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THIRD DIVISION and undervalued by Jacinto and Josephine for their own selfish reasons and for tax

avoidance.chanrob1es virtua1 1aw 1ibrary


[G.R. No. 143340. August 15, 2001.]
Upon Jacintos death in the later part of 1989, his surviving wife, petitioner Cecilia and
LILIBETH SUNGA-CHAN and CECILIA SUNGA, Petitioners, v. LAMBERTO T. particularly his daughter, petitioner Lilibeth, took over the operations, control, custody,
CHUA, Respondent. disposition and management of Shellite without respondents consent. Despite respondents
repeated demands upon petitioners for accounting, inventory, appraisal, winding up and
DECISION restitution of his net shares in the partnership, petitioners failed to comply. Petitioner Lilibeth
allegedly continued the operations of Shellite, converting to her own use and advantage its
properties.
GONZAGA-REYES, J.:
On March 31, 1991, respondent claimed that after petitioner Lilibeth ran out of alibis and
reasons to evade respondents demands, she disbursed out of the partnership funds the amount
Before us is a petition for review on certiorari under Rule 45 of the Rules of Court of the Decision of P200,000.00 and partially paid the same to Respondent. Petitioner Lilibeth allegedly informed
1 of the Court of Appeals dated January 31, 2000 in the case entitled "Lamberto T. Chua v. respondent that the P200,000.00 represented partial payment of the latters share in the
Lilibeth Sunga Chan and Cecilia Sunga" and of the Resolution dated May 23, 2000 denying the partnership, with a promise that the former would make the complete inventory and winding up
motion for reconsideration of herein petitioners Lilibeth Sunga Chan and Cecilia Sunga of the properties of the business establishment. Despite such commitment, petitioners allegedly
(hereafter collectively referred to as petitioners).chanrob1es virtua1 1aw 1ibrary failed to comply with their duty to account, and continued to benefit from the assets and income
of Shellite to the damage and prejudice of Respondent.chanrob1es virtua1 1aw 1ibrary
The pertinent facts of this case are as follows:chanrob1es virtual 1aw library
On December 19, 1992, petitioners filed a Motion to Dismiss on the ground that the Securities
On June 22, 1992, Lamberto T. Chua (hereafter respondent) filed a complaint against Lilibeth and Exchange Commission (SEC) in Manila, not the Regional Trial Court in Zamboanga del Norte
Sunga Chan (hereafter petitioner Lilibeth) and Cecilia Sunga (hereafter petitioner Cecilia), had jurisdiction over the action. Respondent opposed the motion to dismiss.
daughter and wife, respectively of the deceased Jacinto L. Sunga (hereafter Jacinto), for "Winding
Up of Partnership Affairs, Accounting, Appraisal and Recovery of Shares and Damages with Writ On January 12, 1993, the trial court finding the complaint sufficient in form and substance denied
of Preliminary Attachment" with the Regional Trial Court, Branch 11, Sindangan, Zamboanga del the motion to dismiss.
Norte.
On January 30, 1993, petitioners filed their Answer with Compulsory Counterclaims, contending
Respondent alleged that in 1977, he verbally entered into a partnership with Jacinto in the that they are not liable for partnership shares, unreceived income/profits, interests, damages
distribution of Shellane Liquefied Petroleum Gas (LPG) in Manila. For business convenience, and attorneys fees, that respondent does not have a cause of action against them, and that the
respondent and Jacinto allegedly agreed to register the business name of their partnership, trial court has no jurisdiction over the nature of the action, the SEC being the agency that has
SHELLITE GAS APPLIANCE CENTER (hereafter Shellite), under the name of Jacinto as a sole original and exclusive jurisdiction over the case. As counterclaim, petitioner sought attorneys
proprietorship. Respondent allegedly delivered his initial capital contribution of P100,000.00 to fees and expenses of litigation.
Jacinto while the latter in turn produced P100,000.00 as his counterpart contribution, with the
intention that the profits would be equally divided between them. The partnership allegedly had On August 2, 1993, petitioner filed a second Motion to Dismiss this time on the ground that the
Jacinto as manager, assisted by Josephine Sy (hereafter Josephine), a sister of the wife of claim for winding up of partnership affairs, accounting and recovery of shares in partnership
respondent, Erlinda Sy. As compensation, Jacinto would receive a managers fee or remuneration affairs, accounting and recovery of shares in partnership assets/properties should be dismissed
of 10% of the gross profit and Josephine would receive 10% of the net profits, in addition to her and prosecuted against the estate of deceased Jacinto in a probate or intestate proceeding.
wages and other remuneration from the business.
On August 16, 1993, the trial court denied the second motion to dismiss for lack of
Allegedly, from the time that Shellite opened for business on July 8, 1977, its business operation merit.chanrob1es virtua1 1aw 1ibrary
went quite well and was profitable. Respondent claimed that he could attest to the success of
their business because of the volume of orders and deliveries of filled Shellane cylinder tanks On November 26, 1993, petitioners filed their Petition for Certiorari, Prohibition and Mandamus
supplied by Pilipinas Shell Petroleum Corporation. While Jacinto furnished respondent with the with the Court of Appeals docketed as CA-G.R. SP No. 32499 questioning the denial of the motion
merchandise inventories, balance sheets and net worth of Shellite from 1977 to 1989, to dismiss.
respondent however suspected that the amount indicated in these documents were understated
On November 29, 1993, petitioners filed with the trial court a Motion to Suspend Pre-trial and equity in the partnership, or the value thereof in money or moneys worth, if the properties
Conference. are not physically divisible;chanrob1es virtua1 1aw 1ibrary

On December 13, 1993, the trial court granted the motion to suspend pre-trial conference. (6) FINDING them especially Lilibeth Sunga-Chan guilty of breach of trust and in bad faith and
hold them liable to the plaintiff the sum of P50,000.00 as moral and exemplary damages; and,
On November 15, 1994, the Court of Appeals denied the petition for lack of merit.
(7) DIRECTING them to reimburse and pay the sum of P25,000.00 as attorneys (sic) and
On January 16, 1995, this Court denied the petition for review on certiorari filed by petitioner, P25,00.00 as litigation expenses.
"as petitioners failed to show that a reversible error was committed by the appellate court." 2
NO special pronouncements as to COSTS.
On February 20, 1995, entry of judgment was made by the Clerk of Court and the case was
remanded to the trial court on April 26, 1995.chanrob1es virtua1 1aw 1ibrary SO ORDERED." 3

On September 25, 1995, the trial court terminated the pre-trial conference and set the hearing of On October 28, 1997, petitioners filed a Notice of Appeal with the trial court, appealing the case
the case on January 17, 1996. Respondent presented his evidence while petitioners were to the Court of Appeals.chanrob1es virtua1 1aw 1ibrary
considered to have waived their right to present evidence for their failure to attend the
scheduled date for reception of evidence despite notice. On January 31, 2000, the Court of Appeals dismissed the appeal. The dispositive portion of the
Decision reads:jgc:chanrobles.com.ph
On October 7, 1997, the trial court rendered its Decision ruling for Respondent. The dispositive
portion of the Decision reads:jgc:chanrobles.com.ph "WHEREFORE, the instant appeal is dismissed. The appealed decision is AFFIRMED in all
respects." 4
"WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants,
as follows:chanrob1es virtual 1aw library On May 23, 2000, the Court of Appeals denied the motion for reconsideration filed by petitioner.

(1) DIRECTING them to render an accounting in acceptable form under accounting procedures Hence, this petition wherein petitioner relies upon the following grounds:jgc:chanrobles.com.ph
and standards of the properties, assets, income and profits of the Shellite Gas Appliance Center
since the time of death of Jacinto L. Sunga, from whom they continued the business operations "1. The Court of Appeals erred in making a legal conclusion that there existed a partnership
including all businesses derived from the Shellite Gas Appliance Center; submit an inventory, and between respondent Lamberto T. Chua and the late Jacinto L. Sunga upon the latters invitation
appraisal of all these properties, assets, income, profits, etc. to the Court and to plaintiff for and offer and that upon his death the partnership assets and business were taken over by
approval or disapproval;chanrob1es virtua1 1aw 1ibrary petitioners.

(2) ORDERING them to return and restitute to the partnership any and all properties, assets, 2. The Court of Appeals erred in making the legal conclusion that laches and/or prescription did
income and profits they misapplied and converted to their own use and advantage that legally not apply in the instant case.
pertain to the plaintiff and account for the properties mentioned in pars. A and B on pages 4-5 of
this petition as basis; 3. The Court of Appeals erred in making the legal conclusion that there was competent and
credible evidence to warrant the finding of a partnership, and assuming arguendo that indeed
(3) DIRECTING them to restitute and pay to the plaintiff shares and interest of the plaintiff in there was a partnership, the finding of highly exaggerated amounts or values in the partnership
the partnership of the listed properties, assets and good will (sic) in schedules A, B and C, on assets and profits." 5
pages 4-5 of the petition;
Petitioners question the correctness of the finding of the trial court and the Court of Appeals that
(4) ORDERING them to pay the plaintiff earned but unreceived income and profits from the a partnership existed between respondent and Jacinto from 1977 until Jacintos death. In the
partnership from 1988 to May 30, 1992, when the plaintiff learned of the closure of the store the absence of any written document to show such partnership between respondent and Jacinto,
sum of P35,000.00 per month, with legal rate of interest until fully paid; petitioners argue that these courts were proscribed from hearing the testimonies of respondent
and his witness, Josephine, to prove the alleged partnership three years after Jacintos death. To
(5) ORDERING them to wind up the affairs of the partnership and terminate its business support this argument, petitioners invoke the "Dead Mans Statute" or "Survivorship Rule" under
activities pursuant to law, after delivering to the plaintiff all the interest, shares, participation Section 23, Rule 130 of the Rules of Court that provides:jgc:chanrobles.com.ph
First, petitioners filed a compulsory counterclaim 11 against respondent in their answer before
"SECTION 23. Disqualification by reason of death or insanity of adverse party. Parties or the trial court, and with the filing of their counterclaim, petitioners themselves effectively
assignors of parties to a case, or persons in whose behalf a case is prosecuted, against an removed this case from the ambit of the "Dead Mans Statute." 12 Well entrenched is the rule that
executor or administrator or other representative of a deceased person, or against a person of when it is the executor or administrator or representatives of the estate that sets up the
unsound mind, upon a claim or demand against the estate of such deceased person, or against counterclaim, the plaintiff, herein respondent, may testify to occurrences before the death of the
such person of unsound mind, cannot testify as to any matter of fact occurring before the death deceased to defeat the counterclaim. 13 Moreover, as defendant in the counterclaim, respondent
of such deceased person or before such person became of unsound mind." chanrob1es virtua1 is not disqualified from testifying as to matters of fact occurring before the death of the deceased,
1aw 1ibrary said action not having been brought against but by the estate or representatives of the deceased.
14
Petitioners thus implore this Court to rule that the testimonies of respondent and his alter ego,
Josephine, should not have been admitted to prove certain claims against a deceased person Second, the testimony of Josephine is not covered by the "Dead Mans Statute" for the simple
(Jacinto), now represented by petitioners. reason that she is not "a party or assignor of a party to a case or persons in whose behalf a case is
prosecuted." Records show that respondent offered the testimony of Josephine to establish the
We are not persuaded. existence of the partnership between respondent and Jacinto. Petitioners insistence that
Josephine is the alter ego of respondent does not make her an assignor because the term
A partnership may be constituted in any form, except where immovable property or real rights "assignor" of a party means "assignor of a cause of action which has arisen, and not the assignor
are contributed thereto, in which case a public instrument shall be necessary. 6 Hence, based on of a right assigned before any cause of action has arisen." 15 Plainly then, Josephine is merely a
the intention of the parties, as gathered from the facts and ascertained from their language and witness of respondent, the latter being the party plaintiff.chanrob1es virtua1 1aw 1ibrary
conduct, a verbal contract of partnership may arise. 7 The essential points that must be proven to
show that a partnership was agreed upon are (1) mutual contribution to a common stock, and We are not convinced by petitioners allegation that Josephines testimony lacks probative value
(2) a joint interest in the profits. 8 Understandably so, in view of the absence of a written because she was allegedly coerced by respondent, her brother-in-law, to testify in his favor.
contract of partnership between respondent and Jacinto, respondent resorted to the introduction Josephine merely declared in court that she was requested by respondent to testify and that if
of documentary and testimonial evidence to prove said partnership. The crucial issue to settle she were not requested to do so she would not have testified. We fail to see how we can conclude
then is whether or not the "Dead Mans Statute" applies to this case so as to render inadmissible from this candid admission that Josephines testimony is involuntary when she did not in any
respondents testimony and that of his witness, Josephine. way categorically say that she was forced to be a witness of Respondent. Also, the fact that
Josephine is the sister of the wife of respondent does not diminish the value of her testimony
The "Dead Mans Statute" provides that if one party to the alleged transaction is precluded from since relationship per se, without more, does not affect the credibility of witnesses. 16
testifying by death, insanity, or other mental disabilities, the surviving party is not entitled to the
undue advantage of giving his own uncontradicted and unexplained account of the transaction. 9 Petitioners reliance alone on the "Dead Mans Statute" to defeat respondents claim cannot
But before this rule can be successfully invoked to bar the introduction of testimonial evidence, it prevail over the factual findings of the trial court and the Court of Appeals that a partnership was
is necessary that:jgc:chanrobles.com.ph established between respondent and Jacinto. Based not only on the testimonial evidence, but the
documentary evidence as well, the trial court and the Court of Appeals considered the evidence
"1. The witness is a party or assignor of a party to a case or persons in whose behalf a case is for respondent as sufficient to prove the formation of a partnership, albeit an informal one.
prosecuted.chanrob1es virtua1 1aw 1ibrary
Notably, petitioners did not present any evidence in their favor during trial. By the weight of
2. The action is against an executor or administrator or other representative of a deceased judicial precedents, a factual matter like the finding of the existence of a partnership between
person or a person of unsound mind; respondent and Jacinto cannot be inquired into by this Court on review. 17 This Court can no
longer be tasked to go over the proofs presented by the parties and analyze, assess and weigh
3. The subject-matter of the action is a claim or demand against the estate of such deceased them to ascertain if the trial court and the appellate court were correct in according superior
person or against person of unsound mind; credit to this or that piece of evidence of one party or the other. 18 It must be also pointed out
that petitioners failed to attend the presentation of evidence of Respondent. Petitioners cannot
4. His testimony refers to any matter of fact which occurred before the death of such deceased now turn to this Court to question the admissibility and authenticity of the documentary
person or before such person became of unsound mind." 10 evidence of respondent when petitioners failed to object to the admissibility of the evidence at
the time that such evidence was offered. 19
Two reasons forestall the application of the "Dead Mans Statute" to this case.
With regard to petitioners insistence that laches and/or prescription should have extinguished
respondents claim, we agree with the trial court and the Court of Appeals that the action for
accounting filed by respondent three (3) years after Jacintos death was well within the
prescribed period. The Civil Code provides that an action to enforce an oral contract prescribes
in six (6) years 20 while the right to demand an accounting for a partners interest as against the
person continuing the business accrues at the date of dissolution, in the absence of any contrary
agreement. 21 Considering that the death of a partner results in the dissolution of the
partnership22 , in this case, it was after Jacintos death that respondent as the surviving partner
had the right to an account of his interest as against petitioners. It bears stressing that while
Jacintos death dissolved the partnership, the dissolution did not immediately terminate the
partnership. The Civil Code 23 expressly provides that upon dissolution, the partnership
continues and its legal personality is retained until the complete winding up of its business,
culminating in its termination. 24

In a desperate bid to cast doubt on the validity of the oral partnership between respondent and
Jacinto, petitioners maintain that said partnership that had an initial capital of P200,000.00
should have been registered with the Securities and Exchange Commission (SEC) since
registration is mandated by the Civil Code. True, Article 1772 of the Civil Code requires that
partnerships with a capital of P3,000.00 or more must register with the SEC, however, this
registration requirement is not mandatory. Article 1768 of the Civil Code 25 explicitly provides
that the partnership retains its juridical personality even if it fails to register. The failure to
register the contract of partnership does not invalidate the same as among the partners, so long
as the contract has the essential requisites, because the main purpose of registration is to give
notice to third parties, and it can be assumed that the members themselves knew of the contents
of their contract. 26 In the case at bar, non-compliance with this directory provision of the law
will not invalidate the partnership considering that the totality of the evidence proves that
respondent and Jacinto indeed forged the partnership in question.

WHEREFORE, in view of the foregoing, the petition is DENIED and the appealed decision is
AFFIRMED.chanrob1es virtua1 1aw 1ibrary

SO ORDERED.
[G.R. No. 144214. July 14, 2003.] deposited in the respondents house for storage. 8

LUZVIMINDA J. VILLAREAL, DIOGENES VILLAREAL and CARMELITO JOSE, Petitioners, v. On March 1, 1987, respondent spouses wrote petitioners, saying that they were no longer
DONALDO EFREN C. RAMIREZ and Spouses CESAR G. RAMIREZ JR. and CARMELITA C. interested in continuing their partnership or in reopening the restaurant, and that they were
RAMIREZ, Respondents. accepting the latters offer to return their capital contribution. 9

DECISION On October 13, 1987, Carmelita Ramirez wrote another letter informing petitioners of the
deterioration of the restaurant furniture and equipment stored in their house. She also reiterated
the request for the return of their one-third share in the equity of the partnership. The repeated
PANGANIBAN, J.: oral and written requests were, however, left unheeded. 10

Before the Regional Trial Court (RTC) of Makati, Branch 59, respondents subsequently filed a
A share in a partnership can be returned only after the completion of the latters dissolution, Complaint 11 dated November 10, 1987, for the collection of a sum of money from petitioners.
liquidation and winding up of the business.chanrob1es virtua1 1aw 1ibrary
In their Answer, petitioners contended that respondents had expressed a desire to withdraw
The Case from the partnership and had called for its dissolution under Articles 1830 and 1831 of the Civil
Code; that respondents had been paid, upon the turnover to them of furniture and equipment
worth over P400,000; and that the latter had no right to demand a return of their equity because
The Petition for Review on Certiorari before us challenges the March 23, 2000 Decision 1 and the their share, together with the rest of the capital of the partnership, had been spent as a result of
July 26, 2000 Resolution 2 of the Court of Appeals 3 (CA) in CA-GR CV No. 41026. The assailed irreversible business losses. 12
Decision disposed as follows:jgc:chanrobles.com.ph
In their Reply, respondents alleged that they did not know of any loan encumbrance on the
"WHEREFORE, foregoing premises considered, the Decision dated July 21, 1992 rendered by the restaurant. According to them, if such allegation were true, then the loans incurred by petitioners
Regional Trial Court, Branch 148, Makati City is hereby SET ASIDE and NULLIFIED and in lieu should be regarded as purely personal and, as such, not chargeable to the partnership. The
thereof a new decision is rendered ordering the [petitioners] jointly and severally to pay and former further averred that they had not received any regular report or accounting from the
reimburse to [respondents] the amount of P253,114.00. No pronouncement as to costs." 4 latter, who had solely managed the business. Respondents also alleged that they expected the
equipment and the furniture stored in their house to be removed by petitioners as soon as the
Reconsideration was denied in the impugned Resolution. latter found a better location for the restaurant. 13

The Facts Respondents filed an Urgent Motion for Leave to Sell or Otherwise Dispose of Restaurant
Furniture and Equipment 14 on July 8, 1988. The furniture and the equipment stored in their
house were inventoried and appraised at P29,000. 15 The display freezer was sold for P5,000
On July 25, 1984, Luzviminda J. Villareal, Carmelito Jose and Jesus Jose formed a partnership with and the proceeds were paid to them. 16
a capital of P750,000 for the operation of a restaurant and catering business under the name
"Aquarius Food House and Catering Services." 5 Villareal was appointed general manager and After trial, the RTC 17 ruled that the parties had voluntarily entered into a partnership, which
Carmelito Jose, operations manager. could be dissolved at any time. Petitioners clearly intended to dissolve it when they stopped
operating the restaurant. Hence, the trial court, in its July 21, 1992 Decision, held there liable as
Respondent Donaldo Efren C. Ramirez joined as a partner in the business on September 5, 1984. follows: 18
His capital contribution of P250,000 was paid by his parents, Respondents Cesar and Carmelita
Ramirez. 6 "WHEREFORE, judgment is hereby rendered in favor of [respondents] and against the
[petitioners] ordering the [petitioners] to pay jointly and severally the following:chanrob1es
After Jesus Jose withdrew from the partnership in January 1987, his capital contribution of virtual 1aw library
P250,000 was refunded to him in cash by agreement of the partners. 7
(a) Actual damages in the amount of P250,000.00
In the same month, without prior knowledge of respondents, petitioners closed down the
restaurant, allegedly because of increased rental. The restaurant furniture and equipment were (b) Attorneys fee in the amount of P30,000.00
(c) Costs of suit."cralaw virtua1aw library
The Petition has merit.
The CA Ruling
First Issue:chanrob1es virtual 1aw library
The CA held that, although respondents had no right to demand the return of their capital
contribution, the partnership was nonetheless dissolved when petitioners lost interest in Share in Partnership
continuing the restaurant business with them. Because petitioners never gave a proper
accounting of the partnership accounts for liquidation purposes, and because no sufficient Both the trial and the appellate courts found that a partnership had indeed existed, and that it
evidence was presented to show financial losses, the CA. computed their liability as was dissolved on March 1, 1987. They found that the dissolution took place when respondents
follows:jgc:chanrobles.com.ph informed petitioners of the intention to discontinue it because of the formers dissatisfaction
with, and loss of trust in, the latters management of the partnership affairs. These findings were
"Consequently, since what has been proven is only the outstanding obligation of the partnership amply supported by the evidence on record. Respondents consequently demanded from
in the amount of P240,658.00, although contracted by the partnership before [respondents] petitioners the return of their one-third equity in the partnership.
have joined the partnership but in accordance with Article 1826 of the New Civil Code, they are
liable which must have to be deducted from the remaining capitalization of the said partnership We hold that respondents have no right to demand from petitioners the return of their equity
which is in the amount of P1,000,000.00 resulting in the amount of P759,342.00, and in order to share. Except as managers of the partnership, petitioners did not personally hold its equity or
get the share of [respondents], this amount of P759,342.00 must be divided into three (3) shares assets. "The partnership has a juridical personality separate and distinct from that of each of the
or in the amount of P253,114.00 for each share and which is the only amount which [petitioner] partners." 23 Since the capital was contributed to the partnership, not to petitioners, it is the
will return to [respondents] representing the contribution to the partnership minus the partnership that must refund the equity of the retiring partners. 24
outstanding debt thereof." 19
Second Issue:chanrob1es virtual 1aw library
Hence, this Petition. 20
What Must Be Returned?
Issues
Since it is the partnership, as a separate and distinct entity, that must refund the shares of the
partners, the amount to be refunded is necessarily limited to its total resources. In other words,
In their Memorandum, 21 petitioners submit the following issues for our it can only pay out what it has in its coffers, which consists of all its assets. However, before the
consideration:jgc:chanrobles.com.ph partners can be paid their shares, the creditors of the partnership must first be compensated. 25
After all the creditors have been paid, whatever is left of the partnership assets becomes
"9.1. Whether the Honorable Court of Appeals decision ordering the distribution of the capital available for the payment of the partners shares.
contribution, instead of the net capital after the dissolution and liquidation of a partnership,
thereby treating the capital contribution like a loan, is in accordance with law and jurisprudence; Evidently, in the present case, the exact amount of refund equivalent to respondents one-third
share in the partnership cannot be determined until all the partnership assets will have been
"9.2. Whether the Honorable Court of Appeals decision ordering the petitioners to jointly and liquidated in other words, sold and converted to cash and all partnership creditors, if any,
severally pay and reimburse the amount of [P]253,114.00 is supported by the evidence on paid. The CAs computation of the amount to be refunded to respondents as their share was thus
record; and erroneous.

"9.3. Whether the Honorable Court of Appeals was correct in making [n]o pronouncement as to First, it seems that the appellate court was under the misapprehension that the total capital
costs." 22 contribution was equivalent to the gross assets to be distributed to the partners at the time of the
dissolution of the partnership. We cannot sustain the underlying idea that the capital
On closer scrutiny, the issues are as follows: (1) whether petitioners are liable to respondents for contribution at the beginning of the partnership remains intact, unimpaired and available for
the latters share in the partnership; (2) whether the CAs computation of P253,114 as distribution or return to the partners. Such idea is speculative, conjectural and totally without
respondents share is correct; and (3) whether the CA was likewise correct in not assessing costs. factual or legal support.

This Courts Ruling Generally, in the pursuit of a partnership business, its capital is either increased by profits
earned or decreased by losses sustained. It does not remain static and unaffected by the changing We disagree. The delivery of the store furniture and equipment to private respondents was for
fortunes of the business. In the present case, the financial statements presented before the trial the purpose of storage. They were unaware that the restaurant would no longer be reopened by
court showed that the business had made meager profits. 26 However, notable therefrom is the petitioners. Hence, the former cannot be faulted for not disposing of the stored items to recover
omission of any provision for the depreciation 27 of the furniture and the equipment. The their capital investment.
amortization of the goodwill 28 (initially valued at P500,000) is not reflected either. Properly
taking these non-cash items into account will show that the partnership was actually sustaining Third Issue:chanrob1es virtual 1aw library
substantial losses, which consequently decreased the capital of the partnership. Both the trial
and the appellate courts in fact recognized the decrease of the partnership assets to almost nil, Costs
but the latter failed to recognize the consequent corresponding decrease of the capital.
Section 1, Rule 142, provides:jgc:chanrobles.com.ph
Second, the CAs finding that the partnership had an outstanding obligation in the amount of
P240,658 was not supported by evidence. We sustain the contrary finding of the RTC, which had "SECTION 1. Costs ordinarily follow results of suit. Unless otherwise provided in these rules,
rejected the contention that the obligation belonged to the partnership for the following costs shall be allowed to the prevailing party as a matter of course, but the court shall have
reason:jgc:chanrobles.com.ph power, for special reasons, to adjudge that either party shall pay the costs of an action, or that the
same be divided, as may be equitable. No costs shall be allowed against the Republic of the
". . . [E]vidence on record failed to show the exact loan owed by the partnership to its creditors. Philippines unless otherwise provided by law."cralaw virtua1aw library
The balance sheet (Exh.4) does not reveal the total loan. The Agreement (Exh.A) par. 6 shows
an outstanding obligation of P240,055.00 which the partnership owes to different creditors, Although, as a rule, costs are adjudged against the losing party, courts have discretion, "for
while the Certification issued by Mercator Finance (Exh.8) shows that it was Sps. Diogenes P. special reasons," to decree otherwise. When a lower court is reversed, the higher court normally
Villareal and Luzviminda J. Villareal, the former being the nominal party defendant in the instant does not award costs, because the losing party relied on the lower courts judgment which is
case, who obtained a loan of P355,000.00 on Oct. 1983, when the original partnership was not presumed to have been issued in good faith, even if found later on to be erroneous. Unless shown
yet formed."cralaw virtua1aw library to be patently capricious, the award shall not be disturbed by a reviewing tribunal.

Third, the CA failed to reduce the capitalization by P250,000, which was the amount paid by the WHEREFORE, the Petition is GRANTED, and the assailed Decision and Resolution SET ASIDE.
partnership to Jesus Jose when he withdrew from the partnership. This disposition is without prejudice to proper proceedings for the accounting, the liquidation
and the distribution of the remaining partnership assets, if any. No pronouncement as to
Because of the above-mentioned transactions, the partnership capital was actually reduced. costs.chanrob1es virtua1 1aw 1ibrary
When petitioners and respondents ventured into business together, they should have prepared
for the fact that their investment would either grow or shrink. In the present case, the SO ORDERED.
investment of respondents substantially dwindled. The original amount of P250,000 which they
had invested could no longer be returned to them, because one third of the partnership
properties at the time of dissolution did not amount to that much.

It is a long established doctrine that the law does not relieve parties from the effects of unwise,
foolish or disastrous contracts they have entered into with all the required formalities and with
full awareness of what they were doing. Courts have no power to relieve them from obligations
they have voluntarily assumed, simply because their contracts turn out to be disastrous deals or
unwise investments. 29

Petitioners further argue that respondents acted negligently by permitting the partnership assets
in their custody to deteriorate to the point of being almost worthless. Supposedly, the latter
should have liquidated these sole tangible assets of the partnership and considered the proceeds
as payment of their net capital. Hence, petitioners argue that the turnover of the remaining
partnership assets to respondents was precisely the manner of liquidating the partnership and
fully settling the latters share in the partnership.
SECOND DIVISION title to the said property;

[G.R. No. 127347. November 25, 1999.] (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
ALFREDO N. AGUILA, JR., Petitioner, v. HONORABLE COURT OF APPEALS and FELICIDAD S. have any interests over the property;
VDA. DE ABROGAR, Respondents.
(6) All expenses for documentation and other incidental expenses shall be for the account of the
DECISION FIRST PARTY;

(7) Should the FIRST PARTY fail to deliver peaceful possession of the property to the SECOND
MENDOZA, J.: 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
This is a petition for review on certiorari of the decision 1 of the Court of Appeals,. dated damages;
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 (8) Should the FIRST PARTY fail to exercise her option to repurchase the property within ninety
declaration of nullity of a deed of sale filed by private respondent Felicidad S. Vda. de Abrogar (90) days period above-mentioned, this memorandum of agreement shall be deemed cancelled
against petitioner Alfredo N. Aguila, Jr.chanrobles virtual lawlibrary 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
The facts are as follows:chanrob1es virtual 1aw library property above described to its name free from lines and encumbrances. 2

Petitioner is the manager of A.C. Aguila & Sons, Co., a partnership engaged in lending activities. On the same day, April 18, 1991, the parties likewise executed a deed of absolute sale, 3 dated
Private respondent and her late husband, Ruben M. Abrogar, were the registered owners of a June 11, 1991, wherein private respondent, with the consent of her late husband, sold the subject
house and lot, covered by Transfer Certificate of Title No. 195101, in Marikina, Metro Manila. On property to A.C. Aguila & Sons, Co., represented by petitioner, for P200,000.00. In a special power
April 18, 1991, private respondent, with the consent of her late husband, and A.C. Aguila & Sons, of attorney dated the same day, April 18, 1991, private respondent authorized petitioner to cause
Co., represented by petitioner, entered into a Memorandum of Agreement, which the cancellation of TCT No. 195101 and the issuance of a new certificate of title in the name of
provided:chanrob1es virtual 1aw library A.C. Aguila and Sons, Co., in the event she failed to redeem the subject property as provided in the
Memorandum of Agreement. 4
(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 Private respondent failed to redeem the property within the 90-day period as provided in the
Absolute Sale shall be executed by the FIRST PARTY conveying the property to the SECOND Memorandum of Agreement. Hence, pursuant to the special power of attorney mentioned above,
PARTY for and in consideration of the sum of Two Hundred Thousand Pesos (P200,000.00), petitioner caused the cancellation of TCT No. 195101 and the issuance of a new certificate of title
Philippine Currency; in the name of A.C. Aguila and Sons, Co. 5

(2) The FIRST PARTY is hereby given by the SECOND PARTY the option to repurchase the said Private respondent then received a letter dated August 10, 1991 from Atty. Lamberto C. Nanquil,
property within a period of ninety (90) days from the execution of this memorandum of counsel for A.C. Aguila & Sons, Co., demanding that she vacate the premises within 15 days after
agreement effective April 18, 1991, for the amount of TWO HUNDRED THIRTY THOUSAND receipt of the letter and surrender its possession peacefully to A.C. Aguila & Sons, Co. Otherwise,
PESOS (P230,000.00); the latter would bring the appropriate action in court. 6

(3) In the event that the FIRST PARTY fail to exercise her option to repurchase the said property Upon the refusal of private respondent to vacate the subject premises, A.C. Aguila & Sons, Co.
within a period of ninety (90) days, the FIRST PARTY is obliged to deliver peacefully the filed an ejectment case against her in the Metropolitan Trial Court, Branch 76, Marikina, Metro
possession of the property to the SECOND PARTY within fifteen (15) days after the expiration of Manila. In a decision, dated April 3, 1992, the Metropolitan Trial Court ruled in favor of A.C.
the said 90 day grace period; 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
(4) During the said grace period, the FIRST PARTY obliges herself not to file any lis pendens or respondent appealed first to the Regional Trial Court, Branch 163, Pasig, Metro Manila, then to
whatever claims on the property nor shall be cause the annotation of say claim at the back of the 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 For this property, defendant-appellee pays only a measly P200,000.00 or P833.33 per square
Regional Trial Court, Branch 273, Marikina, Metro Manila on December 4, 1993. She alleged that meter for both the land and for the house.
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. 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
It appears, however, that private respondent had filed a criminal complaint for falsification (15) days after the expiration of the said ninety (90) day grace period. Otherwise stated, plaintiff-
against petitioner with the Office of the Prosecutor of Quezon City which was dismissed in a appellant is to retain physical possession of the thing allegedly sold.
resolution, dated February 14, 1994.chanrobles.com : virtual law library
In fact, plaintiff-appellant retained possession of the property "sold" as if they were still the
On April 11, 1995, Branch 273 of RTC-Marikina rendered its decision:chanrob1es virtual 1aw absolute owners. There was no provision for maintenance or expenses, much less for payment of
library rent.

Plaintiffs claim therefore that the Deed of Absolute Sale is a forgery because they could not Third: The apparent vendor, plaintiff-appellant herein, continued to pay taxes on the property
personally appear before Notary Public Lamberto C. Nanquil on June 11, 1991 because her "sold." It is well-known that payment of taxes accompanied by actual possession of the land
husband, Ruben Abrogar, died on May 8, 1991 or one month and 2 days before the execution of covered by the tax declaration, constitute evidence of great weight that a person under whose
the Deed of Absolute Sale, while the plaintiff was still in the Quezon City Medical Center name the real taxes were declared has a claim of right over the land.
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 It is well-settled that the presence of even one of the circumstances in Article 1602 of the New
Memorandum of Agreement, the Special Power of Attorney, and the Deed of Absolute Sale were Civil Code is sufficient to declare a contract of sale with right to repurchase an equitable
all signed by the parties on the same date on April 18, 1991. It is a common and accepted mortgage.
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 Considering that plaintiff-appellant, as vendor, was paid a price which is unusually inadequate,
taxes and surcharges. The plaintiff never questioned receiving the sum of P200,000.00 has retained possession of the subject property and has continued paying the realty taxes over
representing her loan from the defendant. Common sense dictates that an established lending the subject property, (circumstances mentioned in par. (1) (2) and (5) of Article 1602 of the New
and realty firm like the Aguila & Sons, Co. would not part with P200,000.00 to the Abrogar Civil Code), it must be conclusively presumed that the transaction the parties actually entered
spouses, who are virtual strangers to it, without the simultaneous accomplishment and signing of into is an equitable mortgage, not a sale with right to repurchase. The factors cited are in support
all the required documents, more particularly the Deed of Absolute Sale, to protect its interest. to the finding that the Deed of Sale/Memorandum of Agreement with right to repurchase is in
actuality an equitable mortgage.
x x x
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
WHEREFORE, foregoing premises considered, the case in caption is hereby ORDERED same with the amount of the purchase price.
DISMISSED, with costs against the plaintiff.
x x x
On appeal, the Court of Appeals reversed. It held:chanrob1es virtual 1aw library

The facts and evidence show that the transaction between plaintiff-appellant and defendant- Since the real intention of the party is to secure the payment of debt, now deemed to be
appellee is indubitably an equitable mortgage. Article 1602 of the New Civil Code finds strong repurchase price: the transaction shall then be considered to be an equitable mortgage.
application in the case at bar in the light of the following circumstances.
Being a mortgage, the transaction entered into by the parties is in the nature of a pactum
First: The purchase price for the alleged sale with right to repurchase is unusually inadequate. commissorium which is clearly prohibited by Article 2088 of the New Civil Code. Article 2088 of
The property is a two hundred forty (240) sq. m. lot. On said lot, the residential house of plaintiff- the New Civil Code reads:chanrob1es virtual 1aw library
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 ARTICLE 2088. The creditor cannot appropriate the things given by way of pledge or mortgage,
value of the land had considerably increased. or dispose of them. Any stipulation to the contrary is null and void.
should be dismissed for failure to state a cause of action. 9
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 Under Art. 1768 of the Civil Code, a partnership "has a juridical personality separate and distinct
security for the payment of principal obligation; and (2) that there should be a stipulation for an from that of each of the partners." The partners cannot be held liable for the obligations of the
automatic appropriation by the creditor of the thing pledged and mortgaged in the event of non- partnership unless it is shown that the legal fiction of a different juridical personality is being
payment of the principal obligation within the stipulated period. 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
In this case, defendant-appellee in reality extended a P200,000.00 loan to plaintiff-appellant illegal purposes. Moreover, the title to the subject property is in the name of A.C. Aguila & Sons,
secured by a mortgage on the property of plaintiff-appellant. The loan was payable within ninety Co. and the Memorandum of Agreement was executed between private respondent, with the
(90) days, the period within which plaintiff-appellant can repurchase the property. Plaintiff- consent of her late husband, and A. C. Aguila & Sons, Co., represented by petitioner. Hence, it is
appellant will pay P230,000.00 and not P200,000.00, the P30,000.00 excess is the interest for the the partnership, not its officers or agents, which should be impleaded in any litigation involving
loan extended. Failure of plaintiff-appellee to pay the P230,000.00 within the ninety (90) days property registered in its name. A violation of this rule will result in the dismissal of the
period, the property shall automatically belong to defendant-appellee by virtue of the deed of complaint. 11 We cannot understand why both the Regional Trial Court and the Court of Appeals
sale executed. sidestepped this issue when it was squarely raised before them by petitioner.

Clearly, the agreement entered into by the parties is in the nature of pactum commissorium. Our conclusion that petitioner is not the real party in interest against whom this action should be
Therefore, the deed of sale should be declared void as we hereby so declare to be invalid, for prosecuted makes it unnecessary to discuss the other issues raised by him in this appeal.
being violative of law.chanroblesvirtual|awlibrary
WHEREFORE, the decision of the Court of Appeals is hereby REVERSED and the complaint
x x x against petitioner is DISMISSED.chanroblesvirtualawlibrary

SO ORDERED.
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.chanroblesvirtualawlibrary

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