no siempre uniforme, la finalidad perseguida por los interesados: lucro comun partible en la sociedad, y mera conservacion y aprovechamiento en la comunidad. (Derecho Civil Espanol, Vol. 2, Part 1, 10 Ed., 1971, 328- 329).

Article 1769(3) of the Civil Code provides that "the sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived". There must be an unmistakable intention to form a partnership or joint venture.*

Such intent was present in Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666, where 15 persons contributed small amounts to purchase a two-peso sweepstakes ticket with the agreement that they would divide the prize The ticket won the third prize of P50,000. The 15 persons were held liable for income tax as an unregistered partnership.

The instant case is distinguishable from the cases where the parties engaged in joint ventures for profit. Thus, in Oña vs.

** This view is supported by the following rulings of respondent Commissioner:

Co-owership distinguished from partnership.—We find that the case at bar is fundamentally similar to the De Leon case. Thus, like the De Leon heirs, the Longa heirs inherited the 'hacienda' in questionpro-indiviso from their deceased parents; they did not contribute or invest additional ' capital to increase or expand the inherited properties; they merely continued dedicating the property to the use to which it had been put by their forebears; they individually reported in their tax returns their corresponding shares in the income and expenses of the 'hacienda', and they continued for many years the status of co-ownership in order, as conceded by respondent, 'to preserve its (the 'hacienda') value and to continue the existing contractual relations with the Central Azucarera de Bais for milling purposes. Longa vs. Aranas, CTA Case No. 653, July 31, 1963).

All co-ownerships are not deemed unregistered pratnership.—Co-Ownership who own properties which produce income should not automatically be considered partners of an unregistered partnership, or a corporation, within the purview of the income tax law. To hold otherwise, would be to subject the income of all co-ownerships of inherited properties to the tax on corporations, inasmuch as if a property does not produce an income at all, it is not subject to any kind of income tax, whether the income tax on individuals or the income tax on corporation. (De Leon vs. CI R, CTA Case No. 738, September 11, 1961, cited in Arañas, 1977 Tax Code Annotated, Vol. 1, 1979 Ed., pp. 77-78).

Commissioner of Internal Revenue, L-19342, May 25, 1972, 45 SCRA 74, where after an extrajudicial settlement the co-heirs used the inheritance or the incomes derived therefrom as a common fund to produce profits for themselves, it was held that they were taxable as an unregistered partnership.

It is likewise different from Reyes vs. Commissioner of Internal Revenue, 24 SCRA 198, where father and son purchased a lot and building, entrusted the administration of the building to an administrator and divided equally the net income, and from Evangelista vs. Collector of Internal Revenue, 102 Phil. 140, where the three Evangelista sisters bought four pieces of real property which they leased to various tenants and derived rentals therefrom. Clearly, the petitioners in these two cases had formed an unregistered partnership.

In the instant case, what the Commissioner should have investigated was whether the father donated the two lots to the petitioners and whether he paid the donor's tax (See Art. 1448, Civil Code). We are not prejudging this matter. It might have already prescribed.

WHEREFORE, the judgment of the Tax Court is reversed and set aside. The assessments are cancelled. No costs.

SO ORDERED.