Indeed, for as long as the reason for withdrawal of a partner is not partners.
ners. Not only have they refused to give meaningful increases The parties sought a reconsideration of the above decision.
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.
Commercial Law; Partnership; A partnership that does not
fix its term is a partnership at will.—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.
Same; Same; The birth and life of a partnership at will is
predicated on the mutual desire and consent of the partners.—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 but that it
can result in a liability for damages.
Same; Same; 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.—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. Among partners, 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.
Same; Same; Upon its dissolution, the partnership continues
and its legal personality is retained until the complete winding up of
its business culminating in its termination.—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. Upon its
dissolution, the partnership continues and its legal personality is
retained until the complete winding up of its business culminating in
its termination.
Same; Same; The liquidation of the assets of the
partnership following its dissolution is governed by various
provisions of the Civil Code.—The liquidation of the assets of the
partnership following its dissolution is governed by various
provisions of the Civil Code; 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.
Same; Same; It would not be right to let any of the partners
remain in the partnership under such an atmosphere of
animosity.—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.
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.
PETITION for review on certiorari of a decision of the Court of
Appeals.
The facts are stated in the opinion of the Court.
Bito, Lozada, Ortega & Castillo for petitioners.
Misa Law Offices for private respondent.
Adrian Sison collaborating counsel for private respondent.
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
Au-gust 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 x x x 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 respon-
dents-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
532
building. I would like to have this resolved 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
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. “‘1.Decree the formal dissolution and order the
immediate liquidation of (the partnership of) Bito,
Misa & Lozada;
2. ‘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. ‘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. ‘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. ‘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.’
533
“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
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 04 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. 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. 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. 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,
535
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:
1
“ ‘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 partnership4 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:
“x x x 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.12 Indeed, 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 (Chairman), Romero, Melo and Francisco, JJ.,
concur.
Judgment affirmed.
G.R. No. 135813. October 25, 2001.*
FERNANDO SANTOS, petitioner, vs. Spouses ARSENIO and
NIEVES REYES, respondents.
Remedial Law; Appeals; Factual findings of the Court of
Appeals affirming those of the trial court are binding and conclusive
on the Supreme Court.—Petitioner has utterly failed to demonstrate
why a review of these factual findings is warranted. Well-
entrenched is the basic rule that factual findings of the Court of
Appeals affirming those of the trial court are binding and conclusive
on the Supreme Court. Although there are exceptions to this rule,
petitioner has not satisfactorily shown that any of them is applicable
to this issue.
Same; Same; When the judgment of the Court of Appeals is
premised on a misapprehension of facts or a failure to notice
certain relevant facts that would otherwise justify a different
conclusion, a review of its factual findings may be conducted.—
When the judgment of the CA is premised on a misapprehension of
facts or a failure to notice certain relevant facts that would
otherwise justify a different conclusion, as in this particular issue, a
review of its factual findings may be conducted, as an exception to
the general rule applied to the first two issues.
PETITION for review on certiorari of a decision of the Court of
Appeals.
The facts are stated in the opinion of the Court.
Pacifico M. Lontok and Arcangelita M. Romilla-Lontok for
petitioner.
Benito P. Fabie for private respondents.
PANGANIBAN, J.:
As a general rule, the factual findings of the Court of Appeals
affirming those of the trial court are binding on the Supreme Court.
However, there are several exceptions to this principle. In the
present case, we find occasion to apply both the rule and one of the
exceptions.
The Case
Before us is a Petition for Review on Certiorari assailing the
November 28, 1997 Decision,1 as well as the August 17, 1998 and
the October 9, 1998 Resolutions,2 issued by the Court of Appeals
(CA) in CA-GR CV No. 34742. The Assailed Decision disposed as
follows:
“WHEREFORE, the decision appealed from is AFFIRMED save as For
the counterclaim which is hereby DISMISSED. Costs against
[petitioner].”3
Resolving respondent’s Motion for Reconsideration, the August 17,
1998 Resolution ruled as follows:
“WHEREFORE, [respondents’] motion for reconsideration is
GRANTED. Accordingly, the court’s decision dated November 28,
1997 is hereby MODIFIED in that the decision appealed from is
AFFIRMED in toto, with costs against [petitioner].”4
The October 9, 1998 Resolution denied “for lack of merit”
petitioner’s Motion for Reconsideration of the August 17, 1998
Resolution.5
The Facts
The events that led to this case are summarized by the CA as
follows:
“Sometime in June, 1986, [Petitioner] Fernando Santos and
[Respondent] Nieves Reyes were introduced to each other by one
Meliton Zabat regarding a lending business venture proposed by
Nieves. It was
verbally agreed that [petitioner would] act as financier while
[Nieves] and Zabat [would] take charge of solicitation of members
and collection of loan payments. The venture was launched on June
13, 1986, with the understanding that [petitioner] would receive
70% of the profits while x x x Nieves and Zabat would earn 15%
each,
“In July, 1986, x x x Nieves introduced Cesar Gragera to
[petitioner]. Gragera, as chairman of the Monte Maria Development
Corporation6 (Monte Maria, for brevity), sought short-term loans for
members of the corporation. [Petitioner] and Gragera executed an
agreement providing funds for Monte Maria’s members. Under the
agreement, Monte Maria, represented by Gragera, was entitled to
P1.31 commission per thousand paid daily to [petitioner] (Exh. ‘A’),
x x x Nieves kept the books as representative of [petitioner] while
[Respondent] Arsenio, husband of Nieves, acted as credit
investigator.
“On August 6, 1986, [petitioner], xxx [Nieves] and Zabat
executed the ‘Article of Agreement’ which formalized their earlier
verbal arr angement.
“[Petitioner] and [Nieves] later discovered that their partner
Zabat engaged in the same lending business in competition with
their partnership[.] Zabat was thereby expelled from the
partnership. The operations with Monte Maria continued.
“On June 5, 1987, [petitioner] filed a complaint for recovery of
sum of money and damages. [Petitioner] charged [respondents],
allegedly in their capacities as employees of [petitioner], with
having misappropriated funds intended for Gragera for the period
July 8, 1986 up to March 31, 1987. Upon Gragera s complaint that
his commissions were inadequately remitted, [petitioner] entrusted
P200,000.00 to x x x Nieves to be given to Gragera. x x x Nieves
allegedly failed to account for the amount. [Petitioner] asserted that
after examination of the records, he found that of the total amount
of P4,623,201.90 entrusted to [respondents], only P3,068,133.20
was remitted to Gragera, thereby leaving the balance of
P1,555,065.70 unaccounted for.
“In their answer, [respondents] asserted that they were
partners and not mere employees of [petitioner]. The complaint,
they alleged, was filed to preempt and prevent them from claiming
their rightful share to the profits of the partnership.
“x x x Arsenic alleged that he was enticed by [petitioner] to
take the place of Zabat after [petitioner] learned of Zabat’s
activities. Arsenio re
signed from his job at the Asian Development Bank to join the
partnership.
“For her part, x x x Nieves claimed that she participated in the
business as a partner, as the lending activity with Monte Maria
originated from her initiative. Except for the limited period of July 8,
1986 through August 20, 1986, she did not handle sums intended
for Gragera. Collections were turned over to Gragera because he
guaranteed 100% payment of all sums loaned by Monte Maria.
Entries she made on worksheets were based on this assumptive
100% collection of all loans. The loan releases were made less
Gragera’s agreed commission. Because of this arrangement, she
neither received payments from borrowers nor remitted any amount
to Gragera. Her job was merely to make worksheets (Exhs. ‘15’ to
‘15-DDDDDDDDDD’) to convey to [petitioner] how much he would
earn if all the sums guaranteed by Gragera were collected.
“[Petitioner] on the other hand insisted that [respondents]
were his mere employees and not partners with respect to the
agreement with Gragera. He claimed that after he discovered
Zabat’s activities, he ceased infusing funds, thereby causing the
extinguishment of the partnership. The agreement with Gragera
was a distinct partnership [from] that of [respondent] and Zabat.
[Petitioner] asserted that [respondents] were hired as salaried
employees with respect to the partnership between [petitioner] and
Gragera.
“[Petitioner] further asserted that in Nieves’ capacity as
bookkeeper, she received all payments from which Nieves deducted
Gragera’s commission. The commission would then be remitted to
Gragera. She likewise determined loan releases.
“During the pre-trial, the parties narrowed the issues to the
following points: whether [respondents] were employees or
partners of [petitioner], whether [petitioner] entrusted money to
[respondents] for delivery to Gragera, whether the P1,555,068.70
claimed under the complaint was actually remitted to Gragera and
whether [respondents] were entitled to their counterclaim for share
in the profits.”7
Ruling of the Trial Court
In its August 13, 1991 Decision, the trial court held that
respondents were partners, not mere employees, of petitioner. It
further ruled that Gragera was only a commission agent of
2
petitioner, not his partner. Petitioner moreover failed to prove that
he had en-
trusted any money to Nieves. Thus, respondents’ counterclaim for
their share in the partnership and for damages was granted. The
trial court disposed as follows:
“39. WHEREFORE, the Court hereby renders judgment as follows:
39.1. THE SECOND AMENDED COMPLAINT dated July 26,
1989 is DISMISSED.
39.2. The [Petitioner] FERNANDO J. SANTOS is ordered to pay
the [Respondent] NIEVES S. REYES, the following:
39.2.1. P3,064,428.00 The 15 percent share of the
[respondent] NIEVES S. REYES in the profits of her joint venture
with the [petitioner].
39.2.2. Six (6) percent of P3,064,428.00 As damages from
August 3, 1987 until the P3,064,428.00 is fully paid.
39.2.3. ------ P50,000.00 As moral damages
39.2.4. P10,000.00 As exemplary damages
39.3. The [petitioner] FERNANDO J. SANTOS is ordered to pay
the [respondent] ARSENIO REYES, the following:
39.3.1. P2,899,739.50 The balance of the 15 percent share of
the [respondent] ARSENIO REYES in the profits of his joint venture
with the [petitioner].
39.3.2. ------ Six (6) percent of P2,899,739.50 As damages
from August 3, 1987 until the P2,899,739.50 is fully paid.
39.3.3. P25,000.00 As moral damages
39.3.4. ------ P10,000.00 ------ As exemplary damages
39.4. ------ The [petitioner] FERNANDO J. SANTOS is ordered
to pay the [respondents]:
39.4.1. ------ P50,000.00 As attorney’s fees; and
39.4.2. ------ The cost of the suit.”8
Ruling of the Court of Appeals
On appeal, the Decision of the trial court was upheld, and the
counterclaim of respondents was dismissed. Upon the latter’s
Motion for Reconsideration, however, the trial court’s Decision was
reinstated in toto. Subsequently, petitioner’s own Motion for
Reconsideration was denied in the CA Resolution of October 9,
1998.
The CA ruled that the following circumstances indicated the
existence of a partnership among the parties: (1) it was Nieves who
broached to petitioner the idea of starting a money-lending
business and introduced him to Gragera; (2) Arsenio received
“dividends” or “profit-shares” covering the period July 15 to August
7, 1986 (Exh. “6”); and (3) the partnership contract was executed
after the Agreement with Gragera and petitioner and thus showed
the parties’ intention to consider it as a transaction of the
partnership. In their common venture, petitioner invested capital
while respondents contributed industry or services, with the
intention of sharing in the profits of the business.
The CA disbelieved petitioner’s claim that Nieves had
misappropriated a total of P200,000 which was supposed to be
delivered to Gragera to cover unpaid commissions. It was his task
to collect the amounts due, while hers was merely to prepare the
daily cash flow reports (Exhs. “15–15DDDDDDDDDD”) to keep track
of his collections.
Hence, this Petition.9
Issue
Petitioner asks this Court to rule on the following issues:10
“Whether or not Respondent Court of Appeals acted with grave
abuse of discretion tantamount to excess or lack of jurisdiction in:
1. 1.Holding that private respondents were partners/joint
venturers and not employees of Santos in connection
with the agreement between Santos and Monte
Maria/Gragera;
2. 2.Affirming the findings of the trial court that the phrase
‘Received by’ on documents signed by Nieves Reyes
signified receipt of copies of the documents and not of
the sums shown thereon;
3. 3.Affirming that the signature of Nieves Reyes on
Exhibit ‘E’ was a forgery;
4. 4.Finding that Exhibit ‘H’ [did] not establish receipt by
Nieves Reyes of P200,000.00 for delivery to Gragera;
5. 5.Affirming the dismissal of Santos’ [Second] Amended
Complaint;
6. 6.Affirming the decision of the trial court, upholding
private respondents’ counterclaim;
7. 7.Denying Santos’ motion for reconsideration dated
September 11, 1998.”
Succinctly put, the following were the issues raised by petitioner:
(1) whether the parties’ relationship was one of partnership or of
employer-employee; (2) whether Nieves misappropriated the sums
of money allegedly entrusted to her for delivery to Gragera as his
commissions; and (3) whether respondents were entitled to the
partnership profits as determined by the trial court.
The Court’s Ruling
The Petition is partly meritorious.
First Issue: Business Relationship
Petitioner maintains that he employed the services of respondent
spouses in the money-lending venture with Gragera, with Nieves as
bookkeeper and Arsenio as credit investigator. That Nieves
introduced Gragera to Santos did not make her a partner. She was
only a witness to the Agreement between the two. Separate from
the partnership between petitioner and Gragera was that which
existed among petitioner, Nieves and Zabat, a partnership that was
dissolved when Zabat was expelled.
268
On the other hand, both the CA and the trial court rejected
petitioner’s contentions and ruled that the business relationship was
one of partnership. We quote from the CA Decision, as follows:
“[Respondents] were industrial partners of [petitioner]. xxx Nieves
herself provided the initiative in the lending activities with Monte
Maria. In consonance with the agreement between appellant,
Nieves and Zabat (later replaced by Arsenio), [respondents]
contributed industry to the common fund with the intention of
sharing in the profits of the partnership. [Respondents] provided
services without which the partnership would not have [had] the
wherewithal to carry on the purpose for which it was organized and
as such [were] considered industrial partners (Evangelista v. Abad
Santos, 51 SCRA 416 [1973]).
“While concededly, the partnership between [petitioner,]
Nieves and Zabat was technically dissolved by the expulsion of
Zabat therefrom, the remaining partners simply continued the
business of the partnership without undergoing the procedure
relative to dissolution. Instead, they invited Arsenio to participate as
a partner in their operations. There was therefore, no intent to
dissolve the earlier partnership. The partnership between
[petitioner,] Nieves and Arsenio simply took over and continued the
business of the former partnership with Zabat, one of the incidents
of which was the lending operations with Monte Maria.
xxx xxx xxx
“Gragera and [petitioner] were not partners. The money-
lending activities undertaken with Monte Maria was done in pursuit
of the business for which the partnership between [petitioner],
Nieves and Zabat (later Arsenio) was organized. Gragera who
represented Monte Maria was merely paid commissions in exchange
for the collection of loans. The commissions were fixed on gross
returns, regardless of the expenses incurred in the operation of the
business. The sharing of gross returns does not in itself establish a
partnership.”11
We agree with both courts on this point. By the contract of
partnership, two or more persons bind themselves to contribute
money, property or industry to a common fund, with the intention
of dividing the profits among themselves.12 The “Articles of
Agreement”
stipulated that the signatories shall share the profits of the business
in a 70–15–15 manner, with petitioner getting the lion’s
share.13 This stipulation clearly proved the establishment of a
partnership.
We find no cogent reason to disagree with the lower courts
that the partnership continued lending money to the members of
the Monte Maria Community Development Group, Inc., which later
on changed its business name to Private Association for Community
Development, Inc. (PACDI). Nieves was not merely petitioner’s
employee. She discharged her bookkeeping duties in accordance
with paragraphs 2 and 3 of the Agreement, which states as follows:
1. “2.That the SECOND PARTY and THIRD PARTY shall
handle the solicitation and screening of prospective
borrowers, and shall x x x each be responsible in
handling the collection of the loan payments of the
borrowers that they each solicited.
2. “3.That the bookkeeping and daily balancing of account
of the business operation shall be handled by the
SECOND PARTY.”14
The “Second Party” named in the Agreement was none other than
Nieves Reyes. On the other hand, Arsenio’s duties as credit
investigator are subsumed under the phrase “screening of
prospective borrowers.” Because of this Agreement and the
disbursement of monthly “allowances” and “profit shares” or
“dividends” (Exh. “6”) to Arsenio, we uphold the factual finding of
both courts that he replaced Zabat in the partnership.
Indeed, the partnership was established to engage in a
moneylending business, despite the fact that it was formalized only
after the Memorandum of Agreement had been signed by petitioner
and Gragera. Contrary to petitioner’s contention, there is no
evidence to show that a different business venture is referred to in
this Agreement, which was executed on August 6, 1986, or about a
month after the Memorandum had been signed by petitioner and
Gragera on July 14, 1986. The Agreement itself attests to this fact:
“WHEREAS, the parties have decided to formalize the terms of their
business relationship in order that their respective interests may be
properly defined and established for their mutual benefit and
understanding,”15
Second Issue: No Proof of Misappropriation of
Gragera’s Unpaid Commission
Petitioner faults the CA finding that Nieves did not misappropriate
money intended for Gragera’s commission. According to him,
Gragera remitted his daily collection to Nieves. This is shown by
Exhibit “B” (the “Schedule of Daily Payments”), which bears her
signature under the words “received by.” For the period July 1986
to March 1987, Gragera should have earned a total commission of
P4,282,429.30. However, only P3,068,133.20 was received by him.
Thus, petitioner infers that she misappropriated the difference of
P1,214,296.10, which represented the unpaid commissions. Exhibit
“H” is an untitled tabulation which, according to him, shows that
Gragera was also entitled to a commission of P200,000, an amount
that was never delivered by Nieves.16
On this point, the CA ruled that Exhibits “B,” “F,” “E” and “H”
did not show that Nieves received for delivery to Gragera any
amount from which the P1,214,296.10 unpaid commission was
supposed to come, and that such exhibits were insufficient proof
that she had embezzled P200,000. Said the CA:
“The presentation of Exhibit ‘D’ vaguely denominated as ‘members
ledger’ does not clearly establish that Nieves received amounts from
Monte Maria’s members. The document does not clearly state what
amounts the entries thereon represent. More importantly, Nieves
made the entries for the limited period of January 11, 1987
toFebruary 17, 1987 only while the rest were made by Gragera’s
own staff.
“Neither can we give probative value to Exhibit ‘E' which
allegedly shows acknowledgment of the remittance of commissions
to Verona Gonzales. The document is a private one and its due
execution and authenticity have not been duly proved as required in
[S]ection 20, Rule 132 of the Rules of Court which states:
‘Sec. 20. Proof of Private Document—Before any private document
offered as authentic is received in evidence, its due execution and
authenticity must be proved either:
1. (a)By anyone who saw the document executed or
written; or
2. (b)By evidence of the genuineness of the signature or
handwriting of the maker.
‘Any other private document need only be identified as that
which it is claimed to be.’
“The court a quo even ruled that that the signature thereon
was a forgery, as it found that:
‘x x x. But NIEVES denied that Exh. E-1 is her signature; she
claimed that it is a forgery. The initial stroke of Exh. E-1 starts from
up and goes downward. The initial stroke of the genuine signatures
of NIEVES (Exhs. A-3, B-1, F-1, among others) starts from below
and goes upward. This difference in the start of the initial stroke of
the signatures Exhs. E-1 and of the genuine signatures lends
credence to Nieves’ claim that the signature Exh. E-1 is a forgery.’
xxx xxx xxx
“Nieves’ testimony that the schedules of daily payment (Exhs.
‘B’ and ‘F’) were based on the predetermined 100% collection as
guaranteed by Gragera is credible and clearly in accord with the
evidence. A perusal of Exhs. “B” and “F” as well as Exhs. 15’ to 15-
DDDDDDDDDD’ reveal that the entries were indeed based on the
100% assumptive collection guaranteed by Gragera. Thus, the total
amount recorded on Exh. ‘B’ is exactly the number of borrowers
multiplied by the projected collection of P150.00 per borrower. This
holds true for Exh. ‘F.’
“Corollarily, Nieves’ explanation that the documents were pro
formaand that she signed them not to signify that she collected the
amounts but that she received the documents themselves is more
believable than [petitioner’s] assertion that she actually handled the
amounts.
3
 “Contrary to [petitioner’s] assertion, Exhibit ‘H’ does not
unequivocally establish that x x x Nieves received P200,000.00
commission for Gragera. As correctly stated by the court a quo, the
document showed a liquidation of P240,000.00 and not
P200,000.00.
“Accordingly, we find Nieves’ testimony that after August 20,
1986, all collections were made by Gragera believable and worthy
of credence. Since Gragera guaranteed a daily 100% payment of
the loans, he took charge of the collections. As [petitioner’s]
representative, Nieves merely prepared the daily cash flow reports
(Exh. ‘15’ to ‘15 DDDDDDDDDD’) to enable [petitioner] to keep
track of Gragera’s operations. Gragera on the other hand devised
the schedule of daily payment (Exhs. ‘B’ and ‘F’) to record the
projected gross daily collections.
“As aptly observed by the court a quo:
‘26.1. As between the versions of SANTOS and NIEVES on how the
commissions of GRAGERA [were] paid to him[,] that of NIEVES is
more logical and practical and therefore, more believable. SANTOS’
version would have given rise to this improbable situation:
GRAGERA would collect the daily amortizations and then give them
to NIEVES; NIEVES would get GRAGERA’s commissions from the
amortizations and then give such commission to GRAGERA.’ ”17
These findings are in harmony with the trial court’s ruling, which we
quote below:
“21. Exh. H does not prove that SANTOS gave to NIEVES and the
latter received P200,000.00 for delivery to GRAGERA. Exh. H shows
under its sixth column ADDITIONAL CASH’ that the additional cash
was P240,000.00. If Exh. H were the liquidation of the P200,000.00
as alleged by SANTOS, then his claim is not true. This is so because
it is a liquidation of the sum of P240,000.00.
“21.1. SANTOS claimed that he learned of NIEVES’ failure to
give the P200,000.00 to GRAGERA when he received the latter’s
letter complaining of its delayed release. Assuming as true SANTOS’
claim that he gave P200,000.00 to GRAGERA, there is no competent
evidence that NIEVES did not give it to GRAGERA. The only proof
that NIEVES did not
give it is the letter. But SANTOS did not even present the letter in
evidence. He did not explain why he did not.
“21.2. The evidence shows that all money transactions of the
money-lending business of SANTOS were covered by petty cash
vouchers. It is therefore strange why SANTOS did not present any
voucher or receipt covering the P200,000.00.”18
In sum, the lower courts found it unbelievable that Nieves had
embezzled P1,555,068.70 from the partnership. She did not remit
P1,214,296.10 to Gragera, because he had deducted his
commissions before remitting his collections. Exhibits “B” and “F”
are merely computations of what Gragera should collect for the
day; they do not show that Nieves received the amounts stated
therein. Neither is there sufficient proof that she misappropriated
P200,000, because Exhibit “H” does not indicate that such amount
was received by her; in fact, it shows a different figure.
Petitioner has utterly failed to demonstrate why a review of
these factual findings is warranted. Well-entrenched is the basic
rule that factual findings of the Court of Appeals affirming those of
the trial court are binding and conclusive on the Supreme
Court.19 Although there are exceptions to this rule, petitioner has
not satisfactorily shown that any of them is applicable to this issue.
Third Issue: Accounting of Partnership
Petitioner refuses any liability for respondents’ claims on the profits
of the partnership. He maintains that “both business propositions
were flops,” as his investments were “consumed and eaten up by
the commissions orchestrated to be due Gragera”—a situation that
“could not have been rendered possible without complicity between
Nieves and Gragera.”
Respondent spouses, on the other hand, postulate that petitioner
instituted the action below to avoid payment of the demands of
Nieves, because sometime in March 1987, she “signified to
petitioner that it was about time to get her share of the profits
which had already accumulated to some P3 million.” Respondents
add that while the partnership has not declared dividends or
liquidated its earnings, the profits are already reflected on paper.
To prove the counterclaim of Nieves, the spouses show that from
June 13, 1986 up to April 19, 1987, the profit totaled P20,429,520
(Exhs. “10” et seq. and “15” et seq.). Based on that income, her 15
percent share under the joint venture amounts to P3,064,428 (Exh.
“10–1– 3”); and Arsenio’s, P2,026,000 minus the P30,000 which
was already advanced to him (Petty Cash Vouchers, Exhs. “6, 6-A to
6B”).
The CA originally held that respondents’ counterclaim was
premature, pending an accounting of the partnership. However, in
its assailed Resolution of August 17, 1998, it turned volte
face. Affirming the trial court’s ruling on the counterclaim, it held as
follows:
“We earlier ruled that there is still need for an accounting of the
profits and losses of the partnership before we can rule with
certainty as to the respective shares of the partners. Upon a further
review of the records of this case, however, there appears to be
sufficient basis to determine the amount of shares of the parties
and damages incurred by [respondents]. The fact is that the court
a quo already made such a determination [in its] decision dated
August 13, 1991 on the basis of the facts on record.”20
The trial court’s ruling alluded to above is quoted below:
“27. The defendants’ counterclaim for the payment of their share in
the profits of their joint venture with SANTOS is supported by the
evidence.
“27.1. NIEVES testified that: Her claim to a share in the profits
is based on the agreement (Exhs. “5”, “5-A” and “5-B”). The profits
are shown in the working papers (Exhs. “10” to “10–1”, inclusive)
which she prepared. Exhs. “10” to “10–1” (inclusive) were based on
the daily cash flow reports of which Exh. “3” is a sample. The
originals of the daily cash flow reports (Exhs. “3” and “15” to “15-
D(10)” were given to SANTOS. The joint venture had a net profit of
P20,429,520.00 (Exh. “10-I-1”), from its operations from June 13,
1986 to April 19, 1987 (Exh. “1–1–4”). She had a share of
P3,064,428.00 (Exh. “10-I-3”) and ARSENIO, about P2,926,000.00,
in the profits.
“27.1.1 SANTOS never denied NIEVES' testimony that the
moneylending business he was engaged in netted a profit and that
the originals of the daily case flow reports were furnished to him.
SANTOS however alleged that the money-lending operation of his
joint venture with NIEVES and ZABAT resulted in a loss of about
half a million pesos to him. But such loss, even if true, does not
negate NIEVES’ claim that overall, the joint venture among them—
SANTOS, NIEVES and ARSENIO—netted a profit. There is no reason
for the Court to doubt the veracity of [the testimony of] NIEVES.
“27.2 The P26,260.50 which ARSENIO received as part of his
share in the profits (Exhs. 6, 6-A and 6-B) should be deducted from
his total share.”21
After a close examination of respondents’ exhibits, we find reason
to disagree with the CA. Exhibit “10-I”22 shows that the partnership
earned a “total income” of P20,429,520 for the period June 13,
1986 until April 19, 1987. This entry is derived from the sum of the
amounts under the following column headings: “2-Day Advance
Collection,” “Service Fee,” “Notarial Fee,” “Application Fee,” “Net
Interest Income” and “Interest Income on Investment.” Such
entries represent the collections of the money-lending business or
its gross income.
The “total income” shown on Exhibit “10-I” did not consider
the expenses sustained by the partnership. For instance, it did not
factor in the “gross loan releases” representing the money loaned
to clients. Since the business is money-lending, such releases are
comparable with the inventory or supplies in other business
enterprises.
Noticeably missing from the computation of the “total income” is
the deduction of the weekly allowance disbursed to respondents.
Exhibits “I” et seq. and “J” et seq.23 show that Arsenio received
allowances from July 19, 1986 to March 27, 1987 in the aggregate
amount of P25,500; and Nieves, from July 12, 1986 to March 27,
1987, in the total amount of P25,600. These allowances are
different from the profit already received by Arsenio. They
represent expenses that should have been deducted from the
business profits. The point is that all expenses incurred by the
money-lending enterprise of the parties must first be deducted from
the “total income” in order to arrive at the “net profit” of the
partnership. The share of each one of them should be based on this
“net profit” and not from the “gross income” or “total income”
reflected in Exhibit “10–1,” which the two courts invariably referred
to as “cash flow” sheets.
Similarly, Exhibits “15” et seq.,24 which are the “Daily Cashflow
Reports,” do not reflect the business expenses incurred by the
parties, because they show only the daily cash collections. Contrary
to the rulings of both the trial and the appellate courts,
respondents’ exhibits do not reflect the complete financial condition
of the money-lending business. The lower courts obviously labored
over a mistaken notion that Exhibit “10–1–1” represented the “net
profits” earned by the partnership.
For the purpose of determining the profit that should go to an
industrial partner (who shares in the profits but is not liable for the
losses), the gross income from all the transactions carried on by the
firm must be added together, and from this sum must be
subtracted the expenses or the losses sustained in the business.
Only in the difference representing the net profits does the
industrial partner share. But if, on the contrary, the losses exceed
the income, the industrial partner does not share in the losses.25
When the judgment of the CA is premised on a misapprehension of
facts or a failure to notice certain relevant facts that would
otherwise justify a different conclusion, as in this particular issue, a
review of its factual findings may be conducted, as an exception to
the general rule applied to the first two issues.26
The trial court has the advantage of observing the witnesses
while they are testifying, an opportunity not available to appellate
courts. Thus, its assessment of the credibility of witnesses and their
testimonies are accorded great weight, even finality, when
supported by substantial evidence; more so when such assessment
is affirmed by the CA. But when the issue involves the evaluation of
exhibits or documents that are attached to the case records, as in
the third issue, the rule may be relaxed. Under that situation, this
Court has a similar opportunity to inspect, examine and evaluate
those records, independently of the lower courts. Hence, we deem
the award of the partnership share, as computed by the trial court
and adopted by the CA, to be incomplete and not binding on this
Court.
WHEREFORE, the Petition is partly GRANTED. The assailed
November 28, 1997 Decision is AFFIRMED, but the challenged
Resolutions dated August 17, 1998 and October 9, 1998 are
REVERSED and SET ASIDE. No costs.
SO ORDERED.
Melo (Chairman) and Sandoval-Gutierrez, JJ.,concur.
Vitug, J., On official leave.
Petition partly granted, judgment affirmed. Resolutions of
August 17, 1998 and October 9, 1998 reversed and set aside.
Note.—Factual findings of the Court of Appeals are conclusive
on the parties and carry even more weight when the said court
affirms the factual findings of the trial court. (Boneng vs.
People, 304 SCRA 252 [1999])
G.R. No. 127405. September 20, 2001.*
MARJORIE TOCAO and WILLIAM T. BELO,
petitioners, vs. COURT OF APPEALS and NENITA A. ANAY,
respondents.
Partnerships; With no participation in the profits, a person
cannot be deemed a partner since the essence of a partnership is
that the partners share in the profits and losses.—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. On the other hand, petitioner Tocao declared
that petitioner Belo was not entitled to any share in the profits of
Geminesse Enterprise. 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.
MOTION FOR RECONSIDERATION of a decision of the Court of
Appeals.
The facts are stated in the resolution of the Court.
Fortunato M. Lira for petitioners.
Rodolfo M. Mapile for private respondent.
RESOLUTION
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, 2000, 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 ro
Geminesse Enterprise?
A William Belo is the friend of Marjorie Tocao and he was the guarantor o
Q What do you mean by guarantor?
4
 to pay respondent after the formal accounting of the partnership
A He guarantees the stocks that she owes somebody who is Peter Lo and heaffairs.
acts as guarantor for us.
We can borrow money from him. SO ORDERED.
Davide, Jr. (C.J., Chairman), Kapunan and Pardo,
JJ., concur.
Q You mentioned a certain Peter Lo. Who is this Peter Lo? Puno, J., On official leave.
Motion for reconsideration partially granted. Trial court ordered
A Peter Lo is based in Singapore. to dismiss complaint.
Notes.—A partnership is formed when persons contract “to
Q What is the role of Peter Lo in the Geminesse Enterprise?
devote to a common purpose either money, property, or labor with
A He is the one fixing our orders that open the L/C. the intention of dividing the profits between themselves,” while an
association implies associates who enter a joint enterprise for
Q You mean Peter Lo is the financier? the transaction of business. (AFISCO Insurance Corporation vs.
Court of Appeals, 302 SCRA 1 [1999])
A Yes, he is the financier. A partnership may be deemed to exist among parties who
agree toam borrow money to pursue a business and to divide the
Q And the defendant William Belo is merely the guarantor of Geminesse Enterprise, I correct?
profits or losses that may arise therefrom, even if it is shown that
A Yes, sir. 2
they have not contributed any capital of their own to a “common
The foregoing was neither refuted nor contradicted by respondent’s fund,” as their contribution to such fund could be an intangible, like
evidence. It should be recalled that the business relationship credit or industry. (Lim Tong Lim vs. Philippine Fishing Gear
created between petitioner Tocao and respondent Anay was an Industries, Inc., 317 SCRA 729 [1999])
informal partnership, which was not even recorded with the A partnership “has a juridical personality separate and distinct
Securities and Exchange Commission. As such, it was from that of each of the partners”—it is the partnership, not its
understandable that Belo, who was after all petitioner Tocao’s good officers or agents which should be impleaded in any litigation
friend and confidante, would occasionally participate in the affairs involving property registered in its name. (Aguila, Jr. vs. Court of
of the business, although never in a formal or official Appeals, 319 SCRA 246[1999])
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 No. L-59956. October 31, 1984.*
Furthermore, no evidence was presented to show that ISABELO MORAN, JR., petitioner, vs. THE HON. COURT OF
petitioner Belo participated in the profits of the business enterprise. APPEALS and MARIANO E. PECSON, respondents.
Respondent herself professed lack of knowledge that petitioner Belo Damages; Partnership; There is no factual or legal basis for
received any share in the net income of the partnership.5 On the award of speculative damages for likely partnership profits.—The
other hand, petitioner Tocao declared that petitioner Belo was not first question raised in this petition refers to the award of
entitled to any share in the profits of Geminesse Enterprise.6 With P47,500.00 as the private respondent’s share in the unrealized
no participation in the profits, petitioner Belo cannot be deemed a profits of the partnership. The petitioner contends that the award is
partner since the essence of a partnership is that the partners share highly speculative. The petitioner maintains that the respondent
in the profits and losses.7 court did not take into account the great risks involved in the
Consequently, inasmuch as petitioner Belo was not a partner in business undertaking. We agree with the petitioner that the award
Geminesse Enterprise, respondent had no cause of action against of speculative damages has no basis in fact and law.
him and her complaint against him should accordingly be dismissed. Same; Same; Partner who promises to contribute to
As regards the award of damages, petitioners argue that partnership becomes promissory debtor of latter.—The rule is, when
respondent should be deemed in bad faith for failing to account for a partner who has undertaken to contribute a sum of money fails to
stocks of Geminesse Enterprise amounting to P208,250.00 and that, do so, he becomes a debtor of the partnership for whatever he may
accordingly, her claim for damages should be barred to that extent. have promised to contribute (Art. 1786, Civil Code) and for interests
We do not agree. Given the circumstances surrounding private and
respondent’s sudden ouster from the partnership by petitioner damages from the time he should have complied with his
Tocao, her act of withholding whatever stocks were in her obligation (Art. 1788, Civil Code).
possession and control was justified, if only to serve as security for Same; Same; Essence of partnership is that partners share
her claims against the partnership. However, while we do not agree in profits and losses.—Being a contract of partnership, each partner
that the same renders private respondent in bad faith and should must share in the profits and losses of the venture. That is the
bar her claim for damages, we find that the said sum of essence of a partnership. And even with an assurance made by one
P208,250.00 should be deducted from whatever amount is finally of the partners that they would earn a huge amount of profits, in
adjudged in her favor on the basis of the formal account of the the absence of fraud, the other partner cannot claim a right to
partnership affairs to be submitted to the Regional Trial Court. recover the highly speculative profits. It is a rare business venture
WHEREFORE, based on the foregoing, the Motion for guaranteed to give 100% profits. In this case, on an investment of
Reconsideration of petitioners is PARTIALLY GRANTED. The P15,000.00, the respondent was supposed to earn a guaranteed
Regional Trial Court of Makati is hereby ordered to DISMISS the P1,000.00 a month for eight months and around P142,500.00 on
complaint, docketed as Civil Case No. 88-509, as against petitioner 95,000 posters costing P2.00 each but 2,000 of which were sold at
William T. Belo only. The sum of P208,250.00 shall be deducted P5.00 each. The fantastic nature of expected profits is obvious. We
from whatever amount petitioner Marjorie Tocao shall be held liable have to take various factors into account. The failure of the
Commission on Elections to proclaim all the 320 candidates of the
Constitutional Convention on time was a major factor. The
petitioner used his best business judgment and felt that it would be
a losing venture to go on with the printing of the agreed 95,000
copies of the posters. Hidden risks in any business venture have to
be considered.
Same; Same; Partner entitled to recover share of profits
actually realized by venture.—It does not follow however that the
private respondent is not entitled to recover any amount from the
petitioner. The records show that the private respondent gave
P10,000.00 to the petitioner. The latter used this amount for the
printing of 2,000 posters at a cost of P2.00 per poster or a total
printing cost of P4,000.00. The records further show that the 2,000
copies were sold at P5.00 each. The gross income therefore was
P10,000.00. Deducting the printing costs of P4,000.00 from the
gross income of P10,000.00 and with no evidence on the cost of
distribution, the net profits amount to only P6,000.00. This net
profit of P6,000.00 should be divided between the petitioner and
the private respondent. And since only P4,000.00 was used by the
petitioner in printing the 2,000 copies, the remaining P6,000.00
should therefore be returned to the private respondent.
Same; Same; Agency; Where partnership venture is a
failure, a partner is not entitled to any commission promised by co-
partner where agreement does not state basis of commission.—The
partnership agreement stipulated that the petitioner would give the
private respondent a monthly commission of P1,000.00 from April
15, 1971 to December 15, 1971 for a total of eight (8) monthly
commissions. The agreement does not state the basis of the
commission. The payment of the commission could only have been
predicated on relatively extravagant profits. The parties could not
have intended the giving of a commission inspite of loss or failure of
the venture. Since the venture was a failure, the private respondent
is not entitled to the P8,000.00 commission.
Appeal; When Supreme Court will review factual findings of
Court of Appeals.—As a rule, the findings of facts of the Court of
Appeals are final and conclusive and cannot be reviewed on appeal
to this Court (Amigo v. Teves, 96 Phil. 252), provided they are
borne out by the record or are based on substantial evidence
(Alsua-Betts v. Court of Appeals, 92 SCRA 332). However, this rule
admits of certain exceptions. Thus, in Carolina Industries Inc. v.
CMS Stock Brokerage, Inc., et al, (97 SCRA 734), we held that this
Court retains the power to review and rectify the findings of fact of
the Court of Appeals when (1) the conclusion is a finding grounded
entirely on speculation, surmises and conjectures; (2) when the
inference made is manifestly mistaken, absurd and impossible; (3)
where there is grave abuse of discretion; (4) when the judgment is
based on a misapprehension of facts; and (5) when the court, in
making its findings, went beyond the issues of the case and the
same are contrary to the admissions of both the appellant and the
appellee.
Same; C.A. erred in its factual finding in the case at bar.—In
this case, there is misapprehension of facts. The evidence of the
private respondent himself shows that his investment in the “Voice
of Veterans” project amounted to only P3,000.00. The remaining
P4,000.00 was the amount of profit that the private respondent
expected to receive.
Same; Partnership; Damages; Factual finding of C.A. that
venture never left the ground and on this basis decreed full return
of respondent’s investment is erroneous.—The respondent court
erred when it concluded that the project never left the ground
because the project did take place. Only it failed. It was the private
respondent himself who presented a copy of the book entitled
“Voice of the Veterans” in the lower court as Exhibit “L”. Therefore,
it would be error to state that the project never took place and on
this basis decree the return of the private respondent’s investment.
PETITION for certiorari to review the decision of the Court of
Appeals.
The facts are stated in the opinion of the Court.
GUTIERREZ, JR., J.:
This is a petition for review on certiorari of the decision of the
respondent Court of Appeals which ordered petitioner Isabelo
Moran, Jr. to pay damages to respondent Mariano E. Pecson.
As found by the respondent Court of Appeals, the undisputed
facts indicate that:
xxx xxx xxx
“x x x on February 22, 1971 Pecson and Moran entered into an
agreement whereby both would contribute P15,000 each for the
purpose of printing 95,000 posters (featuring the delegates to the
1971 Constitutional Convention), with Moran actually supervising
the work; that Pecson would receive a commission of P1,000 a
month starting on April 15, 1971 up to December 15, 1971; that on
December 15, 1971, a liquidation of the accounts in the distribution
and printing of the 95,000 posters would be made; that Pecson
gave Moran P10,000 for which the latter issued a receipt; that only
a few posters were printed; that on or about May 28, 1971, Moran
executed in favor of Pecson a promissory note in the amount of
P20,000 payable in two equal installments (P10,000 payable on or
before June 15, 1971 and P10,000 payable on or before June 30,
1971), the whole sum becoming due upon default in the payment
of the first installment on the date due, complete with the costs of
collection.”
Private respondent Pecson filed with the Court of First Instance of
Manila an action for the recovery of a sum of money and alleged in
his complaint three (3) causes of action, namely: (1) on the alleged
partnership agreement, the return of his contribution of P10,000.00,
payment of his share in the profits that the partnership would have
earned, and, payment of unpaid commission; (2) on the alleged
promissory note, payment of the sum of P20,000.00; and, (3) moral
and exemplary damages and attorney’s fees.
After the trial, the Court of First Instance held that:
“From the evidence presented it is clear in the mind of the court
that by virtue of the partnership agreement entered into by the
92
parties—plaintiff and defendant—the plaintiff did contribute
P10,000.00, and another sum of P7,000.00 for the Voice of the
Veteran or Delegate Magazine. Of the expected 95,000 copies of
the posters, the defendant was able to print 2,000 copies only all of
which, however, were sold at P5.00 each. Nothing more was done
after this and it can be said that the venture did not really get off
the ground. On the other hand, the plaintiff failed to give his full
contribution of P15,000.00. Thus, each party is entitled to rescind
the contract which right is implied in reciprocal obligations under
Article 1385 of the Civil Code whereunder ‘rescission creates the
obligation to return the things which were the object of the contract
x x x.
“WHEREFORE, the court hereby renders judgment ordering
defendant Isabelo C. Moran, Jr. to return to plaintiff Mariano E.
Pecson the sum of P17,000.00, with interest at the legal rate from
the filing of the complaint on June 19, 1972, and the costs of the
suit.
5
 “For insufficiency of evidence, the counterclaim is hereby
dismissed.”
From this decision, both parties appealed to the respondent Court
of Appeals. The latter likewise rendered a decision against the
petitioner. The dispositive portion of the decision reads:
“PREMISES CONSIDERED, the decision appealed from is hereby SET
ASIDE, and a new one is hereby rendered, ordering defendant-
appellant Isabelo C. Moran, Jr. to pay plaintiff-appellant Mariano E.
Pecson:
1. “(a)Forty-seven thousand five hundred (P47,500) (the
amount that could have accrued to Pecson under their
agreement);
2. “(b)Eight thousand (P8,000), (the commission for eight
months);
3. “(c)Seven thousand (P7,000) (as a return of Pecson’s
investment for the Veteran’s Project);
4. “(d)Legal interest on (a), (b) and (c) from the date the
complaint was filed (up to the time payment is made)”
The petitioner contends that the respondent Court of Appeals
decided questions of substance in a way not in accord with law and
with Supreme Court decisions when it committed the following
errors:
93
I Constitutional Convention on
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN
HOLDING PETITIONER ISABELO C. MORAN, JR. LIABLE TO
RESPONDENT MARIANO E. PECSON IN THE SUM OF P47,500 AS
THE SUPPOSED EXPECTED PROFITS DUE HIM.
II
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN
HOLDING PETITIONER ISABELO C. MORAN, JR. LIABLE TO
RESPONDENT MARIANO E. PECSON IN THE SUM OF P8,000, AS
SUPPOSED COMMISSION IN THE PARTNERSHIP ARISING OUT OF
PECSON’S INVESTMENT.
III
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN
HOLDING PETITIONER ISABELO C. MORAN, JR. LIABLE TO
RESPONDENT MARIANO E. PECSON IN THE SUM OF P7,000 AS A
SUPPOSED RETURN OF INVESTMENT IN A MAGAZINE VENTURE.
IV
ASSUMING WITHOUT ADMITTING THAT PETITIONER IS AT
ALL LIABLE FOR ANY AMOUNT, THE HONORABLE COURT OF
APPEALS DID NOT EVEN OFFSET PAYMENTS ADMITTEDLY
RECEIVED BY PECSON FROM MORAN.
V Anent the third assigned error, the petitioner maintains that
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN
NOT GRANTING THE PETITIONER’S COMPULSORY COUNTERCLAIM
FOR DAMAGES.
The first question raised in this petition refers to the award of
P47,500.00 as the private respondent’s share in the unrealized
profits of the partnership. The petitioner contends that the award is
highly speculative. The petitioner maintains that the respondent
court did not take into account the great risks involved in the
business undertaking.
94
We agree with the petitioner that the award of speculative damages
has no basis in fact and law.
There is no dispute over the nature of the agreement between
the petitioner and the private respondent. It is a contract of
partnership. The latter in his complaint alleged that he was induced
by the petitioner to enter into a partnership with him under the
following terms and conditions:
1. “1.That the partnership will print colored posters of the
delegates to the Constitutional Convention;
2. “2.That they will invest the amount of Fifteen Thousand
Pesos (P15,000.00) each;
3. “3.That they will print Ninety Five Thousand (95,000)
copies of the said posters;
4. “4.That plaintiff will receive a commission of One
Thousand Pesos (P1,000.00) a month starting April
15, 1971 up to December 15, 1971;
5. “5.That upon the termination of the partnership on
December 15, 1973, a liquidation of the account
pertaining to the distribution and printing of the said
95,000 posters shall be made.”
The petitioner on the other hand admitted in his answer the
existence of the partnership.
The rule is, when a partner who has undertaken to contribute
a sum of money fails to do so, he becomes a debtor of the
partnership for whatever he may have promised to contribute (Art.
1786, Civil Code) and for interests and damages from the time he
should have complied with his obligation (Art. 1788, Civil Code),
Thus in Uy v. Puzon (79 SCRA 598), which interpreted Art. 2200 of
the Civil Code of the Philippines, we allowed a total of P200,000.00
compensatory damages in favor of the appellee because the
appellant therein was remiss in his obligations as a partner and as
prime contractor of the construction projects in question. This case
was decided on a particular set of facts. We awarded compensatory
damages in the Uycase because there was a finding that the
“constructing business is a profitable one and that the UP
construction company derived some profits from its contractors in
the construction of roads and bridges despite its deficient
95
capital.” Besides, there was evidence to show that the partnership
made some profits during the periods from July 2, 1956 to
December 31, 1957 and from January 1, 1958 up to September 30,
1959. The profits on two government contracts worth
P2,327,335.76 were not speculative. In the instant case, there is no
evidence whatsoever that the partnership between the petitioner
and the private respondent would have been a profitable venture.
In fact, it was a failure doomed from the start. There is therefore
no basis for the award of speculative damages in favor of the
private respondent.
Furthermore, in the Uy case, only Puzon failed to give his full
contribution while Uy contributed much more than what was
expected of him. In this case, however, there was mutual breach.
Private respondent failed to give his entire contribution in the
amount of P15,000.00. He contributed only P10,000.00. The
petitioner likewise failed to give any of the amount expected of him.
He further failed to comply with the agreement to print 95,000
copies of the posters. Instead, he printed only 2,000 copies.
Article 1797 of the Civil Code provides:
“The losses and profits shall be distributed in conformity with the
agreement. If only the share of each partner in the profits has been
agreed upon, the share of each in the losses shall be in the same
proportion.”
Being a contract of partnership, each partner must share in the
profits and losses of the venture. That is the essence of a
partnership. And even with an assurance made by one of the
partners that they would earn a huge amount of profits, in the
absence of fraud, the other partner cannot claim a right to recover
the highly speculative profits. It is a rare business venture
guaranteed to give 100% profits. In this case, on an investment of
P15,000.00, the respondent was supposed to earn a guaranteed
P1,000.00 a month for eight months and around P142,500.00 on
95,000 posters costing P2.00 each but 2,000 of which were sold at
P5.00 each. The fantastic nature of expected profits is obvious. We
have to take various factors into account. The failure of the
Commission on Elections to proclaim all the 320 candidates of the
96
time was a major factor. The petitioner used his best business
judgment and felt that it would be a losing venture to go on with
the printing of the agreed 95,000 copies of the posters. Hidden
risks in any business venture have to be considered.
It does not follow however that the private respondent is not
entitled to recover any amount from the petitioner. The records
show that the private respondent gave P10,000.00 to the petitioner.
The latter used this amount for the printing of 2,000 posters at a
cost of P2.00 per poster or a total printing cost of P4,000.00. The
records further show that the 2,000 copies were sold at P5.00 each.
The gross income therefore was P10,000.00. Deducting the printing
costs of P4,000.00 from the gross income of P10,000.00 and with
no evidence on the cost of distribution, the net profits amount to
only P6,000.00. This net profit of P6,000.00 should be divided
between the petitioner and the private respondent. And since only
P4,000.00 was used by the petitioner in printing the 2,000 copies,
the remaining P6,000.00 should therefore be returned to the private
respondent.
Relative to the second alleged error, the petitioner submits
that the award of P8,000.00 as Pecson’s supposed commission has
no justifiable basis in law.
Again, we agree with the petitioner.
The partnership agreement stipulated that the petitioner would
give the private respondent a monthly commission of P1,000.00
from April 15, 1971 to December 15, 1971 for a total of eight (8)
monthly commissions. The agreement does not state the basis of
the commission. The payment of the commission could only have
been predicated on relatively extravagant profits. The parties could
not have intended the giving of a commission inspite of loss or
failure of the venture. Since the venture was a failure, the private
respondent is not entitled to the P8,000.00 commission.
the respondent Court of Appeals erred in holding him liable to the
private respondent in the sum of P7,000.00 as a supposed return of
investment in a magazine venture. In awarding P7,000.00 to the
private respondent as his sup-
97
posed return of investment in the “Voice of the Veterans” magazine
venture, the respondent court ruled that:
xxx xxx xxx
“x x x Moran admittedly signed the promissory note of P20,000
in favor of Pecson. Moran does not question the due execution of
said note. Must Moran therefore pay the amount of P20,000? The
evidence indicates that the P20,000 was assigned by Moran to
cover the following:
1. “(a)P7,000—the amount of the PNB check given by
Pecson to Moran representing Pecson’s investment in
Moran’s other project (the publication and printing of
the ‘Voice of the Veterans’);
2. “(b)P10,000—to cover the return of Pecson’s
contribution in the project of the Posters;
3. “(c)P3,000—representing Pecson’s commission for three
months (April, May, June, 1971).
Of said P20,000 Moran has to pay P7,000 (as a return of Pecson’s
investment for the Veterans’ project, for this project never left the
ground). x x x”
As a rule, the findings of facts of the Court of Appeals are final and
conclusive and cannot be reviewed on appeal to this Court (Amigo
v. Teves, 96 Phil. 252), provided they are borne out by the record
or are based on substantial evidence (AlsuaBetts v. Court of
Appeals, 92 SCRA 332). However, this rule admits of certain
exceptions. Thus, in Carolina Industries Inc. v. CMS Stock
Brokerage, Inc., et al., (97 SCRA 734), we held that this Court
retains the power to review and rectify the findings of fact of the
Court of Appeals when (1) the conclusion is a finding grounded
entirely on speculation, surmises and conjectures; (2) when the
inference made is manifestly mistaken, absurd and impossible; (3)
where there is grave abuse of discretion; (4) when the judgment is
based on a misapprehension of facts; and (5) when the court, in
making its findings, went beyond the issues of the case and the
same are contrary to the admissions of both the appellant and the
appellee.
In this case, there is misapprehension of facts. The evidence
of the private respondent himself shows that his investment in
98
the “Voice of Veterans” project amounted to only P3,000.00. The
remaining P4,000.00 was the amount of profit that the private
respondent expected to receive.
The records show the following exhibits—
“E—Xerox copy of PNB Manager’s Check No. 234265 dated March
22, 1971 in favor of defendant. Defendant admitted the authenticity
of this check and of his receipt of the proceeds thereof (t.s.n., pp.
3-4, Nov. 29, 1972). This exhibit is being offered for the purpose of
showing plaintiff’s capital investment in the printing of the ‘Voice of
the Veterans’ for which he was promised a fixed profit of P8,000.
This investment of P6,000.00 and the promised profit of P8,000 are
covered by defendant’s promissory note for P14,000 dated March
31, 1971 marked by defendant as Exhibit 2 (t.s.n., pp. 20-21, Nov.
29, 1972), and by plaintiff as Exhibit P. Later, defendant returned
P3,000.00 of the P6,000.00 investment thereby proportionately
reducing the promised profit to P4,000. With the balance of P3,000
(capital) and P4,000 (promised profit), defendant signed and
executed the promissory note for P7,000 marked Exhibit 3 for the
6
defendant and Exhibit M for plaintiff. Of this P7,000, defendant paid
P4,000 representing full return of the capital investment and P1,000
partial payment of the promised profit. The P3,000 balance of the
promised profit was made part consideration of the P20,000
promissory note (t.s.n., pp. 22-24, Nov. 29, 1972). It is, therefore,
being presented to show the consideration for the P20,000
promissory note.
“F—Xerox copy of PNB Manager’s check dated May 29, 1971
for P7,000 in favor of defendant. The authenticity of the check and
his receipt of the proceeds thereof were admitted by the defendant
(t.s.n., pp. 3-4, Nov. 29, 1972). This P7,000 is part consideration,
and in cash, of the P20,000 promissory note (t.s.n., p. 25, Nov. 29,
1972), and it is being presented to show the consideration for the
P20,000 note and the existence and validity of the obligation.
xxx xxx xxx
“L—Book entitled ‘Voice of the Veterans’ which is being offered
for the purpose of showing the subject matter of the other
partnership agreement and in which plaintiff invested the P6,000
(Exhibit E) which, together with the promised profit of P8,000 made
up for the consideration of the P14,000 promissory note (Exhibit 2;
Exhibit P). As explained in connection with Exhibit E, the P3,000
balance of the promised profit was later made part consideration of
the P20,000 promissory note. “M—Promissory note for P7,000
dated March 30, 1971. This is also defendant’s Exhibit E. This
document is being offered for the purpose of further showing the
transaction as explained in connection with Exhibits E and L.
“N—Receipt of plaintiff dated March 30, 1971 for the return of
his P3,000 out of his capital investment of P6,000 (Exh. E) in the
P14,000 promissory note (Exh. 2; P). This is also defendant’s
Exhibit 4. This document is being offered in support of plaintiff’s
explanation in connection with Exhibits E, L, and M to show the
transaction mentioned therein.
xxx xxx xxx
“P—Promissory note for P14,000.00. This is also defendant’s
Exhibit 2. It is being offered for the purpose of showing the
transaction as explained in connection with Exhibits E, L, M, and N
above.”
Explaining the above-quoted exhibits, respondent Pecson testified
that:
“Q During the pre-trial of this case. Mr. Pecson, the defendant presented a promissory noteNov.
amount of P14,000.00 which has been marked as Exhibit 2. Do you know“Qthis promissory
“A Yes, sir.
“Q What is this promissory note, in connection with your transaction with the
“A This promissory note is for the printing of the ‘Voice of the Veterans’.
“Q What is this ‘Voice of the Veterans’, Mr. Pecson?
“A It is a book.”
(T.S.N., p. 19, Nov. 29, 1972)
“Q And what does the amount of P14,000.00 indicated in the promissory note,
“A Exhibit
“A It represents the P6,000.00 cash which I gave to Mr. Moran, as evidenced by the Philippinenote of P20,000.00.”
National Bank Manager’s check and the P8,000.00 profit assured me by Mr.
derive from the printing of this ‘Voice of the Veterans’ book.
“Q You said that the P6,000.00 of this P14,000.00 is covered by a Manager’sfailed.
E, is this the Manager’s check that you mentioned?
never took place and on this basis decree the return of the private The instant petition for annulment of decision is DISMISSED.
“A Yes, sir. respondent’s investment.
What happened to this promissory note of P14,000.00 which you said representedAs already mentioned,
P6,000.00 of there are risks in any business venture
and the failure of the undertaking cannot entirely be blamed on the 1. 1.Judgments may be annulled only on the ground of
managing partner alone, specially if the latter exercised his best extrinsic or collateral fraud, as distinguished from
“Q your investment and P8,000.00 promised profits?
business judgment, which seems to be true in this case. intrinsic fraud (Canlas vs. Court of Appeals, 164 SCRA
“A Latter, Mr. Moran returned to me P3,000.00 which represented one-half (½) of In the
viewP6,000.00
of the foregoing, there is no reason to pass upon the 160, 170). No such ground is alleged in the petition.
fourth and fifth assignments of errors raised by the petitioner. We 2. 2.Even if the judgment rendered by the respondent
capital I gave to him. Court were erroneous, it is not necessarily void
likewise find no valid basis for the grant of the counter-claim.
WHEREFORE, the to
petition is GRANTED. The decision of the (Chereau vs. Fuentebella, 43 Phil. 216). Hence, it
“Q As a consequence of the return by Mr. Moran of one-half (½) of the P6,000.00 capital you gave
respondent Court of Appeals (now Intermediate Appellate Court) is cannot be annulled by the proceeding sought to be
him, what happened to the promised profit of P8,000.00? hereby SET ASIDE and a new one is rendered ordering the commenced by the petitioners.
petitioner Isabelo Moran, Jr., to pay private respondent Mariano 3. 3.The petitioners’ remedy against the judgment
“A It was reduced to one-half (½) which is P4,000.00. Pecson SIX THOUSAND (P6,000.00) PESOS representing the enforcement of which is sought to be stopped should
amount of of P3,000.00
the privateofrespondent’s contribution to the partnership have been appeal.
“Q Was there any document executed by Mr. Moran in connection with the Balance
but which remained unused; and THREE THOUSAND (P3,000.00)
your capital investment and the P4,000.00 promised profits? PESOS representing one-half (½) of the net profits gained by the SO ORDERED. (pp. 24-25, Rollo.)
partnership in the sale of the two thousand (2,000) copies of the The antecedent facts of the case are as follows:
“A Yes. sir, he executed a promissory note. posters, with interests at the legal rate on both amounts from the On July 23, 1976, herein private respondent Olivia V. Yanson
date the complaint was filed until full payment is made. filed a complaint against petitioner Lourdes Navarro for “Delivery of
“Q I show you a promissory note in the amount of P7,000.00 dated March 30, 1971 which for
SO ORDERED. Personal Properties With Damages”. The complaint incorporated an
purposes of identification I request the same to be marked as Exhibit M. . . application for a writ of replevin. The complaint was later docketed
as Civil Case No. 716 (12562) of the then Court of First Instance of
Court
Bacolod (Branch 55) and was subsequently amended to include
private respondent’s husband, Ricardo B. Yanson, as co-plaintiff,
Mark it as Exhibit M. G.R. No. 101847. May 27, 1993.*
and petitioner’s husband, as co-defendant.
LOURDES NAVARRO AND MENARDO NAVARRO,
“Q (continuing) is this the promissory note which you said was executed by Mr. Moran in connection On July 27, 1976, then Executive Judge Oscar R. Victoriano
petitioners, vs. COURT OF APPEALS, JUDGE BETHEL
KATALBAS-MOSCARDON, Presiding Judge, Regional Trial (later to be promoted and to retire as Presiding Justice of the Court
with your transaction regarding the printing of the ‘Voice of the Veterans’? of Appeals) approved private respondents’ application for a writ of
Court of Bacolod City, Branch 52, Sixth Judicial Region and
“A Yes, sir. Spouses OLIVIA V. YANSON AND RICARDO B. YANSON, replevin. The Sheriff’s Return of Service dated March 3, 1978
affirmed receipt by private respondents of all the pieces of personal
respondents.
(T.S.N., pp. 20-22, Nov. 29, 1972). Remedial Law; Annulment of Judgments; Judgments may property sought to be recovered from petitioners.
On April 30, 1990, Presiding Judge Bethel Katalbas-Moscardon
“Q What happened to this promissory note executed by Mr. Moran, Mr. Pecson? be annulled only on grounds of extrinsic or collateral fraud.—Having
lost their right of appeal, petitioners resorted to annulment rendered a decision, disposing as follows:
Accordingly, in the light of the aforegoing findings, all chattels
“A proceedings
Mr. Moran paid me P4,000.00 out of the P7,000.00 as shown by the promissory note. to justify a belated judicial review of their case. This
was, however, correctly thrown out by the Court of Appeals already recovered by plaintiff by virtue of the Writ of Replevin and
as
“Q Was there a receipt issued by you covering this payment of P4,000.00 inbecause
favor of Mr. Moran? failed to cite extrinsic or collateral fraud to
petitioners
677
warrant the setting aside of the trial court’s decision. We respect
“A Yes, sir.” listed in the complaint are hereby sustained to belong to plaintiff
the appellate court’s finding in this regard.
in the Civil Law; Partnerships; Co-ownership or co-possession or being the owner of these properties; the motor vehicle, particularly
(T.S.N., p. 23, 29, 1972).
any sharing of proceeds not an indicia of the existence of that Ford Fiera Jeep registered in and which had remain in the
You statednote?
that Mr. Moran paid the amount of P4,000.00 on account of the P7,000.00
partnership coveredthere
.—While by may have been co-ownership or co- possession of the defendant is likewise declared to belong to her,
possession of some items and/ or any sharing of proceeds by way however, said defendant is hereby ordered to reimburse plaintiff the
the promissory note, Exhibit M. What does this P4,000.00 covered by Exhibit N represent? sum of P6,500.00 representing the amount advanced to pay part of
of advances received by both plaintiff and the defendant, these are
not indicative the price therefor; and said defendant is likewise hereby ordered to
“Adefendant?
This P4,000.00 represents the P3,000.00 which he has returned of my P6,000.00 capitaland supportive of the existence of any partnership
investment return to plaintiff such other equipment[s] as were brought by the
between them.
and the latter to and during the operation of their business as were listed in
the complaint and not recovered as yet by virtue of the previous
PETITION
P1,000.00 represents partial payment of the P4,000.00 profit that was promised to for
mereview
by Mr. of the decision of the Court of Appeals. Writ of Replevin. (p. 12, Rollo.)
Petitioner received a copy of the decision on January 10, 1991
Moran. (almost 9 months after its rendition) and filed on January 16, 1991
The facts are stated in the opinion of the Court.
George a “Motion for Extension of Time to File a Motion for
“Q
And what happened to the balance of P3,000.00 under the promissory note, Exhibit M? L. Howard Law Office for petitioners.
Geocadin, Vinco, Guance, Laudenorio & Cario Law Reconsideration”. This was granted on January 18, 1991. Private
The2,balance
represent?
of P3,000.00 and the rest of the profit was applied as part of the consideration
Office of the
for private respondents. respondents filed their opposition, citing the ruling in the case
of Habaluyas Enterprises, Inc. vs. Japson (142 SCRA 208 [1986])
promissory proscribing the filing of any motion for extension of time to file a
MELO, J.: motion for new trial or reconsideration. The trial judge vacated the
Moran
(T.S.N., pp.which I will
23-24, Nov. 29, 1972). order dated January 18, 1991 and declared the decision of April 30,
The respondent court erred when it concluded that the project 1990 as final and executory. (Petitioner’s motion for reconsideration
Assailed and sought to be set aside by the petition before us is the
never left the ground because the project did take place. Only it was subsequently filed on February 1, 1991 or 22 days after the
Resolution of the Court of Appeals dated June 20, 1991 which
check.It Iwas
showthe private
you respondent himself who presented a copy
Exhibit dismissed the petition for annulment of judgment filed by the receipt of the decision).
of the book entitled “Voice of the Veterans” in the lower court as
Spouses Lourdes and Menardo Navarro, thusly:
Exhibit “L”. Therefore, it would be error to state that the project
7
 On February 4, 1991, the trial judge issued a writ of execution
(Annex “5”, p. 79, Rollo). The Sheriff’s Return of Service (Annex
“6”, p. 82, Rollo) declared that the writ was “duly served and
satisfied”. A receipt for the amount of P6,500.00 issued by Mrs.
Lourdes Yanson, co-petitioner in this case, was likewise submitted
by the Sheriff (Annex “7”, p. 83, Rollo).
On June 26, 1991, petitioners filed with respondent court a
petition for annulment of the trial court’s decision, claiming that the
trial judge erred in declaring the non-existence of a partnership,
contrary to the evidence on record.
The appellate court, as aforesaid, outrightly dismissed the
petition due to absence of extrinsic or collateral fraud, observing
further that an appeal was the proper remedy.
In the petition before us, petitioners claim that the trial judge
ignored evidence that would show that the parties “clearly intended
to form, and (in fact) actually formed a verbal partnership engaged
in the business of Air Freight Service Agency in Bacolod”;
678
and that the decision sustaining the writ of replevin is void since
“the properties belonging to the partnership do not actually belong
to any of the parties until the final disposition and winding up of the
partnership” (p. 15, Rollo). These issues, however, were extensively
discussed by the trial judge in her 16-page, single-spaced decision.
We agree with respondents that the decision in this case has
become final. In fact a writ of execution had been issued and was
promptly satisfied by the payment of P6,500.00 to private
respondents.
Having lost their right of appeal, petitioners resorted to
annulment proceedings to justify a belated judicial review of their
case. This was, however, correctly thrown out by the Court of
Appeals because petitioners failed to cite extrinsic or collateral fraud
to warrant the setting aside of the trial court’s decision. We respect
the appellate court’s finding in this regard.
Petitioners have come to us in a petition for review. However,
the petition is focused solely on factual issues which can no longer
be entertained. Petitioners’ arguments are all directed against the
decision of the regional trial court; not a word is said in regard to
the appellate court’s disposition of their petition for annulment of
judgment. Verily, petitioners keep on pressing the idea that a
partnership exists on account of the so-called admissions in
judicio. But the factual premises of the trial court were more than
enough to suppress and negate petitioners’ submissions along this
line:
To be resolved by this Court factually involved the issue of whether
there was a partnership that existed between the parties based on
their verbal contention; whether the properties that were commonly
used in the operation of Allied Air Freight belonged to this alleged
partnership business; and the status of the parties in this
transaction of alleged partnership. On the other hand, the legal
issue revolves on the dissolution and winding up in case a
partnership so existed as well as the issue of ownership over the
properties subject matter of recovery.
As a premise, Article 1767 of the New Civil Code defines the
contract of partnership to quote:
“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 proceeds
679
among themselves.
xxx xxx xxx.”
Corollary to this definition is the provision in determining
whether a partnership exist as so provided under Article 1769, to
wit:
xxx xxx xxx
Furthermore, the Code provides under Article 1771 and 1772
that while a partnership may be constituted in any form, a public
instrument is necessary where immovables or any rights is
constituted. Likewise, if the partnership involves a capitalization of
P3,000.00 or more in money or property, the same must appear in
a public instrument which must be recorded in the Office of the
Securities and Exchange Commission. Failure to comply with these
requirements shall only affect liability of the partners to third
persons.
In consideration of the above, it is undeniable that both the
plaintiff and the defendant-wife made admission to have entered
into an agreement of operating this Allied Air Freight Agency of
which the plaintiff personally constituted with the Manila Office in a
sense that the plaintiff did supply the necessary equipments and
money while her brother Atty. Rodolfo Villaflores was the Manager
and the defendant the Cashier. It was also admitted that part of
this agreement was an equal sharing of whatever proceeds realized.
Consequently, the plaintiff brought into this transaction certain
chattels in compliance with her obligation. The same has been done
by the herein brother and the herein defendant who started to work
in the business. A cursory examination of the evidences presented
no proof that a partnership, whether oral or written had been
constituted at the inception of this transaction. True it is that even
up to the filing of this complaint those movables brought by plaintiff
for the use in the operation of the business remain registered in her
name.
While there may have been co-ownership or co-possession of
some items and/or any sharing of proceeds by way of advances
received by both plaintiff and the defendant, these are not
indicative and supportive of the existence of any partnership
between them. Article 1769 of the New Civil Code is explicit. Even
the books and records retrieved by the Commissioner appointed by
the Court did not show proof of the existence of a partnership as
conceptualized by law. Such that if assuming that there were profits
realized in 1975 after the two-year deficits were compensated, this
could only be subject to an equal sharing consonant to the
agreement to equally divide any profit realized. However, this Court
cannot overlook the fact that the Audit Report of the appointed
Commissioner was not highly reliable in the sense that it was more
of his personal estimate of what is available on hand. Besides, the
alleged profits was a difference found after valuating the assets and
not arising from the real operation of the business. In
680
accounting procedures, strictly, this could not be profit but a net
worth.
In view of the above factual findings of the Court it follows
inevitably therefore that there being no partnership that existed,
any dissolution, liquidation or winding up is beside the point. The
plaintiff herself had summarily ceased from her contract of agency
and it is a personal prerogative to desist. On the other hand, the
assumption by the defendant in negotiating for herself the
continuance of the Agency with the principal in Manila is
comparable to plaintiff’s. Any account of plaintiff with the principal
as alleged, bore no evidence as no collection was ever demanded of
from her. The alleged P20,000.00 assumption specifically, as would
have been testified to by the defendant’s husband remain a mere
allegation.
As to the properties sought to be recovered, the Court sustains
the possession by plaintiff of all equipments and chattels recovered
by virtue of the Writ of Replevin. Considering the other vehicle
which appeared registered in the name of the defendant, and to
which even she admitted that part of the purchase price came from
the business claimed mutually operated, although the Court have
not as much considered all entries in the Audit report as totally
reliable to be sustained insofar as the operation of the business is
concerned, nevertheless, with this admission of the defendant and
the fact that as borne out in said Report there has been disbursed
and paid for this vehicle out of the business funds in the total sum
of P6,500.00, it is only fitting and proper that validity of these
disbursements must be sustained as true (Exhs. M-1 to M-3, p. 180,
Records). In this connection and taking into account the earlier
agreement that only profits were to be shared equally, the plaintiff
must be reimbursed of this cost if only to allow the defendant
continuous possession of the vehicle in question. It is a
fundamental, moral and civil injunction that no one shall enrich
himself at the expense of another. (pp. 71-75, Rollo.)
Withal, the appellate court acted properly in dismissing the petition
for annulment of judgment, the issue raised therein having been
directly litigated in, and passed upon by, the trial court.
WHEREFORE, the petition is DISMISSED. The Resolution of the
Court of Appeals dated June 20, 1991 is AFFIRMED in all respects.
No special pronouncements is made as to costs.
SO ORDERED.
Feliciano (Chairman), Bidin, Davide, Jr. and Romero,
JJ., concur.
Nos. L-24020-21. July 29, 1968.
FLORENCIO REYES and ANGEL REYES,
petitioners, vs.COMMISSIONER OF iNTERNAL REVENUE and
HON. COURT OF TAX APPEALS, respondents.
Taxation; Income tax on corporations imposable on
partnerships, except duly registered general copurtnerships.—For
purposes of the tax on corporations, the National Internal Revenue
Code includes partnerships, with the exception only of duly
registered general copartnerships.
199
Same; Ruling in Evangelista vs. Collector of Internal
Revenue applind.—Where petitioners (father and son) purchased
the lot and building for P375,000.00 leaving a balance of
P460,000.00 representing the mortgage obligation of the vendors
with the Chiria Banking Gorporation which was assumed by
petitioners, that such initial payment was shared equally by
petitioners, that administration of the building was entrusted to an
administrator who collected the rents, kept its books and records
and rendered statements of accounts to petitioners, negotiated
leases and made repairs and disibursed payments; and where
petitioners divided equally the income derived from the building
after deducting expenses of operation and maintenance, petitioners
are not only co-owners but partners. And since under section 84(b)
of the Revenue Code, the term corporation includes partnerships no
matter how created or organized, this qualifying expression clearly
indicates that a joint venture need not be undertaken in any of the
standard forms or in conformity with the usual requirements of the
law on partnerships. Pursuant to the same section 84(b), the term
'corporation' includes among others, joint accounts (cuentas en
participacion) and associations, none of which has a legal
personality of its own independent of that of its members. The
lawmaker could not have regarded personality as a condition
precedent to the existence of partnerships referred to therein.
Same; Same; Slight differences do not call for a different
ruling.—In the Evangelista case the following circumstances were
found to exist: a common fund created purposely, the investment
of the same not merely in one transaction but in a series of
transactions, the lots not being devoted to residential purposes or
to other personal purposes, the properties being under the
management of one person with full power to lease, collect rents,
issue receipts, bring suits—and that all these conditions existed for
over 10 years. In the case at bar, petitioners could claim that this
was only one transaction, that: their intention was to house in that
building acquired by them the respective enterprises and to effect a
division in 10 years. But while the purchase was made in 1950, as
late as 1965, or almost 15 years later, there was no allegation of
such division and the facts show that the building continued to be
leased by other parties with petitioners dividing equally the income
after deducting operational expenses. Differences of such slight
significance do not call for a different ruling, they do not suffice to
preclude the applicability of the Evangelista decision.
Court of Tax Appeals; Findinys entitled to respect owing to
its expertise on xubject.—As a matter of principle, it is not advisable
for the appellate Court to set aside the conclusion reached by an
agency such as the Court of Tax Appeals which is, by the very
nature of its function, dedicated exclusively to the study and
consideration of tax problems and has neces-sarily developed an
expertise on the subject unless there has been an abuse or
improvident exercise of its authority.
PETITION for review of a decision of the Court of Tax Appeals.
The facts are stated in the opinion of the Court.
Jose W. Diokno and Domingo Sandoval for petitioners.
Solicitor General for respondents.
FERNANDO, J.:
Petitioners in this case were assessed by respondent Commissioner
of Internal Revenue the sum of 5P46,647.00 as income tax,
surcharge and compromise for the years 1951 to 1954, an
assessment subsequently reduced to P37,528.00. This assessment
sought to be reconsidered unsuccessfully was the subject of an
appeal to respondent Court of Tax Appeals. Thereafter, another
assessment was made against petitioners, this time for back income
taxes plus surcharge and compromise in the total sum of
P25,973.75, covering the years 1955 and 1956. There being a
failure on their -part to have such assessments reconsidered, the
matter was likewise taken to the respondent Court of Tax Appeals.
The two cases1 involving as they did identical issues and ultimately
traceable to facts similar in character were heard jointly with only
one decision being rendered.
In that joint decision of respondent Court of Tax Appeals, the
tax liability for the years 1951 to 1954 was reduced to ?37,128.00
and for the years 1955 and 1956, to P20,619.00 as income tax due
"from the partnership formed" by petitioners.2 The reduction was
due to the elimination of surcharge, the failure to file the income
tax return being accepted as due to petitioners' honest belief that
no such liability was incurred as well as the compromise penalties
for such failure to file.3 A reconsideration of the aforesaid decision
was sought and denied by respondent Court of Tax Appeals. Hence
this petition f or review.
The facts as found by respondent Court of Tax Appeals, which
being supported by substantial evidence, must be re-
spected4 follow: "On October 31, 1950, petitioners, father and son,
purchased a lot and building, known as the Gibbs Building, situated
at 671 Dasmarinas Street, Manila, for P835,000.00, of which they
8
paid the sum of P375.000.00, leaving a balance of ?460,000.00,
representing the mortgage obligation of the vendors with the China
Banking Corporation, which mortgage obligations were assumed by
the vendees. The initial payment of ?375,000.00 was shared equally
by petitioners. At the time of the purchase, the building was leased
to various tenants, whose rights under the lease contracts with the
original owners, the purchasers, petitioners herein, agreed to
respect. The administration of the building was entrusted to an
administrator who collected the rents; kept its books and records
and rendered statements of accounts to the owners; negotiated
leases; made necessary repairs and disbursed payments, whenever
necessary, after approval by the owners; and performed such other
functions necessary for the conservation and preservation of the
building. Petitioners divided equally the income of operation and
maintenance. The gross income from rentals of the building'
amounted to about F90,000.00 annually."5
From the above facts, the respondent Court of Tax Appeals
applying the appropriate provisions of the National Internal
Revenue Code, the first of which imposes an income tax on
corporations "organized in, or existing under the laws of the
Philippines, no matter how created or organized but not including
duly registered general co-partnerships (compañias colectivas), x x
x,"6 a term, which according to the second provision cited, includes
partnerships "no matter how created or organized, x x x,"7 and
applying the leading case of Evangelista v. Collector of Internal
Reyenue,8 sustained the action of respondent Commissioner of
Internal Revenue, but reduced the tax liability of petitioners, as
previously noted.
Petitioners maintain the view that the Evangelista ruling does
not apply; for them, the situation is dissimilar. Consequently, they
allege that the reliance by respondent Court of Tax Appeals was
unwarranted and the decision should be set aside. If their
interpretation of the authoritative doctrine therein set forth
commands assent, then clearly what respondent Court of Tax
Appeals did fails to find shelter in the law. That is the crux of the
matter. A perusal of the Evangelista decision is therefore
unavoidable.
As noted in the opinion of the Court, penned by the present
Ghief Justice, the issue was 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, x
x x."9 After referring to another section of the National Internal
Revenue Code, which explicitly provides that the term corporation
"includes partnerships" and then to Article 1767 of the Civil Code of
the Philippines, defining what a contract of partnership is, the
opinion goes on to state that "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 f or monetary
gain and then divide the same among themselves, x x x."10
In support of the above conclusion, reference was made to the
following circumstances, namely, the common fund being created
purposely not something already found in existence, the investment
of the same not merely in one transaction but in a series of
transactions; the lots thus acquired not being devoted to residential
purposes or to other personal uses of petitioners in that case; such
properties having been under the management of one person with
full power to lease, to collect rents, to issue receipts, to bring suits,
to sign letters and contracts and to endorse notes and checks; the
above conditions having existed for more than 10 years since the
acquisition of the above properties; and no testimony having been
introduced as to the purpose "in creating the set up already
adverted to, or on the causes for its continued existence."11 The
conclusion that emerged had all the imprint of inevitability. Thus:
"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."12
It may be said that there could be a differentiation made
between the circumstances above detailed and those existing in the
present case. It does not suffice though to preclude the applicability
of the Evangelista decision. Petitioners could harp on these being
only one transaction. They could stress that an affidavit of one of
them found in the Bureau of Internal Revenue records would
indicate that their intention was to house in the building acquired
by them the respective enterprises, coupled with a plan of effecting
a division in 10 years. It is a little surprising then that while the
purchase was made on October 31, 1950 and their brief as
petitioners filed on October 20, 1965, almost 15 years later, there
was no allegation that such division as between them was in fact
made. Moreover, the facts as found and as submitted in the brief
made clear that the building in question continued to be leased by
other parties with petitioners dividing "equally the in-
come xxx after deducting the expenses of operation and
maintenance x x x."13 Differences of such slight significance do not
call for a different ruling.
It is obvious that petitioners' effort to avoid the controlling
force of the Evangelista ruling cannot be deemed successful.
Respondent Court of Tax Appeals acted correctly. It yielded to the
command of an authoritative decision; it recognized its binding
character. There is clearly no merit to the second error assigned by
petitioners, who would deny its applicability to their situation.
The first alleged error committed by respondent Court of Tax
Appeals in holding that petitioners, in acquiring the Gibbs Building,
established a partnership subject to income tax as a corporation
under the National Internal Revenue Code is likewise untenable. In
their discussion in their brief of this alleged error, stress is laid on
their being co-owners and not partners. Such an allegation was
likewise made in the Evangelista case.
This is the way it was disposed of in the opinion of the present
Chief Justice: "This pretense was correctly rejected by the Court of
Tax Appeals."14 Then came the explanation why: "To begin with,
the tax in question is one imposed upon 'corporations', which,
strictly speaking, are distinct and different from 'partnerships'.
Wben our Internal Revenue Code includes 'partnerships' among the
entities subject to the tax on 'corporations', said Code must allude,
therefore, to organizations which are not necessarily'partnerships',
in the technical sense of the term. Thus, for instance, section 24 of
said Code exempts from the aforementioned tax 'duly registered
general partnerships', which constitute precisely one of the most
typical forms of partnerships in this jurisdiction. Likewise, as defined
in section 84 (b) of said Code, 'the term corporation includes
partnerships, no matter how created or organized.' This qualifying
expression clearly indicates that a joint venture need not be
undertaken in any of the standard forms, or in conformity with the
usual requirements of the law on partnerships, in order that one
could
be deemed constituted for purposes of the tax on corporations.
Again, pursuant to said section 84 (b), the term 'corporation'
includes, among others, 'joint accounts, (cuentas en
participacion)' and 'associations', none of which has a legal
personality of its own, independent of that of its
members. Accordingly, the lawmaker could not have regarded that
personality as a condition essential to the existence of the
partnerships therein referred to. In fact, as above stated, 'duly
registered general copartnerships'—which are possessed of the
aforementioned personality—have been expressly excluded by
Iaw(sections24and84[b]) from the connotation of the term
'corporation'."15 The opinion went on to summarize the matter
aptly: "For purposes of the tax on corporations, our National
Internal Revenue Code, include these partnerships—with the
exception only of duly registered general copartnerships—within the
purview of the term 'corporation.' It is, therefore, clear to our mind
that petitioners herein constitute a partnership, insofar as said Code
is concerned, and are subject to the income tax for corporations."16
In the light of the above, it cannot be said that the respondent
Court of Tax Appeals decided the matter incorrectly. There is no
warrant for the assertion that it failed to apply the settled law to
uncontroverted facts. Its decision cannot be successfully assailed.
Moreover, an observation made in Alhambra Cigar & Cigarette
Manufacturing Co. v. Cornmissioner of Internal Revenue,17is well-
worth recalling. Thus: "Nor as a matter of principle is it advisable
for this Court to set aside the conclusion reached by an agency
such as the Court of Tax Appeals which is, by the very nature of its
functions, dedicated exclusively to the study and consideration of
tax problems and has necessarily developed an expertise on the
subject, unless, as did not happen here, there has been an abuse or
improvident exercise of its authority."
WHEREFORE, the decision of the respondent Court of
Tax Appeals ordering petitioners "to pay the sums of ?37,128.00 as
income tax due from the partnership formed by herein petitioners
for the years 1951 to 1954 and P20,-619.00 for the years 1955 and
1956 within thirty days from the date this decision becomes final,
plus the corresponding surcharge and interest in case of
delinquency," is affirmed. With costs against petitioners.
Concepcion, C.J., Reyes,
J.B.L., Dizon, Makalintal,Zaldivar, Sanchez, Castro and Angeles,
JJ., concur.
Decision affirmed.
[No. 45425. April 29, 1939]
JOSE GATCHALIAN ET AL., plaintiffs and appellants, vs.THE
COLLECTOR OF INTERNAL REVENUE, defendant and
appellee.
1. 1.PARTNERSHIP OF A CIVIL NATURE; COMMUNITY OF
PROPERTY; SWEEPSTAKES; INCOME TAX.—According
to the stipulated facts the plaintiffs organized a
partnership of a civil nature because each of them put
up money to buy a sweepstakes ticket for the sole
purpose of dividing equally the prize which they may
win, as they did in fact in the amount of P50,000
(article 1665, Civil Code). The partnership was not
only formed, but upon the organization thereof and
the winning of the prize, J. G. personally appeared in
the office of the Philippine Charity Sweepstakes, in his
capacity as co-partner, as such collected the prize, the
office issued the check for ?50,000 in favor of J. G.
and company, and the said partner, in the same
capacity, collected the check. All these circumstances
repel the idea that the plaintiffs organized and formed
a community of property only.
1. 2.ID.; ID.; ID.; ID.—Having organized and constituted a
partnership of a civil nature, the said entity is the one
bound to pay the income tax which the defendant
collected under the aforesaid section 10 (a) of Act No.
2833, as amended by section 2 of Act No. 3761. There
is no merit in plaintiffs' contention that the tax should
be prorated among them and paid individually,
resulting in their exemption from the tax.
APPEAL from a judgment of the Court of First Instance of Bulacan.
Sison, J.
The facts are stated in the opinion of the court.
Guillermo B. Reyes for appellants.
Solicitor-General Tuason for appellee.
IMPERIAL, J.:
The plaintiff brought this action to recover from the defendant
Collector of Internal Revenue the sum of P1,863.44, with legal
interest thereon, which they paid under protest by way of income
tax. They appealed from the decision rendered in the case on
October 23, 1936 by the Court of First Instance of the City of
Manila, which dismissed the action with the costs against them.
The case was submitted for decision upon the following stipulation
of facts:
"Come now the parties to the above-mentioned case, through their
respective undersigned attorneys, and hereby agree to respectfully
submit to this Honorable Court the case upon the following
statement of facts:
1. "1.That plaintiffs are all residents of the municipality of
Pulilan, Bulacan, and that defendant is the Collector of
Internal Revenue of the Philippines;
2. "2.That prior to December 15, 1934 plaintiffs, in order
to enable them to purchase one sweepstakes ticket
valued at two pesos (P2), subscribed and paid
therefor the amounts as follows:
1. Jose Gatchalian .............................................................................
2. Gregoria Cristobal ..........................................................................
3. Saturnina Silva ..............................................................................
4. Guillermo Tapia .............................................................................
5. Jesus Legaspi ................................................................................
6. Jose Silva .....................................................................................
7. Tomasa Mercado ...........................................................................
8. Julio Gatchalian .............................................................................
9. Emiliana Santiago ..........................................................................
10. Maria C. Legaspi ...........................................................................
9
 by Jose Gatchalian dated December 29, 1934 is treasurer of Pulilan, Bulacan the sum of P1,260.93 (Sgd.) "JOSE GATCHALIAN"
11. Francisco Cabral ................................................................................................ attached and marked Exhibit
.13 F and made part hereof; representing the unpaid balance of the income tax And a summary of Exhibits D-1 to D-15 is inserted in the bill of
12. 4. "8.That the defendant in
Gonzalo Javier .................................................................................................. .14his letter dated January 28, and penalties demanded by defendant as evidenced exceptions as follows:
1935, a copy of which marked Exhibit G is enclosed, by income tax receipt No. 35811 which is attached "RECAPITULATIONS OF 15 INDIVIDUAL INCOME TAX RETURNS
13. Maria Santiago .................................................................................................. denied plaintiffs' request
.17 of January 20, 1935, for and marked Exhibit N and made a part hereof; and FOR 1934 ALL DATED JANUARY 19, 1935 SUBMITTED f O THE
exemption from the payment of tax and reiterated his that on September 3, 1936, the plaintiffs formally COLLECTOR OF INTERNAL REVENUE.
14. Buenaventura Guzman ....................................................................................... demand for the payment .13 of the sum of P1,499.94 as protested to the defendant against the payment of
income tax and gave plaintiffs until February 10, 1935 said amount and requested the refund thereof, copy Name Exhibit Purchase
15. Mariano Santos ................................................................................................. .14
within which to pay the said tax; of which is attached and marked Exhibit O. and made No. Price
Total ........................................................................................................... 2.00 part hereof; but that on September 4, 1936, the
defendant overruled the protest and denied the 1. Jose Gatchalian .............................. D-1 P0
1. "9.That in view of the failure of the plaintiffs to pay the refund thereof; copy of which is attached and marked
1. "3.That immediately thereafter but prior to December amount of tax demanded by the defendant, Exhibit P and made a part hereof; and 2. Gregoria Cristobal .......................... D-2
15, 1934, plaintiffs purchased, in the ordinary course notwithstanding subsequent demand made by 3. "16.That plaintiffs demanded upon defendant the refund
of business, from one of the duly authorized agents of defendant upon the plaintiffs through their attorney 3. Saturnina Silva ............................... D-3
.of the total sum of one thousand eight hundred and
the National Charity Sweepstakes Office one ticket on March 23, 1935, a copy of which marked Exhibit H sixtythree pesos and forty-four centavos (P1,863.44) 4. Guillermo Tapia ............................ D-4
bearing No. 178637 for the sum of two pesos (P2) is enclosed, defendant on May 13, 1935 issued a paid under protest by them but that defendant
and that the said ticket was registered in the name of warrant of distraint and levy against the property of refused and still refuses to refund the said amount 5. Jesus Legaspi by Maria D-5
Jose Gatchalian and Company; the plaintiffs, a copy of which warrant marked Exhibit notwithstanding the plaintiffs' demands.
2. "4.That as a result of the drawing of the sweepstakes I is enclosed and made a part hereof; 4. "17.The parties hereto reserve the right to present other Cristobal ..................................
on December 15, 1934, the above-mentioned ticket 2. "10.That to avoid embarrassment arising from the and additional evidence if necessary."
embargo of the property of the plaintiffs, the said 6. Jose Silva ...................................... D-6
bearing No. 178637 won one of the third prizes in the
amount of plaintiffs on June 15, 1935, through Gregoria 7. Tomasa Mercado .......................... D-7 .07
Cristobal, Maria C. Legaspi and Jesus Legaspi, paid Exhibit E referred to in the stipulation is of the following tenor:
under protest the sum of P601.51 as part of the tax "To whom it may concern: 8. Julio Gatchalian by Bea- D-8 .13
P50,000 and that the corresponding check covering the above- and penalties to the municipal treasurer of Pulilan, "I, Jose Gatchalian, a resident of Pulilan, Bulacan, married, of age,
mentioned prize of P50,000 was drawn by the National Charity Bulacan, as evidenced by official receipt No. 7454879 hereby certify, that on the 11th day of August,1934, I sold parts of triz Guzman .............................
Sweepstakes Office in favor of Jose Gatchalian & Company against which is attached and marked Exhibit J and made a my share on ticket No. 178637 to thepersons and for the amount
9. Emiliana Santiago ......................... D-9 .13
the Philippine National Bank, which check was cashed during the part hereof, and requested defendant that plaintiffs be indicated below and the partof my share remaining is also shown to
latter part of December, 1934 by Jose Gatchalian & Company; allowed to pay under protest the balance of the tax wit: 10. Maria C. Legaspi ......................... D-10 .16
and penalties by monthly installments;
3. "11.That plaintiffs' request to pay the balance of the tax Purchaser Amount Address
11. Francisco Cabral ......................... D-11 .13
1. "5.That on December 29, 1934, Jose Gatchalian was
and penalties was granted by defendant subject to the 1. Mariano Santos ........................................................... P0.14 Pulilan,
required by income tax examiner Alfredo David to file 12. Gonzalo JavierBulacan.
............................ D-12 .14
condition that plaintiffs file the usual bond secured by
the corresponding income tax return covering the
two solvent persons to guarantee prompt payment of 2. Buenaventura Guzman ................................................. .13 Santiago
13. Maria Do............................. D-13 .17
prize won by Jose Gatchalian & Company and that on
each installments as it becomes due;
December 29, 1934, the said return was signed by 3. Maria Santiago ............................................................ .17 Do.
4. "12.That on July 16, 1935, plaintiff filed a bond, a copy 14. Buenaventura Guzman ................ D-14 .13
Jose Gatchalian, a copy of which return is enclosed as
of which marked Exhibit K is inclosed and made a part
Exhibit A and made a part hereof; 4. Gonzalo Javier ............................................................ .14
15. Mariano Do...........................
Santos D-15 .14
hereof, to guarantee the payment of the balance of
2. "6.That on January 8, 1935, the defendant made an
the alleged tax liability by monthly installments at the 5. Francisco Cabral .......................................................... .13 Do. 2.00
assessment against Jose Gatchalian & Company
rate of P118.70 a month, the first payment under
requesting the payment of the sum of P1,499.94 to The legal questions raised in plaintiffs-appellants' five assigned
protest to be effected on or before July 31, 1935; 6. Maria C. Legaspi ......................................................... .16 Do.
the deputy provincial treasurer of Pulilan, Bulacan, errors may properly be reduced to the two following: (1) Whether
5. "13.That on July 16, 1935 the said plaintiffs formally
giving to said Jose Gatchalian & Company until 7. Emiliana Santiago ....................................................... the plaintiffs
.13 formed
Do. a partnership, or merely a community of
protested against the payment of the sum of P602.51,
January 20, 1935 within which to pay the said amount property without a personality of its own; in the first case it is
a copy of which protest is attached and marked 8. Julio Gatchalian .......................................................... .13 that theDo.
of P1,499.94, a copy of which letter marked Exhibit B admitted partnership thus formed is liable for the payment
Exhibit L, but that defendant in his letter dated August
is inclosed and made a part hereof; of income tax, whereas if there was merely a community of
1, 1935 overruled the protest and denied the request 9. Jose Silva ..................................................................... .07 Do.
3. "7.That on January 20, 1935, the plaintiffs, through property, they are exempt from such payment; and (2) whether
for refund of the plaintiffs;
their attorney, sent to defendant a reply, a copy of 10. Tomasa Mercado ......................................................... they.08
should pay Do.
the tax collectively or whether the latter should be
which marked Exhibit C is attached and made a part prorated among them and paid individually.
hereof, requesting- exemption from the payment of 1. "14.That, in view of the failure of the plaintiffs to pay 11. Jesus Legaspi ............................................................... .15
The CollectorDo. of Internal Revenue collected the tax under
the income tax to which reply there were enclosed the monthly installments in accordance with the terms section 10 of Act No. 2833, as last amended by section 2 of Act No.
12. Guillermo Tapia ........................................................... 3761,.13reading asDo.
follows:
fifteen (15) separate individual income tax returns and conditions of the bond filed by them, the
filed separately by each one of the plaintiffs, copies of defendant in his letter dated July 23, 1935, copy of 13. Saturnina Silva ............................................................. "SEC..0810. (a) There
Do. shall be levied, assessed, collected, and paid
which returns are attached and marked Exhibits D-1 which is attached and marked Exhibit M, ordered the annually upon the total net income received in the preceding
to D-15, respectively, in order of their names listed in municipal treasurer of Pulilan, Bulacan to execute 14. Gregoria Cristobal ........................................................ calendar
.18 year from Do. all sources by every corporation, joint-stock
the caption of this case and made parts hereof; a within five days the warrant of distraint and levy company, partnership, joint account (cuenta en participación),
statement of sale signed by Jose Gatchalian showing 15. Jose Gatchalian ............................................................ .18 Do.
association or insurance company, organized in the Philippine
issued against the plaintiffs on May 13,1935;
the amounts put up by each of the plaintiffs to cover 2. "15.That in order to avoid annoyance and Islands, no matter how created or organized, but not including duly
2.00 Total cost of
up the cost price of P2 of said ticket, copy of which embarrassment arising from the levy of their property, registered general copartnerships (compañias colectivas), a tax of
statement is attached and marked as Exhibit E and the plaintiffs on August 28, 1936, through Jose said ticket; and that, therefore, the persons named above are entitled to the parts three per centum
of whatever upon
prize thatsuch income; and a like tax shall be levied,
made a part hereof; and a copy of the affidavit signed Gatchalian, Guillermo Tapia, Maria Santiago and assessed, collected, and paid annually upon the total net income
Emiliano Santiago, paid under protest to the municipal might be won by said ticket. received in the preceding calendar year from all sources within the
"Pulilan, Bulacan, P, I. Philippine Islands by every corporation, joint-stock company,
10
partnership, joint account (cuenta en participación), association, or
insurance
company organized, authorized, or existing under the laws of any
foreign country, including interest on bonds, notes, or other
interest-bearing obligations of residents, corporate or
otherwise: Provided, however, That nothing in this section shall be
construed as permitting the taxation of the income derived from
dividends or net profits on which the normal tax has been paid.
"The gain derived or loss sustained from the sale or other
disposition by a corporation, joint-stock company, partnership, joint
account (cuenta en participación), association, or insurance
company, or property, real, personal, or mixed, shall be ascertained
in accordance with subsections (c) and (d) of section two of Act
Numbered Two thousand eight hundred and thirty-three, as
amended by Act Numbered Twenty-nine hundred and twenty-six.
"The foregoing tax rate shall apply to the net income received
by every taxable corporation, joint-stock company, partnership,
joint account (cuenta en participación), association, or insurance
company in the calendar year nineteen hundred and twenty and in
each year thereafter."
There is no doubt that if the plaintiffs merely formed a community
of property the latter is exempt from the payment of income tax
under the law. But according to the stipulated facts the plaintiffs
organized a partnership of a civil nature because each of them put
up money to buy asweepstakes ticket for the sole purpose of
dividing equally the prize which they may win, as they did in fact in
the amount of P50,000 (article 1665, Civil Code). The partnership
was not only formed, but upon the organization thereof and the
winning of the prize, Jose Gatchalian personally appeared in the
office of the Philippine Charity Sweepstakes, in his capacity as co-
partner, as such collected the prize, the office issued the check for
P50,000 in favor of Jose Gatchalian and company, and the said
partner, in the same capacity, collected the said check. All these
circumstances repel the idea that the plaintiffs organized and
formed a community of property only.
Having organized and constituted a partnership of a civil nature, the
'said entity is the one bound to pay the income tax which the
defendant collected under the aforesaid section 10 (a) of Act No.
2833, as amended by section 2 of Act No. 3761. There is no merit
in plaintiffs' contention that the tax should be prorated among them
and paid individually, resulting in their exemption from the tax.
In view of the foregoing, the appealed decision is affirmed,
with the costs of this instance to the plaintiffsappellants. So
ordered.
Avanceña, C. J., Villa-
Real, Diaz, Laurel, Concepcion,and Moran, JJ., concur
Judgment affirmed.
LORENZO T. OÑA,and HEIRS OF JULIA BUNALES,namely:
RODOLFO B. OÑA,MARIANO B. OÑA,LUZ B. OÑA,VIRGINIA
B. OÑA,and LORENZO B. OÑA,JR., petitioners, vs. THE
COMMISSIONER OF INTERNAL REVENUE,respondent.
Taxation; Partnership; When co-ownership converted to co-
partnership.—For tax purposes, the co-ownership of inherited
properties is automatically converted into an unregistered
partnership the moment the said common properties and/or the
incomes derived therefrom are used as a common fund with intent
to produce profits for the heirs in proportion to their respective
shares in the inheritance as determined in a project partition either
duly executed in an extra-judicial settlement or approved by the
court in the corresponding testate or intestate proceeding. The
reason is simple. From the moment of such partition, the heirs are
entitled already to their respective definite shares of the estate and
the incomes thereof, for each of them to manage and dispose of as
exclusively his own without the intervention of the other heirs, and,
accordingly, he becomes liable individually for all taxes in
connection therewith. If after such partition, he allows his share to
be held in common with his co-heirs under a single management to
be used with the intent of making profit thereby in proportion to his
share, there can be no doubt that, even if no document or
instrument were executed for the purpose, for tax purposes, at
least, an unregistered partnership is formed.
Same; Same; Corporation; Partnerships considered
corporation for tax purposes.—For purposes of the tax on
corporations, the National Internal Revenue Code, includes
partnerships—with the exception only of duly registered general co-
partnerships—within the purview of the term “corporation.”
Same; Same; When income derived from inherited
properties deemed part of partnership income.—The income
derived from inherited properties may be considered as individual
income of the respective heirs only so long as the inheritance or
estate is notdistributed or, at least, partitioned, but the moment
their respective known shares are used as part of the common
assets of the heirs to be used in making profits, it is but proper that
the income of such shares should be considered as part of the
taxable income of an unregistered partnership.
Same; Same; Effect on unregistered partnership profits of
individual income tax paid.—The partnership profits
distributable to the partners should be reduced by the amounts of
income tax assessed against the partnership. Consequently, each of
the petioners in his individual capacity overpaid his income tax for
the years in question. But as the individual income tax liabilities of
petitioners are not in issue in the instant proceeding, it is not proper
for the Court to pass upon the same.
Same; Same; Where right to refund of overpaid individual
income tax has prescribed.—A taxpayer who did not pay the tax
due on the income from an unregistered partnership, of which he is
a partner, due to an erroneous belief that no partnership, but only a
co-ownership, existed between him and his co-heirs, and who due
to the payment of the individual income tax corresponding to his
share in the unregistered partnership profits, on the balance,
overpaid his income tax has the right to be reimbursed what he has
erroneously paid. However, the law is very clear that the claim and
action for such reimbursement are subject to the bar of
prescription.
PETITION for review from a decision of the Court of Tax Appeals.
Umali, J.
The facts are stated in the opinion of the Court.
Orlando Velasco for petitioners.
Solicitor General Arturo A. Alafriz, Assistant Solicitor
General Felici&imo R. Rosete and Special Attorney Purificacion
Ureta for respondent.
BAKHEDO, J.:
Petition for review of the decision of the Court of Tax Appeals in
CTA Case No. 617, similarly entitled as above, holding that
petitioners have constituted an unregistered partnership and are,
therefore, subject to the payment of the deficiency corporate
income taxes assessed against them by respondent Commissioner
of Internal Revenue for the years 1955 and 1956 in the total sum of
P21,891.00, plus 5% surcharge and 1% monthly interest from
December 15, 1958, subject to the provisions of Section 51 (e) (2)
of the Internal Revenue Code, as amended by Section 8 of Republic
Act No. 2848 and the costs of the suit,1 as well
as the resolution of said court denying petitioners’ motion for
reconsideration of said decision.
The facts are stated in the decision of the Tax Court as
follows:
“Julia Bunales died on March 23, 1944, leaving as heirs her
surviving spouse. Lorenzo T. Oña and her five children. In 1948,
Civil Case No. 4519 was instituted in the Court of First Instance of
Manila for the settlement of her estate. Later, Lorenzo T. Oña, the
surviving spouse was appointed administrator of the estate of said
deceased (Exhibit 3, pp. 34-41, BIR rec). On April 14, 1949, the
administrator submitted the project of partition, which was
approved by the Court on May 16, 1949 (See Exhibit K). Because
three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all
surnamed Oña, were still minors when the project of partition was
approved, Lorenzo T. Oña, their father and administrator of the
estate, filed a petition in Civil Case No. 9637 of the Court of First
Instance of Manila for appointment as guardian of said minors. On
November 14, 1949, the Court appointed him guardian of the
persons and property of the aforenamed minors (See p. 3, BIR rec).
“The project of partition (Exhibit K; see also pp. 77-70, BIR
rec.) shows that the heirs have undivided one-half (1/2) interest in
ten parcels of land with a total assessed value of P87,860.00, six
houses with a total assessed value of P17,590.00 and an
undetermined amount to be collected from the War Damage
Commission. Later, they received from said Commission the amount
of P50,000.00, more or less. This amount was not divided among
them but was used in the rehabilitation of properties owned by
them in common (t.s.n., p. 46). Of the ten parcels of land
aforementioned, two were acquired after the death of the decedent
with money borrowed from the Philippine Trust Company in the
amount of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 34-31, BIR rec).
“The project of partition also shows that the estate shares
equally with Lorenzo T. Oña, the administrator thereof, in the
obligation of P94,973.00, consisting of loans contracted by the
latter with the approval of the Court (see p. 3 of Exhibit K; or see p.
74, BIR rec).
“Although the project of partition was approved by the Court
on May 16, 1949. no attempt was made to divide the properties
therein listed. Instead, the properties remained under the
management of Lorenzo T. Oña who used said properties in
business by leasing or selling them and investing the income
derived therefrom and the proceeds from the sales thereof in real
properties and securities. As a result, petitioners’ properties and
investments gradually increased from P105,450.00 in 1949 to
P480.005.20 in 1956 as can be gleaned from the following year-end
balances:
Year Investment Account Land Account
1949 P87,860
1950 P 24,657.65 128,566.72
1951 51,301.31 120,349.28
1952 67,927.52 87,065.28
1953 61,258.27 84,925.68
1954 63,623.37 99,001.20
1955 100,786.00 120,249.78
1956 175,028.68 135,714.68
(See Exhibits 3 & K; t.s.n., pp. 22, 25-26, 40, 50, 102-104)
“From said investments and properties petitioners derived such
incomes as profits from installment sales of subdivided lots, profits
from sales of stocks, dividends, rentals and interests (see p. 3 of
Exhibit 3; p. 32, BIR rec; t.s.n., pp. 37-38). The said incomes are
recorded in the books of account kept by Lorenzo T. Oña, where
‘the corresponding shares of the petitioners in the net income for
the year are also known. Every year, petitioners returned for
income tax purposes their shares in the net income derived from
said properties and securities and/or from transactions involving
them (Exhibit 3, supra; t.s.n., pp. 25-26); However, petitioners did
not actually receive their shares in the yearly income. (t.s.n., pp.
25-26, 40, 98; 100). The income was always left in the hands of
Lorenzo T. Oña who, as heretofore pointed out, invested them in
real properties and securities. (See Exhibit 3, ts.n., pp. 50, 102-
104).
“On the basis of the foregoing facts, respondent
(Commissioner of Internal Revenue) decided that petitioners
formed an unregistered partnership and therefore, subject to the
corporate income tax, pursuant to Section 24, in relation to Section
84(b), of the Tax Code. Accordingly, he assessed against the
petitioners the amounts of P8,092.00 and P13,899.00 as corporate
income taxes for 1955 and 1956, respectively. (See Exhibit 5,
amended by Exhibit 17, pp. 50 and 86, BIR rec.). Petitioners
protested against the assessment and asked for reconsideration
of the ruling of respondent that they have formed an unregistered
partnership. Finding no merit in petitioners’ request, respondent
denied it (See Exhibit 17, p. 86, BIR rec). (See pp. 1-4,
Memorandum for Respondent, June 12, 1961).
“The original assessment was as follows:
“1955
“N et incom e as p er i nves ti gati on ...............................
Income tax due thereon .................................................
25% surcharge .................................................................
Compromise for non-filing ..........................................
Total ..................................................................................
“1956
“N et incom e as p er i nves ti gati on ...............................
Income tax due thereon .................................................
Building Account
25% surcharge .................................................................
P 17,590.00
Compromise for non-filing ............................... , ............
96,076.26
Total ..................................................................................
110,605.11
(Sec Exhibit 13, page 50, BIR records)
152,674.39
161.46b.83
“Upon further consideration of the case, the 25% surcharge was
eliminated in line with the ruling of the Supreme Court in Collector
167,962.04
11
v. Batangas Transportation Co., G.R. No. L-9692, Jan. 6, 1958, so
that the questioned assessment refers solely to the income tax
proper for the years 1955 and 1956 and the ‘Compromise for non-
filing,’ the latter item obviously referring to the compromise in lieu
of the criminal liability for failure of petitioners to file the corporate
income tax returns for said years. (See Exh. 17, page 86, BIR
records).” (Pp. 1-5, Annex C to Petition)
Petitioners have assigned the following as alleged errors of the Tax
Court:
“I
“THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE
PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP;
“THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT
THE PETITIONERS WERE CO-OWNERS OF THE PROPERTIES
INHERITED AND (THE) PROFITS DERIVED FROM TRANSACTIONS
THEREFROM (sic);
“III
“THE COURT OF TAX APPEALS ERRED IN HOLDING THAT
PETITIONERS WERE LIABLE FOR CORPORATE INCOME TAXES FOR
1955 AND 1956 AS AN UNREGISTERED PARTNERSHIP;
“IV
“ON THE ASSUMPTION THAT THE PETITIONERS
CONSTITUTED AN UNREGISTERED PARTNERSHIP, THE COURT OF
TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS
WERE AN UNREGISTERED PARTNERSHIP TO THE EXTENT ONLY
THAT THEY INVESTED THE PROFITS FROM THE PROPERTIES
OWNED IN COMMON AND THE LOANS RECEIVED USING THE
INHERITED PROPERTIES AS COLLATERALS;
“ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED
PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT
DEDUCTING THE VARIOUS AMOUNTS PAID BY THE PETITIONERS
AS INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE SHARES OP
THE PROFITS ACCRUING FROM THE PROPERTIES OWNED IN
COMMON, FROM THE DEFICIENCY TAX OF THE UNREGISTERED
PARTNERSHIP.”
In other words, petitioners pose for our resolution the following
questions: (1) Under the facts found by the Court of Tax Appeals,
should petitioners be considered as co-owners of the properties
inherited by them from the deceased Julia Buñales and the profits
derived from transactions involving the same, or, must they be
deemed to have formed an unregistered partnership subject to tax
under Sections 24 and 84(b) of the National Internal Revenue
Code? ‘2) Assuming they have formed an unregistered partnership,
should this not be only in the sense that they invested as a
common fund the profits earned by the properties owned by them
in common and the loans granted to them upon the security of the
said properties, with the result that as far as their respective shares
in the inheritance are concerned, the total income thereof should be
considered as that of co-owners and not of the unregistered
partnership? And (3) assuming again that they are taxable as an
unregistered partnership, should not the various amounts already
paid by them for the same years 1955 and 1956 as individual
income taxes on their respective shares of the profits accruing from
the properties they owned in common be deducted from the
deficiency corporate taxes, herein involved, assessed against such
unregistered partnership by the respondent Commissioner?
Pondering on these questions, the first thing that has struck
the Court is that whereas petitioners’ predecessor in interest died
way back on March 23, 1944 and the project of partition of her
estate was judicially approved as early as May 16, 1949, and
presumably petitioners have been holding their respective shares in
their inheritance since those dates admittedly under the
administration or management of the head of the family, the
widower and father Lorenzo T. Oña, the assessment in question
refers to the later years 1955 and 1956. We believe this point to be
important because, apparently, at the start, or in the years 1944 to
1954, the respondent Commissioner of Internal Revenue did treat
petitioners as co-owners, not liable to corporate tax, and it was only
from 1955 that he considered them as having formed an
unregistered partnership. At least, there is nothing in the record
indicating that an earlier assessment had already been made. Such
being the case, and We see no reason how it could be otherwise, it
is easily understandable why petitioners’ position that they are co-
owners and not unregistered co-partners, for the purposes of the
impugned assessment, cannot be upheld. Truth to tell, petitioners
should find comfort in the fact that they were not similarly assessed
earlier by the Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing
the estate of the deceased among themselves pursuant to the
project of partition approved in 1949, “the properties remained
under the management of Lorenzo T. Oña who used said properties
in business by leasing or selling them and investing the income
derived therefrom and the proceeds from the sales thereof in real
properties and securities,” as a result of which said properties and
investments steadily increased yearly from P87,860.00 in “land
account” and P17,590.00 in “building account’ ‘in 1949 to
P175,028.68 in “investment account,” P135,714.68 in “land
account” and P169,262.52 in “building account” in 1956. And all
these became possible because, admittedly, petitioners never
actually received any share of the income or profits from Lorenzo T.
Oña, and instead, they allowed him to continue using said shares as
part of the common fund for their ventures, even as they paid the
corresponding income taxes on the basis of their respective shares
of the profits of their common business as reported by the said
Lorenzo T. Oña.
It is thus incontrovertible that petitioners did not, contrary to
their contention, merely limit themselves to holding the properties
inherited by them. Indeed, it is admitted that during the material
years herein involved, some of the said properties were sold at
considerable profit, and that with said profit, petitioners engaged,
thru Lorenzo T. Oña, in the purchase and sale of corporate
securities. It is likewise admitted that all the profits from these
ventures were divided among petitioners proportionately in
accordance with their respective shares in the inheritance. In these
circumstances, it is Our considered view that from the moment
petitioners allowed not only the incomes from their respective
shares of the inheritance but even the inherited properties
themselves to be used by Lorenzo T. Oña as a common fund in
undertaking several1transactions or in business, with the intention
of deriving profit to be shared by them proportionally, such act was
tantamount to actually contributing such incomes to a common
fund and, in effect, they thereby formed an unregistered
partnership within the purview of the abovementioned provisions of
the Tax
It is but logical that in cases of inheritance, there should be a
period when the heirs can be considered as co-owners rather than
unregistered co-partners within the contemplation of our corporate
tax laws aforementioned. Before the partition and distribution of the
estate of the deceased, all the income thereof does belong
commonly to all the heirs, obviously, without them becoming
thereby unregistered co-partners, but it does not necessarily follow
that such status as co-owners continues until the inheritance is
actually and physically distributed among the heirs, for it is easily
conceivable that after knowing their respective shares in the
partition, they might decide to continue holding said shares under
the common management of the administrator or executor or of
anyone chosen by them and engage in business on that basis.
Withal, if this were to be allowed, it would be the easiest thing for
heirs in any inheritance to circumvent and render meaningless
Sections 24 and 84 (b) of the National Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was
stated, among the reasons for holding the appellants therein to be
unregistered co-partners for tax purposes, that their common fund
“was not something they found already in existence” and that “[i]t
was not a property inherited by them pro indiviso,” but it is
certainly far fetched to argue therefrom, as petitioners are doing
here, that ergo, in all instances where an inheritance is not actually
divided, there can be no unregistered co-partnership. As already
indicated, for tax purposes, the co-ownership of inherited properties
is automatically converted into an unregistered partnership the
moment the said common properties and/or the incomes derived
therefrom are used as a common fund with intent to produce
profits for the heirs in proportion to their respective shades in the
inheritance as determined in a project partition either duly executed
in an extrajudicial settlement or approved by the court in the
corresponding testate or intestate proceeding. The reason for this is
simple. From the moment of such partition, the heirs are entitled
already to their respective definite shares of the estate and the
incomes thereof, for each of them to manage and dispose of as
exclusively his own without the intervention of the other heirs, and,
accordingly he becomes liable individually for all taxes in connection
therewith. If after such partition, he allows his share to be held in
common with his co-heirs under a single management to be used
with the intent of making profit thereby in proportion to his share,
there can be no doubt that, even if no document or instrument
were executed for the purpose, for tax purposes, at least, an
unregistered partnership is formed. This is exactly what happened
to petitioners in this case.
In this connection, petitioners’ reliance on Article 1769,
paragraph (3), of the Civil Code, providing that: “The sharing of
gross returns does not of itself establish a partnership, whether or
not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived,” and,
for that matter, on any other provision of said code on partnerships
is unavailing. In Evangelista, supra, this Court clearly differentiated
the concept of partnerships under the Civil Code from that of
unregistered partnerships which are considered as “corporations”
under Sections 24 and 84(b) of the National Internal Revenue Code.
Mr. Justice Roberto Concepcion, now Chief Justice, elucidated on
this point thus:
“To begin with, the tax in question is one imposed upon
‘corporations’, which, strictly speaking, are distinct and different
from ‘partnerships’. When our Internal Revenue Code includes
‘partnerships’ among the entities subject to the tax on
‘corporations’, said Code must allude, therefore, to organizations
which are not necessarily ‘partnerships’, in the technical sense of
the term. Thus, for instance, section 24 of said Code exempts from
the aforementioned tax ‘duly registered general partnerships’, which
constitute precisely one of the most typical forms of partnerships in
this jurisdiction. Likewise, as defined in section 84(b) of said Code,
‘the term corporation includes partnerships, no matter how created
or organized.’ This qualifying expression clearly indicates that a joint
venture need not be undertaken in any of the standard forms, or in
conformity with the usual requirements of the law on partnerships,
in order that one could be deemed constituted for purposes of the
tax on corporation. Again, pursuant to said section 84(b), the term
‘corporation’ includes, among other, ‘joint accounts, (cuentas en
participation)’ and ‘associations’, none of which has a legal
personality of its own, independent of that of its
members.Accordingly, the lawmaker could not have regarded that
personality as a condition essential to the existence of the
partnerships therein referred to. In fact, as above stated, ‘duly
registered general co-partnerships’—which are possessed of the
aforementioned personality—have been expressly excluded by law
(sections 24 and 84 [b]) from the connotation of the term
‘corporation.’ x x x
“xxx xxx xxx
“Similarly, the American Law
‘xxx provides its own concept of a partnership. Under the term
‘partnership’ it includes not only a partnership as known as common
law but, as well, a syndicate, group, pool, joint venture, or other
unincorporated organization which carries on any business, financial
operation^ or venture, and which is not, within the meaning of the
Code, a trust, estate, or a corporation, x x x.’ (7A Merten’s Law of
Federal Income Taxation, p. 789; italics ours.)
‘The term “partnership” includes a syndicate, group, pool, joint
venture or other unincorporated organization, through or by means
of which any business, financial operation, or venture is carried
on. x x x.’ (8 Merten’s Law of Federal Income Taxation, p. 562 Note
63; italics ours.)
“For purposes of the tax on corporations, our National Internal
Revenue Code, includes these partnerships—with the exception only
of duly registered general copartnerships—within the purview of the
term ‘corporation.’ It is, therefore, clear to our mind that petitioners
herein constitute a partnership, insofar as said Code is concerned,
and are subject to the income tax for corporations.”
We reiterated this view, thru Mr. Justice Fernando, In Reyes vs.
Commissioner of Internal Revenue, G. R. Nos. L-24020-21, July 29,
1968, 24 SCRA 198, wherein the Court ruled against a theory of co-
ownership pursued by appellants therein.
As regards the second question raised by petitioners about the
segregation, for the purposes of the corporate taxes in question, of
their inherited properties from those acquired by them
subsequently, We consider as justified the following ratiocination of
the Tax Court in denying their motion for reconsideration:
“In connection with the second ground, it is alleged that, if there
was an unregistered partnership, the holding should be limited to
the business engaged in apart from the properties inherited by
petitioners. In other words, the taxable income of the partnership
should be limited to the income derived from the acquisition and
sale of real properties and corporate securities and should not
include the income derived from the inherited properties. It is
admitted that the inherited properties and the income derived
therefrom were used in the business of buying and selling other
real properties and corporate securities. Accordingly, the
partnership income must include not only the income derived from
the purchase and sale of other properties but also the income of the
inherited properties.”
Besides, as already observed earlier, the income derived from
inherited properties may be considered as individual income of the
respective heirs only so long as the inheritance or estate is not
distributed or, at least, partitioned, but the moment their respective
known shares are used as part of the common assets of the heirs
12
to be used in making profits, it is but proper that the income of
such shares should be considered as the part of the taxable income
of an unregistered partnership. This, We, hold, is the clear intent of
the law.
Likewise, the third question of petitioners appears to have
adequately resolved by the Tax Court-in the aforementioned
resolution denying petitioners’ motion for reconsideration of the
decision of said court. Pertinently, the court ruled this wise:
“In support of the third ground, counsel for petitioners allege:
‘Even if we were to yield to the decision of this Honorable
Court that the herein petitioners have formed an unregistered
partnership and, therefore, have to be taxed as such, it might be
recalled that the petitioners in their individual income tax returns
reported their shares of the of the unregistered
partnership. Wethink it only
fair and equitable that the various amounts paid by the individual
petitioners as income tax on their respective shares of the
unregistered partnership should be deducted from the deficiency
income tax found by this Honorable Court against the unregistered
partnership.’ (page 7, Memorandum for the Petitioner in Support of
Their Motion for Reconsideration, Oct. 28, 1961.)
In other words, it is the position of petitioners that the taxable
income of the partnership must be reduced by the amounts of
income tax paid by each petitioner on his share of partnership
profits. This is not correct; rather, it should be the other way
around. The partnership profits distributable to the partners
(petitioners herein) should be reduced by the amounts of income
tax assessed against the partnership. Consequently, each of the
petitioners in his individual capacity overpaid his income tax for the
years in question, but the income tax due from the partnership has
been correctly assessed. Since the individual income tax liabilities of
petitioners are not in issue in this proceeding, it is not proper for
the Court to pass upon the same.”
Petitioners insist that it was error for the Tax Court to so rule that
whatever excess they might have paid as individual income tax
cannot be credited as part payment of the taxes herein in question.
It is argued that to sanction the view of the Tax Court is to oblige
petitioners to pay double income tax on the same income, and,
worse, considering the time that has lapsed since they paid their
individual income taxes, they may already be barred by prescription
from recovering their overpayments in a separate action. We do not
agree. As We see it, the case of petitioners as regards the point
under discussion is simply that of a taxpayer who has paid the
wrong tax, assuming that the failure to pay the corporate taxes in
question was not deliberate. Of course, such taxpayer has the right
to be reimbursed what he has erroneously paid, but the law is very
clear that the claim and action for such reimbursement are subject
to the bar of prescription. And since the period for the recovery of
the excess income taxes in the case of herein petitioners has
already lapsed, it would not seem right to virtually disregard
prescription merely upon the ground that the reason for the delay is
precisely because the taxpayers failed to make the proper return
and
payment of the corporate taxes legally due from them. In principle,
it is but proper not to allow any relaxation of the tax laws in favor
of persons who are not exactly above suspicion in their conduct vis-
a-vis their tax obligation to the State.
IN VIEW OF ALL THE FOREGOING, the judgment of the Court
of Tax Appeals appealed from is affirmed, with costs against
petitioners.
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.
Same; Partnership; Co-ownership; Where the father sold his
rights over two parcels of land to his four children so they can build
their residence, but the latter after one (1) year sold them and paid
the capital gains, they should not be treated to have formed an
unregistered partnership and taxed corporate income tax on the
sale and dividend income tax on their shares of the profit's from the
sale.—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
coownership. 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.
Same; Same; Same; Mere sharing of gross income from an
isolated transaction does not establish a partnership.—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 j oint 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.
PETITION to review the judgment of the Court of Tax Appeals.
The facts are stated in the opinion of the Court.
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 on
P16,792.
In April, 1980, or one day before the expiration of the fiveyear
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 "distributive dividend" taxable
in full (not a mere capital gain of which ½is 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
unegistered 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 coownership
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:
"Cómo establecer el deslinde entre la comunidad ordinaria o
copropiedad y la sociedad?
"El criterio diferencial—según la doctrina más generalizada—
está: por razón del origen, en que la sociedad presupone
necesariamente la convención, mientras que la comunidad puede
existir y existe ordinariamente sin ella; y por razón
del fin u objecto,en que el objeto de la sociedad es obtener lucro,
mientras que el de la indivisión es sólo mantener en su integridad la
cosa común y favorecer su conservación.
"Reflejo de este criterio es la sentencia de 15 de octubre de
1940, en la que se dice que si en nuestro Derecho positivo se
ofrecen a veces dificultades al tratar de fijar la linea divisoria entre
comunidad de bienes y contrato de sociedad, la moderna
orientación de la doctrina cientifíca señala como nota fundamental
de diferenciación, aparte del origen o fuente de que surgen, no
siempre uniforme, la finalidad perseguida por los interesados: lucro
común partible en la sociedad, y mera conservación y
aprovechamiento en la comunidad." (Derecho Civil Español, 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-ownership 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
question pro-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 partnership.—
Co-heirs 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
coownerships 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. CIR,
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 coheirs 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.
o. 35840. March 31, 1933]
FRANCISCO BASTIDA, plaintiff and appellee, vs. MENZI &
Co., INC., J. M. MENZI and P. C. SCHLOBOHM, defendants.
MENZI & Co., INC., appellant.
13
 1. 1.CONTRACT OF EMPLOYMENT; RELATIONSHIP
BETWEEN EMPLOYER AND
EMPLOYEE; COPARTNERSHIP.—The relationship
established between the defendant corporation and
the plaintiff by their contract was not that of partners,
but that of employer and employee, whereby the
plaintiff was to receive 35 per cent of the net profits
of the fertilizer business of the defendant corporation
in compensation for his services of supervising the
mixing of the fertilizers. Neither the provisions of the
contract nor the conduct of the parties prior or
subsequent to its execution justified the finding that it
was a contract of copartnership.
1. 2.ID.; ID.; ID.—The trial court relied on article 116 of
the Code of Commerce, which provides that articles of
association by which two or more persons obligate
themselves to place in a common fund any property,
industry, or any of these things, in order to
1. obtain profit, shall be commercial, no matter what its
class may be, provided it has been established in
accordance with the provisions of that Code; but in
the case at bar there was no common fund, that is, a
fund belonging to the parties as joint owners or
partners. Instead of receiving a fixed salary or a fixed
salary and a small percentage of the net profits, the
plaintiff was to receive 35 per cent of the net profits
as compensation for his services. It is now well settled
that the old rule that sharing profits as profits made
one a partner is overthrown. (Mechem, second
edition, p. 89.)
1. 3.ID. ; ID. ; ID.—It is nowhere stated in Exhibit A that
the parties were establishing a partnership or
intended to become partners. Great stress is laid by
the trial judge and plaintiff's attorneys on the fact that
in the sixth paragraph of said exhibit the phrase "en
sociedad con" is used in providing that defendant
corporation shall not engage in the business of
prepared fertilizers except in association with the
plaintiff (en sociedad con). The fact is that en
sociedad com, as there used, merely means en
reunión con or in association with, and does not carry
the meaning of "in partnership with". Although the
word "associated" may be related etymologically to
the Spanish word "socio", meaning partner, it does
not in its common acceptation imply any partnership
relation.
1. 4.PLEADINGS; ADMISSIBILITY AS EVIDENCE.—"Where
amended pleadings have been filed, allegations in the
original pleadings are held admissible, but in such
case the original pleadings can have no effect, unless
formally offered in evidence." (Jones on Evidence, sec.
273; Lucido vs.Calupitan, 27 Phil., 148.)
APPEAL from a judgment of the Court of First Instance of Manila.
Imperial, J.
The facts are stated in the opinion of the court.
Romualdez Brothers and Harvey & O'Brien for appellant.
Jose M. Casal, Alberto Barretto and Gibbs & McDonough for
appellee.
VICKERS, J.:
This is an appeal by Menzi & Co., Inc., one of the defendants, from
a decision of the Court of First Instance of Manila. The case was
tried on the amended complaint dated May 26,1928 and
defendants' amended answer thereto of September 1, 1928. For the
sake of clearness, we shall incorporate herein the principal
allegations of the parties.
FIRST CAUSE OF ACTION
Plaintiff alleged:
I and data required for the purpose, and the constant obstacles they
That the defendant J. M. Menzi, together with his wife and
daughter, owns ninety-nine per cent (99%) of the capital stock of
the defendant Menzi & Co., Inc., that the plaintiff has been
informed and therefore believes that the defendant J. M. Menzi, his
wife and daughter, together with the defendant P. C. Schlobohm
and one Juan Seiboth, constitute the board of directors of the
defendant, Menzi &Co., Inc.;
II
That on April 27, 1922, the defendant Menzi & Co., Inc., through its
president and general manager, J. M. Menzi, under the authority of
the board of directors, entered into a contract with the plaintiff to
engage in the business of exploiting prepared fertilizers, as
evidenced by the contract marked Exhibit A, attached to the original
complaint as a part thereof, and likewise made a part of the
amended complaint, as if it were here copied verbatim;
III
That in pursuance of said contract, plaintiff and defendant Menzi &
Co., Inc., began to manufacture prepared fertilizers, the f ormer
superintending the work of actual preparation, and the latter,
through defendants J. M. Menzi and P. C. Schlobohm, managing the
business and opening an account entitled "FERTILIZERS" on the
books of the defendant Menzi & Co., Inc., where all the accounts of
the partnership business were supposed to be kept; the plaintiff
had no participation in the making of these entries, which were
wholly in the defendants' charge, under whose orders every entry
was made;
IV
That according to paragraph 7 of the contract Exhibit A, the
defendant Menzi & Co., Inc., was obliged to render annual balance
sheets to the plaintiff upon the 30th day of June of each year; that
the plaintiff had no intervention in the preparation of these yearly
balances, nor was he permitted to have any access to the books of
account; and when the balance sheets were shown him, he,
believing in good faith that they contained the true statement of the
partnership business, and relying upon the good faith of the
defendants, Menzi & Co., Inc., J. M. Menzi, and P. C. Schlobohm,
accepted and signed them, the last balance sheet having been
rendered in the year 1926;
V the plaintiff prays the court:
That by reason of the foregoing facts and especially those set forth
in the preceding paragraph, the plaintiff was kept in ignorance of
the defendants' acts relating to the management of the partnership
funds, and the keeping of accounts, until he was informed and so
believes and alleges, that the defendants had conspired to conceal
from him the true status of the business, and to his damage and
prejudice made false entries in the books of account and in the
yearly balance sheets, the exact nature and amount of which it is
impossible to ascertain, even after the examination of the books of
the business, due to the defendants' refusal to furnish all the books
have placed in the way of the examination of the books of account
and vouchers;
VI
That when the plaintiff received the information mentioned in the
preceding paragraph, he demanded that the defendants permit him
to examine the books and vouchers of the business, which were in
their possession, in order to ascertain the truth of the alleged false
entries in the books and balance sheets submitted for his approval,
but the defendants refused, and did not consent to the examination
until after the original complaint was filed in this case; but up to
this time they have refused to furnish all the books, data, and
Vouchers necessary for a complete and accurate examination of all
the partnership's accounts; and
VII
That as a result of the partial examination of the books of account
of the business, the plaintiff has, through his accountants,
discovered that the defendants, conspiring and confederating
together, presented to the plaintiff during the period covered by the
partnership contract false and incorrect accounts,
1. (a)For having included therein undue interest;
2. (b)For having entered, as a charge to fertilizers, salaries
and wages which should have been paid and were in
fact paid by the defendant Menzi & Co., Inc.;
3. (c)For having collected from the partnership the income
tax which should have been paid for its own account
by Menzi & Co., Inc.;
4. (d)For having collected, to the damage and prejudice of
the plaintiff, commissions on the purchase of materials
for the manufacture of fertilizers;
5. (e)For having appropriated, to the damage and
prejudice of the plaintiff, the profits obtained from the
sale of fertilizers belonging to the partnership and
bought with its own funds; and
6. (f)For having appropriated to themselves all rebates for
freight insurance, taxes, etc., upon materials for
fertilizer bought abroad, no entries of said rebates
having been made on the books to the credit of the
partnership.
Upon the strength of the facts set out in this first cause of action,
1. 1.To prohibit the defendants, each and every one of
them, from destroying and concealing the books and
papers of the partnership constituted between the
defendant Menzi & Co., Inc., and the plaintiff;
2. 2. To summon each and every defendant to appear and
give a true account of all facts relating to the
partnership between the plaintiff and the defendant
Menzi & Co., Inc., and of each and every act and
transaction connected with the business of said
partnership from the beginning to April 27, 1927, and
a true statement of all merchandise of what
1. ever description, purchased for said partnership, and of
all the expenditures and sales of every kind, together
with the true amount thereof, besides the sums
received by the partnership from every source
together with their exact nature, and a true and
complete account of the vouchers f or all sums paid
by the partnership, and of the salaries paid to its
employees;
2. 3.To declare null and void the yearly balances submitted
by the defendants to the plaintiff from 1922 to 1926,
both inclusive;
3. 4.To order the defendants to give a true statement of all
receipts and disbursements of the partnership during
the period of its existence, besides granting the
plaintiff any other remedy that the court may deem
just and equitable.
EXHIBIT A
"CONTRATO
que se celebra entre los Sres. Menzi y Compañía, de Manila, como
Primera Parte, y D. Francisco Bastida, también de Manila, como
Segunda Parte, bajo las siguientes
"CONDICIONES
1. "1.aEl objeto de este contrato es la explotación del
negocio de Abonos o Fertilizantes Preparados, para
diversas aplicaciones agrícolas;
2. "2.aLa duración de este contrato será de cinco años, a
contar desde la fecha de su firma;
3. "3.aLa Primera Parte se compromete a facilitar la ayuda
financiera necesaria para el negocio;
4. "4.aLa Segunda Parte se compromete a poner su entero
tiempo y toda su experiencia a la disposición del
negocio;
14
 5. "5.aLa Segunda Parte no podrá, directa o
indirectamente, dedicarse por sí sola ni en sociedad
con otras personas, o de manera alguna que no sea
con la Primera Parte, al negocio de Abonos, simples o
preparados, o de materia alguna que se aplique
comúnmente a la fertilización de suelos y plantas,
durante la vigencia de este contrato, a
1. menos que obtenga autorización expresa de la Primera
Parte para ello;
2. "6.aLa Primera Parte no podrá dedicarse, por sí sola ni
en sociedad o combinación con otras personas o
entidades, ni de otro modo que en sociedad con la
Segunda Parte, al negocio de Abonos o Fertilizantes
preparados, ya sean ellos importados, ya preparados
en las Islas Filipinas; tampoco podrá dedicarse a la
venta o negocio de materias o productos que tengan
aplicación como fertilizantes, o que se usen en la
composición de fertilizantes o abonos, si ellos son
productos de suelo de la manufactura filipinos,
pudiendo sin embargo vender o negociar en materias
fertilizantes simples importados de los Estados Unidos
o del Extranjero;
3. "7.aLa Primera Parte se obliga a ceder y a hacer efectivo
a la Segunda Parte el 35 por ciento (treinta y cinco
por ciento) de las utilidades netas del negocio de
abonos, liquidables el 30 de junio de cada año;
4. "8.aLa Primera Parte facilitará a la Segunda,
mensualmente, la cantidad de P300 (trescientos
pesos), a cuenta de su parte de beneficios;
5. "9.aDurante el año 1923 la Primera Parte concederá a la
Segunda permiso para que éste se ausente de
Filipinas por un período de tiempo que no exceda de
un año, sin menoscabo para los derechos de la
Segunda Parte con arreglo a este contrato.
"En testimonio de lo cual firmamos el presente en la Ciudad de
Manila, I. F., a veintisiete de abril de 1922.
"MENZI & CO., INC.
"Por (Fdo.) J. MENZI
"General Manager
"Primera Parte
"(Fdo.) F. BASTIDA
"Segunda, Parte
"MENZI & CO., INC.
"(Fdo.) MAX KAEGI
"Acting Secretary"
Defendants denied all the allegations of the amended complaint,
except the formal allegations as to the parties, and as a special
defense to the first cause of action alleged:
1. That the defendant corporation, Menzi & Co., Inc., has been
engaged in the general merchandise business in the Philippine
Islands since its organization in October, 1921, including the
importation and sale of all kinds of goods, wares, and merchandise,
and especially simple fertilizers and fertilizer ingredients, and as a
part of that business, it has been engaged since its organization in
the manufacture and sale of prepared fertilizers for agricultural
purposes, and has used f or that purpose trade-marks belonging to
it;
2. That on or about November, 1921, the defendant, Menzi &
Co., Inc., made and entered into an employment agreement with
the plaintiff, who represented that he had had much experience in
the mixing of fertilizers, to superintend the mixing of the ingredients
in the manufacture of prepared fertilizers in its f ertilizer department
and to obtain orders for such prepared fertilizers subject to its
approval, for a compensation of 50 per cent of the net profits which
it might derive from the sale of the fertilizers prepared by him, and
that said Francisco Bastida worked under said agreement until April
27, 1922, and received the compensation agreed upon for his
services; that on the said 27th of April, 1922, the said Menzi & Co.,
Inc., and the said Francisco Bastida made and entered into the
written agreement, which is marked Exhibit A, and made a part of
the amended complaint in this case, whereby they mutually agreed
that the employment of the said Francisco Bastida by the said Menzi
& Co., Inc., in the capacity stated, should be for a definite period of
five years from that date and under the other terms and conditions
stated therein, but with the understanding and agreement that the
said Francisco Bastida should receive as compensation for his said
services only 35 per cent of the net profits derived from the sale of
the fertilizers prepared by him during the period of the contract
instead of 50 per cent of such profits, as provided in his former
agreement; that the said Francisco Bastida was found to be
incompetent to do anything in relation to its said f ertilizer business
with the exception of over-seeing the mixing of the ingredients in
the manufacture of the same, and on or about the month of
December, 1922, the def endant, Menzi & Co., Inc., in order to
make said business successful, was obliged to and actually did
assume the f ull management and direction of said business;
3. That the accounts of the business of the said fertilizer
department of Menzi & Co., Inc., were duly kept in the regular
books of its general business, in the ordinary course thereof, up to
June 30, 1923, and that after that time and during the remainder of
the period of said agreement, for the purpose of convenience in
determining the amount of compensation due to the plaintiff under
his agreement, separate books of account for its said fertilizer
business were duly kept in the name of 'Menzi & Co., Inc.,
Fertilizer', and used exclusively for that purpose, and it was
mutually agreed between the said Francisco Bastida and the said
Menzi & Co., Inc., that the yearly balances for the determination of
the net profits of said business due to the said plaintiff as
compensation f or his services under said agreement would be
made as of December 31st, instead of June 30th, of each year,
during the period of said agreement; that the accounts of the
business of its said f ertilizer department, as recorded in its said
books, and the vouchers and records supporting the same, for each
year of said business have been duly audited by Messrs. White,
Page & Co., certified public accountants, of Manila, who, shortly
after the close of business at the end of each year up to and
including the year 1926, have prepared therefrom a manufacturing
and profit and loss account and balance sheet, showing the status
of said business and the share of the net profits pertaining to the
plaintiff as his compensation under said agreement; that after the
said manufacturing and profit and the loss account and balance
sheet for each year of the business of its said f ertilizer department
up to and including the year 1926, had been prepared by the said
auditors and certified by them, they were shown to and examined
by the plaintiff, and duly accepted, and approved by him, with full
knowledge of their contents, and as evidence of such approval, he
signed his name on each of them, as shown on the copies of said
manufacturing and profit and loss account and balance sheet f or
each year up to and including the year 1926, which are attached to
the record of this case, and which are hereby referred to and made
a part of this amended answer, and in accordance therewith, the
said plaintiff has actually received the portion of the net profits of
its said business for those years pertaining to him for his services
under said agreement; that at no time during the course of said
fertilizer business and the liquidation thereof has the plaintiff been
in any way denied access to the books and records pertaining
thereto, but on the contrary, said books and records have been
subject to his inspection and examination at any time during
business hours, and even since the commencement of this action,
the plaintiff and his accountants, Messrs. Haskins & Sells, of Manila,
have been going over and examining said books and records for
months and the defendant, Menzi & Co., Inc., through its officers,
have turned over to said plaintiff and his accountant the books and
records of said business and even furnished them suitable
accommodations in its own office to examine the same;
4. That prior to the termination of the said agreement, Exhibit
A, the defendant, Menzi & Co., Inc., duly notified the plaintiff that it
would not under any conditions renew his said agreement or
continue his said employment with it after its expiration, and after
the termination of said agreement of April 27, 1927, the said Menzi
& Co., Inc., had the certified public accountants, White, Page & Co.,
audit the accounts of the business of its said fertilizer department
for the four months of 1927 covered by plaintiff's agreement and
prepare a manufacturing and profit and loss account and balance
sheet of said business showing the status of said business at the
termination of said agreement, a copy of which was shown to and
explained to the plaintiff; that at that time there were accounts
receivable to be collected for business covered by said agreement
of over P100,000, and there was guano, ashes, fine tobacco and
other fertilizer ingredients on hand of over P75,000, which had to
be disposed of by Menzi & Co., Inc., or valued by the parties, bef
ore the net profits of said business for the period of the agreement
could be determined; that Menzi & Co., Inc,, offered to take the
face value of said accounts and the cost value of the other
properties f or the purpose of determining the profits of said
business for that period, and to pay to the plaintiff at that time his
proportion of such profits on that basis/which the plaintiff refused
to accept, and being disgruntled because the said Menzi & Co., Inc.,
would not continue him in its service, the said plaintiff commenced
this action, including therein not only Menzi & Co., Inc., but also its
managers J. M. Menzi and P. C. Schlobohm, wherein he knowingly
make various false and malicious allegations against the def
endants; that since that time the said Menzi & Co., Inc., has been
collecting the accounts receivable and disposing of the stocks on
hand, and there is still on hand old stock of approximately P25,000,
which it has been unable to dispose of up to this time; that as soon
as possible a final liquidation and accounting of the net profits of
the business covered by said agreement for the last f our months
thereof will be made and the share thereof appertaining to the
plaintiff will be paid to him; that the plaintiff has been informed
from time to time as to the status of the disposition of such
properties, and he and his auditors have fully examined the books
and records of said business in relation thereto.
SECOND CAUSE OF ACTION
As a second cause of action plaintiff alleged:
I. That the plaintiff hereby reproduces paragraphs I, II, III, IV,
and V of the first cause of action.
II. That the examination made by the plaintiff's auditors of
some of the books of the partnership that were furnished by the
defendants disclosed the fact that said defendants had charged to
"purchases" of the business, undue interest, the amount of which
the plaintiff is unable to determine as he has never had at his
disposal the books and vouchers necessary for that purpose, and
especially, owing to the fact that the partnership constituted
between the plaintiff and the defendant Menzi & Co., Inc., never
kept its own cash book, but that its funds were maliciously included
in the private funds of the defendant entity, neither was there a
separate BANK ACCOUNT of the partnership, such account being
included in the defendant's bank account.
III. That from the examination of the partnership books as
aforesaid, the plaintiff estimates that the partnership between
himself and the defendant Menzi & Co., Inc., has been defrauded
by the defendants by way of interest in an amount of approximately
P184,432.51, of which 35 per cent, or P64,551.38, belongs to the
plaintiff exclusively.
Wherefore, the plaintiff prays the court to render judgment
ordering the defendants jointly and severally to pay him the sum of
P64,551.38, or any amount which. may finally appear to be due and
owing from the defendants to the plaintiff upon this ground, with
legal interest from the filing of the original complaint until payment.
Defendants alleged:
1. That they repeat and make a part of this special defense
paragraphs 1, 2, 3 and 4, of the special defense to the first cause of
action in this amended answer;
2. That under the contract of employment, Exhibit A, of the
amended complaint, the defendant, Menzi & Co., Inc., only
undertook and agreed to facilitate financial aid in carrying on the
said fertilizer business, as it had been doing before the plaintiff was
employed under the said agreement; that the said defendant, Menzi
& Co., Inc., in the course of the said business of its fertilizer
department, opened letters of credit through the banks of Manila,
accepted and paid drafts drawn upon it under said letters of credit,
and obtained loans and advances of moneys for the purchase of
materials to be used in mixing and manufacturing its fertilizers and
in paying the expenses of said business; that such drafts and loans
naturally provided for interest at the banking rate from the dates
thereof until paid, as is the case in all such business enterprises,
and that such payments of interest as were actually made on such
drafts, loans and advances during the period of the said
employment agreement constituted legitimate expenses of said
business under said agreement.
THIRD CAUSE OF ACTION
As third cause of action, plaintiff alleged:
1. I.That he hereby reproduces paragraphs I, II, III, IV,
and V of the first cause of action.
2. II.That under the terms of the contract Exhibit A,
neither the defendants J. M. Menzi and P. C.
Schlobohm, nor the defendant Menzi & Co., Inc., had
a right to collect for itself or themselves any amount
whatsoever by way of salary for services rendered to
the partnership between the plaintiff and the
defendant, inasmuch as such services were
compensated with the 65 % of the net profits of the
business constituting their share.
3. III.That the plaintiff has, on his own account and with
his own money, paid all the employees he has placed
in the service of the partnership, having expended for
their account, during the period of the contract, over
15
 P88,000, without ever having made any claim upon
the defendants for this sum because it was included in
the compensation of 35 per cent which he was to
receive in accordance with the contract Exhibit A.
4. IV.That the defendants J. M. Menzi and P. C.
Schlobohm, not satisfied with collecting undue and
excessive salaries for themselves, have made the
partnership, or the fertilizer business, pay the salaries
of a number of the employees of the defendant Menzi
& Co., Inc.
5. V.That under this item of undue salaries the defendants
have appropriated P43,920 of the partnership funds,
of which 35 per cent, or P15,372 belongs exclusively
to the plaintiff. Wherefore, the plaintiff prays the court
to render judgment ordering the defendants to pay
jointly and severally to the plaintiff the amount of
P15,372, with legal interest from the date of the filing
of the original complaint until the date of payment.
Defendants alleged:
1. That they repeat and make a part of this special defense
paragraphs 1, 2, 3 and 4, of the special defense to the first cause of
action in this amended answer;
2. That the defendant, Menzi & Co., Inc., through its manager,
exclusively managed and conducted its said fertilizer business, in
which the plaintiff was to receive 35 percent of the net profits as
compensation for his services, as hereinbefore alleged, from on or
about January 1, 1923, when its other departments had special
experienced Europeans in charge thereof, who received not only
salaries but also a percentage of the net profits of such
departments; that its said fertilizer business, after its manager took
charge of it, became very successful, and owing to the large volume
of business transacted, said business required great deal of time
and attention, and actually consumed at least one-half of the time
of the manager and certain employees of Menzi & Co., Inc., in
carrying it on; that the said Menzi & Co., Inc., furnished office
space, stationery and other incidentals, for said business, and had
its employees perform the duties of cashiers, accountants, clerks,
messengers, etc., for the same, and for that reason the said Menzi
& Co., Inc., charged each year, from and after 1922, as expenses of
said business, which pertained to the fertilizer department, as
certain amount as salaries and wages to cover the proportional part
of the overhead expenses of Menzi & Co., Inc.; that the same
method is f ollowed in each of the several departments of the
business of Menzi & Co., Inc., that each and every year from and
after 1922, a just proportion of said overhead expenses were
charged to said fertilizer departments and entered on the books
thereof, with the knowledge and consent of the plaintiff, and
included in the auditors'
reports, which were examined, accepted and approved by him, and
he is now estopped from saying that such expenses were not
legitimate and just expenses of said business,
FOURTH CAUSE OF ACTION
As fourth cause of action, the plaintiff alleged:
1. I.That he hereby reproduces paragraphs I, II, III, IV,
and V of the first cause of action.
2. II.That the defendant Menzi & Co., Inc., through the
defendants J. M. Menzi and P. C. Schlobohm, has paid,
with the funds of the partnership between the
defendant entity and the plaintiff, the income tax due
from said defendant entity for the fertilizer business,
thereby defrauding the partnership in the amount of
P10,361.72 of which 35
3. III.That the. plaintiff has, during the period of the
contract, paid with his own money the income tax
corresponding to his share which consists in 35 per
cent of the profits of the fertilizer business, expending
about P5,000 without ever having made 'any claim for
reimbursement against the partnership, inasmuch as it
has always been understood among the partners that
each of them would pay his own income tax.
Wherefore, the plaintiff prays the court to order the defendants
jointly and-severally to pay the plaintiff the sum of P3,626.60, with
legal interest from the date of the filing of the original complaint
until its payment
Defendants alleged:
1. That they repeat and make a part of this special defense
paragraphs 1, 2, 3 and 4, of the special defense to the first cause of
action in this amended answer;
2. That under the Income Tax Law Menzi & Co., Inc., was
obliged to and did make return to the Government of the Philippine
Islands each year during the period of the agreement, Exhibit A, of
the income of its whole business, including its fertilizer department;
that the proportional share of such income taxes found to be due
on the business of the fertilizer department was charged as a
proper and legitimate expense of that department, in the same
manner as was done in the other departments of its business; that
inasmuch as the agreement with the plaintiff was an employment
agreement, he was requested to make his own return under the
Income Tax Law and to pay his own income taxes, instead of
having them paid at the source, as might be done under the law, so
that he would be entitled to the personal exemptions allowed by the
law; that the income taxes paid by the said Menzi & Co., Inc.,
pertaining to the business of the fertilizer department and charged
to that business, were duly entered on the books of that
department, and included in the auditors' reports hereinbefore
referred to, which reports were examined, accepted and approved
by the plaintiff, with full knowledge of their contents, and he is now
estopped from saying that such taxes are not a legitimate expense
of said business.
FIFTH CAUSE OF ACTION
As fifth cause of action, plaintiff alleged:
I. That he hereby reproduces paragraphs I, II, III, IV, and V of
the first cause of action.
II. That the plaintiff has discovered that the defendant Menzi &
Co., Inc., had been receiving, during the period of the contract
Exhibit A, from foreign firms selling fertilizing material, a secret
commission equivalent to 5 per cent of the total value of the
purchases of fertilizing material made by the partnership constituted
between the plaintiff and the defendant Menzi & Co., Inc., and that
said 5 per cent commission was not entered by the defendants in
the books of the business, to the credit and benefit of the
partnership constituted between the plaintiff and the def endant,
but to the credit of the defendant Menzi & Co., Inc., which
appropriated it to itself.
III. That the exact amount, or even the approximate amount
of the fraud thus suffered by the plaintiff cannot be determined,
because the entries referring to these items do not appear in the
partnership books, although the plaintiff believes and alleges that
they do appear in the private books of the defendant Menzi & Co.,
Inc., which the latter has refused to furnish, notwithstanding the
demands made therefor by the auditors and the lawyers of the
plaintiff.
IV. That taking as basis the amount of the purchases of some
fertilizing materia! made by the partnership during the first four
years of the contract Exhibit A, the plaintiff estimates that this 5 per
cent commission collected by the defendant Menzi & Co., Inc., to
the damage and prejudice of the plaintiff, amounts to P127,375.77
of which 35 per cent belongs exclusively to the plaintiff.
Wherefore, the plaintiff prays the court to order the
defendants to pay jointly and severally to the plaintiff the amount of
P44,581.52, or the exact amount owed upon this ground, after both
parties have adduced their evidence upon the point.
Def endants alleged:
1. That they repeat and make a part of this special defense
paragraphs 1, 2, 3 and 4, of the special defense to the first cause of
action in this amended answer;
2. That the defendant, Menzi & Co., Inc., did have during the
period of said agreement, Exhibit A, and has now what is called a
"Propaganda Agency Agreement" with the Deutsches Kalesyndikat,
G. M. B., of Berlin, which is a manufacturer of potash, by virtue of
which the said Menzi & Co., Inc., was to receive for its propaganda
work in advertising and bringing about sales of its potash a
commission of 5 per cent on all orders of potash received by it from
the Philippine Islands; that during the period of said agreement,
Exhibit A, orders were sent to said concern for potash, through C.
Andre & Co., of Hamburg, as the agent of the said Menzi & Co.,
Inc., upon which the said Menzi & Co., Inc., received a 5 per cent
commission, amounting in all to P2,222.32 for the propaganda work
which it did for said firm in the Philippine Islands; that said
commissions were not in any sense discounts on the purchase price
of said potash, and have no relation to the fertilizer business of
which the plaintiff was to receive a share of the net profits for his
services, and consequently were not credited to that department;
3. That in going over the books of Menzi & Co., Inc., it has
been f ound that there are only two items of commissions, which
were received from the United Supply Co., of San Francisco, in the
total sum of $66.51, which, through oversight, were not credited on
the books of the fertilizer department of Menzi & Co., Inc., but due
allowance has now been given to that department for such item.
SIXTH CAUSE OF ACTION
As sixth cause of action, plaintiff alleged:
I. That he hereby reproduces paragraphs I, II, III, IV, and V,
of the first cause of action.
II. That the defendant Menzi & Co., Inc., in collusion with and
through the defendants J. M. Menzi and P. C. Schlobohm and their
assistants, has tampered with the books of the business making
fictitious transfers in favor of the defendant Menzi & Co., Inc., of
merchandise belonging to the partnership, purchased with the
latter's money, and deposited in its warehouses, and then sold by
Menzi & Co., Inc., to third persons, thereby appropriating to itself
the profits obtained from such resale.
III. That it is impossible to ascertain the amount of the fraud
suffered by the plaintiff in this respect as the real amount obtained
from such sales can only be ascertained from an examination of the
private books of the defendant entity, which the latter has refused
to permit notwithstanding the demand made for the purpose by the
auditors and the lawyers of the plaintiff, and no basis of
computation can be established, even approximately, to ascertain
the extent of the fraud sustained by the plaintiff in this respect, by
merely examining the partnership books.
Wherefore, the plaintiff prays the court to order the
defendants J. M. Menzi and P. C. Schlobohm, to make a sworn
statement as to all the profits received from the sale to third
persons of the fertilizers pertaining to the partnership, and the
profits they have appropriated, ordering them jointly and severally
to pay 35 per cent of the net amount, with legal interest from the
filing of the original complaint until the payment thereof,
Defendants alleged:
1. That they repeat and make a part of this special defense
paragraphs 1, 2, 3 and 4, of the special defense to the first cause of
action in this amended answer:
2. That under the express terms of the employment
agreement, Exhibit A, the defendant, Menzi & Co., Inc., had the
right to import into the Philippine Islands in the course of its
fertilizer business and sell for its exclusive account and benefit
simple fertilizer ingredients; that the only materials imported by it
and sold during the period of said agreement were simple f ertilizer
ingredients, which had nothing whatever to do with the business of
mixed fertilizers, of which the plaintiff was to receive a share of the
net profits as a part of his compensation.
SEVENTH CAUSE OF ACTION
As seventh cause of action, plaintiff alleged:
1. I.That he hereby reproduces paragraphs I, II, III, IV,
and V of the first cause of action.
2. II.That during the existence of the contract Exhibt A,
the defendant Menzi & Co., Inc., for the account of
the partnership constituted between itself and the
plaintiff, and with the latter's money, purchased from
several foreign firms various simple fertilizing material
for the use of the partnership.
3. III.That in the paid invoices for such purchases there
are charged, besides the cost price of the
merchandise, other amounts for freight, insurance,
duty, etc., some of which were not entirely thus spent
and were later credited by the selling firms to the
defendant Menzi & Co., Inc.
4. IV.That said defendant Menzi & Co., Inc., through and
in collusion with the defendants J. M. Menzi and P.Co
Schlobohm upon receipt of the credit notes remitted
by the selling firms of fertilizing material, for rebates
upon freight.
1. insurance, duty, etc., charged in the invoice but not all
expended, did not enter them upon the books to the
credit of the partnership constituted between the
defendant and the plaintiff, but entered or had them
entered to the credit of Menzi & Co., Inc., thereby
defrauding the plaintiff of 35 per cent of the value of
such reductions.
2. V.That the total amount, or even the approximate
amount of this fraud cannot be ascertained without an
examination of the private books of Menzi & Co., Inc.,
16
 which the latter has refused to permit notwithstanding
the demand to this effect made upon them by the
auditors and the lawyers of the plaintiff.
Wherefore, the plaintiff prays the court to order the defendants J.
M. Menzi and P. C. Schlobohm, to make a sworn statement as to
the total amount of such rebates, and to sentence the defendants
to pay to the plaintiff jointly and severally 35 per cent of the net
amount.
Defendants alleged:
1. That they repeat and make a part of this special defense
paragraphs 1, 2, 3 and 4, of the special defense to the first cause of
action in this amended answer:
2. That during the period of said employment agreement,
Exhibit A, the defendant, Menzi & Co., Inc., received from its agent,
C. Andre & Co., of Hamburg, certain credits pertaining to the
fertilizer business in the profits of which the plaintiff was interested,
by way of refunds of German Export Taxes, in the total sum of
P1,402.54; that all of said credits were duly noted on the books of
the fertilizer department as received, but it has just recently been
discovered that through error an additional sum of P216.22 was
credited to said department, which does not pertain to said
business in the profits of which the plaintiff is interested.
EIGHTH CAUSE OF ACTION
As eighth cause of action, plaintiff alleged:
I. That he hereby reproduces paragraphs I, II, III, IV, and V of
the first cause of action.
II. That on or about April 21, 1927, that is, before the expiration of
the contract Exhibit A of the complaint, the defendant Menzi & Co.,
Inc., acting as manager of the fertilizer business constituted
between said defendant and the plaintiff, entered into a contract
with the Compañia General de Tabacos de Filipinas for the sale to
said entity of three thousand tons of fertilizers of the trade mark
"Corona No. 1", at the rate of P111 per ton, f. o. b. Bais, Oriental
Negros, to be delivered, as they were delivered, according to
information received by the plaintiff, during the months of
November and December, 1927, and January, February, March, and
April, 1928.
III. That both the contract mentioned above and the benefits
derived therefrom, which the plaintiff estimates at P90,000,
Philippine currency, belongs to the fertilizer business constituted
between the plaintiff and the defendant, of which 35 per cent, or
P31,500, belongs to said plaintiff.
IV. That notwithstanding the expiration of the partnership
contract Exhibit A, on April 27, 1927, the defendants have not
rendered a true accounting of the profits obtained by the business
during the last four months thereof, as the proposed balance
submitted to the plaintiff was incorrect with regard to the inventory
of merchandise, transportation equipment, and the value of the
trade marks, f or which reason such proposed balance did not
represent the true status of the business of the partnership on April
30, 1927.
V. That the proposed balance submitted to the plaintiff with ref
erence to the partnership operations during the last four months of
its existence, was likewise incorrect, inasmuch as it did not include
the profit realized or to be realized from the contract entered into
with the Compañía General de Tabacos de Filipinas,
notwithstanding the fact that this contract was negotiated during
the existence of the partnership, and while the defendant Menzi &
Co., Inc., was the manager thereof.
VI. That the defendant entity now contends that the contract
entered into with the Compañia General de Tabaos de Filipinas
belongs to it exclusively, and refuses to
give the plaintiff his share consisting in 35 per cent of the profits
produced thereby.
Wherefore, the plaintiff prays the honorable court to order the
defendants to render a true and detailed account of the business
during the last four months of the existence of the partnership, i.
e., from January 1, 1927 to April 27, 1927, and to sentence them
likewise to pay the plaintiff 35 per cent of the net profits.
Defendants alleged:
1. That they repeat and make a part of this special defense
paragraphs 1, 2, 3 and 4, of the special defense to
the first cause of action in this amended answer; 2. That the
said order for 3,000 tons of mixed fertilizer, received by Menzi &
Co., Inc., from the Compañía General de Tabacos de Filipinas on
April 21, 1927, was taken by it in the regular course of its fertilizer
business, and was to be manufactured and delivered in December,
1927, and up to April, 1928; that the employment agreement of the
plaintiff expired by its own terms on April 27, 1927, and he has not
been in any way in the service of the defendant, Menzi & Co., Inc.,
since that time, and he cannot possibly have any interest in the
fertilizers manufactured and delivered by the said Menzi & Co., Inc.,
after the expiration of his contract for any service rendered to it.
NINTH CAUSE OF ACTION
As ninth cause of action, plaintiff alleged:
1. I.That he hereby reproduces paragraphs I, II, III, IV,
and V of the first cause of action.
2. II.That during the period of the contract Exhibit A, the
partnership constituted thereby registered in the
Bureau of Commerce and Industry the trade marks
"CORONA NO. 1", "CORONA No. 2", "ARADO", and
"Hoz", the plaintiff and the defendant having by their
efforts succeeded in making them favorably known in
the market.
3. III.That the plaintiff and the defendant, laboring jointly,
have succeeded in making the fertilizing business a
prosperous concern to such an extent that the profits
obtained
1. from the business during the five years it has existed,
amount to approximately P1,000,000, Philippine
currency.
2. IV.That the value of the good-will and the trade marks
of a business of this nature amounts to at least
P1,000,000, of which sum 35 per cent belongs to the
plaintiff, or, P350,000.
3. V.That at the time of the expiration of the contract
Exhibit A, the defendant entity, notwithstanding and in
spite of the plaintiff's insistent opposition, has
assumed the charge of liquidating the fertilizing
business, without having rendered a monthly account
of the state of the liquidation, as required by law,
thereby causing the plaintiff damages.
4. VI.That the damages sustained by the plaintiff, as well
as the amount of his share in the remaining property
of the business, after its expiration, are wholly
unknown to the plaintiff, and may only be truly and
correctly ascertained by compelling the defendants J.
M. Menzi and P. C. Schlo bohm to declare under oath
and explain to the court in detail the sums obtained
from the sale of the remaining merchandise, after the
expiration of the partnership contract.
5. VII.That after the contract Exhibit A had expired, the
defendant continued to use for its own benefit the
good-will and trade marks belonging to the
partnership, as well as its transportation equipment
and other machinery, thereby indicating its intention
to retain such good-will, trade marks, transportation
equipment and machinery, for the manufacture of
fertilizers, by virtue of which the defendant is bound
to pay the plaintiff 35 per cent of the value of said
property.
6. VIII.That the true value of the transportation equipment
and machinery employed in the preparation of the
fertilizers amounts to P20,000, 35 per cent of which
amounts to P7,000.
7. IX.That the plaintiff has repeatedly demanded that the
defendant entity render a true and detailed account of
the state of the liquidation of the partnership
business, but
1. said defendant has ignored such demands, so that the
plaintiff does not, at this date, know whether the
liquidation of the business has been finished, or what
the status of it is at present.
Wherefore, the plaintiff prays the Honorable Court:
1. "1.To order the defendants J. M. Menzi and P. C.
Schlobohm to render a true and detailed account of
the status of the business in liquidation, that is, from
April 28, 1927, until it is finished, ordering all the
defendants to pay the plaintiff jointly and severally 35
per cent of the net amount.
2. "2.To order the defendants to pay the plaintiff jointly
and severally the amount of P350,000, which is 35 per
cent of the value of the goodwill and the trade marks
of the fertilizer business;
3. "3.To order the defendants to pay the plaintiff jointly
and severally the amount of P7,000, which is 35 per
cent of the value of the transportation equipment and
machinery of the business; and
4. "4.To order the def endants to pay the costs of this trial,
and further, to grant any other remedy that this
Honorable Court may deem just and equitable."
Defendants alleged:
1. That they repeat and make a part of this special defense
paragraphs 1, 2, 3 and 4, of the special defense to the first cause of
action in this amended answer;
2. That the good-will, if any, of the said fertilizer business of
the defendant, Menzi & Co., Inc., pertains exclusively to it, and the
plaintiff can have no interest therein of any nature under his said
employment agreement; that the trade-marks mentioned by the
plaintiff in his amended complaint, as a part of such good-will,
belonged to and have been used by the said Menzi & Co., Inc., in
its fertilizer business from and since its organization, and the
plaintiff can have no rights to or interest therein under his said
employment agreement; that the transportation equipment pertains
to the fertilizer department of Menzi & Co., Inc., and whenever it
has been used by the said Menzi & Co., Inc., in its own business,
due and reasonable compensation for its use has been allowed to
said business; that the machinery pertaining to the said fertilizer
business was destroyed by fire in October, 1926, and the value
thereof in the sum of P20,000 was collected from the Insurance
Company, and the plaintiff has been given credit for 35 per cent of
that amount; that the present machinery used by Menzi & Co., Inc.,
was constructed by it, and the costs thereof was not charged to the
fertilizer department, and the plaintiff has no right to have it taken
into consideration in arriving at the net profits due to him under his
said employment agreement.
The dispositive part of the decision of the trial court is as
follows:
"Wherefore, let judgment be entered:
1. "(a)Holding that the contract entered into by the
parties, evidenced by Exhibit A, is a contract of
general regular commercial partnership, wherein
Menzi & Co., Inc., was the capitalist, and the plaintiff,
the industrial partner;
2. "(b)Holding that the plaintiff, by the mere fact of having
signed and approved the balance sheets, Exhibits C to
C-8, is not estopped from questioning the statements
of accounts therein contained;
3. "(c)Ordering Menzi & Co., Inc., upon the second ground
of action, to pay the plaintiff the sum of P60,385.67
with legal interest from the date of the filing of the
original complaint until paid;
4. "(d)Dismissing the third cause of action;
5. "(e)Ordering Menzi & Co., Inc., upon the fourth cause of
action, to pay the plaintiff the sum of P3,821.41, with
legal interest from the date of the filing of the original
complaint until paid;
6. "(f)Dismissing the fifth cause of action;
7. "(g)Dismissing the sixth cause of action;
8. "(h)Dismissing the seventh cause of action;
9. "(i)Ordering the defendant Menzi & Co., Inc., upon the
eighth cause of action, to pay the plaintiff the sum of
P6,578.38 with legal interest from January 1, 1929,
the date of the liquidation of the fertilizer business,
until paid;
1. "(j)Ordering Menzi & Co., Inc., upon the ninth cause of
action to pay the plaintiff the sum of P196,709.20 with
legal interest from the date of the filing of the original
complaint until paid;
2. "(k)Ordering the said defendant corporation, in view of
the plaintiff's share of the profits of the business
accruing from January 1, 1927 to December 31, 1928,
to pay the plaintiff 35 per cent of the net balance
shown in Exhibits 51 and 51-A, after deducting the
item of P2,410 for income tax, and any other sum
charged for interest under the entry 'Purchases';
3. "(l)Ordering the defendant corporation, in connection
with the final liquidation set out in Exhibits 52 and 52-
17
 A, to pay the plaintiff the sum of P17,463.54 with
legal interest from January 1, 1929, until fully paid;
4. "(m)Dismissing the case with reference to the other
defendants, J. M. Menzi and P. C. Schlobohm; and
5. "(n)Menzi & Co., Inc., shall pay the costs of the trial."
The appellant makes the following assignments of error:
1. "I.The trial court erred in finding and holding that the
contract Exhibit A constitutes a regular collective
commercial copartnership between the defendant
corporation, Menzi & Co., Inc., and the plaintiff,
Francisco Bastida, and not a contract of employment.
2. "II.The trial court erred in finding and holding that the
defendant, Menzi & Co., Inc., had wrongfully charged
to the f ertilizer business in question the sum of
P10,918.33 as income taxes partners' balances,
foreign drafts, local drafts, and on other credit
balances in the sum of P172,530.49, and that 35 per
cent thereof, or the sum of P60,385.67, with legal
interest thereon from the date of filing his complaint,
corresponds to the plaintiff.
3. "III.The trial court erred in finding and holding that the
defendant, Menzi & Co., Inc., had wrongfully charged
to the fertilizer business in question the sum of
P10,918.33 as income taxes for the years 1923, 1924,
1925 and 1926, and that the plaintiff is entitled to 35
per cent thereof, or the sum of P3,821.41, with legal
interest thereon from the
1. date of filing his complaint, and in disallowing the item
of P2,410 charged as income tax in the liquidation in
Exhibits 51 and 51-A for the period from January 1 to
April 27, 1927.
2. "IV.The trial court erred in refusing to find and hold
under the evidence in this case that the contract,
Exhibit A was during the whole period thereof
considered by the parties and performed by them as a
contract of employment in relation to the fertilizer
business of the defendant, and that the accounts of
said business were kept by the defendant, Menzi &
Co., Inc., on that theory with the knowledge and
consent of the plaintiff, and that at the end of each
year for five years a balance sheet and profit and loss
statement of said business were prepared from the
books of account of said business on the same theory
and submitted to the plaintiff, and that each year said
balance sheet and profit and loss statement were
examined, approved and signed by said plaintiff and
he was paid the amount due him under said contract
in accordance therewith with full knowledge of the
manner in which said business was conducted and the
charges for interest and income taxes made against
the same and that by reason of such facts, the
plaintiff is now estopped from raising any question as
to the nature of said contract or the propriety of such
charges.
3. "V.The trial court erred in finding and holding that the
plaintiff, Francisco Bastida, is entitled to 35 per cent of
the net profits in the sum of P18,795.38 received by
the defendant, Menzi & Co., Inc., from its contract
with the Compañía General de Tabacos de Filipinas, or
the sum of P6,578.38, with legal interest thereon from
January 1, 1929, the date upon which the liquidation
of said business was terminated.
4. "VI.The trial court erred in finding and holding that the
value of the good-will of the fertilizer business in
question was P562,312, and that the plaintiff,
Francisco Bastida, was entitled to 35 per cent of such
valuation, or the sum of P196,709.20, with legal
interest thereon from the date of filing his complaint.
1. "VII.The trial court erred in rendering judgment in favor
of the plaintiff and against the defendant, Menzi &
Co., Inc., (a) on the second cause of action, for the
sum of P60,385.67, with legal interest thereon from
the date of filing the complaint; (b) on the fourth
cause of action, for the sum of P3,821.41, with legal
interest thereon from the date of filing the complaint;
(c) on the eighth cause of action, for the sum of
P6,578.38, with legal interest thereon from January 1,
1929; and (d) on the ninth cause of action, for the
sum of P196,709.20, with legal interest thereon from
the date of filing the original complaint; and (e) for
the costs of the action, and in not approving the final
liquidation of said business, Exhibits 51 and 51-A and
52 and 52-A, as true and correct, and entering
judgment against said defendant only for the amounts
admitted therein as due the plaintiff with legal
interest, with the costs against the plaintiff.
2. "VIII.The trial court erred in overruling the defendants'
motion for a new trial."
It appears from the evidence that the defendant corporation was
organized in 1921 for the purpose of importing and selling general
merchandise, including fertilizers and fertilizer ingredients. It
acquired through John Bordman and the Menzi-Bordman Co. the
good-will, trade-marks, business, and other assets of the old
German firm of Behn, Meyer & Co., Ltd., including its fertilizer
business with its stocks and trade-marks. Behn, Meyer &Co., Ltd.,
had owned and carried on this fertilizer business from 1910 until
that firm was taken over by the Alien Property Custodian in 1917.
Among the trade-marks thus acquired by the appellant were those
known as the "ARADO", "Hoz", and "CORONA". They were
registered in the Bureau of Commerce and Industry in the name of
Menzi & Co. The trade-marks "ARADO" and "Hoz" had been used by
Behn, Meyer & Co., Ltd., in the sale of its mixed fertilizers, and the
trade-mark "CORONA" had been used in its other business. The
"Hoz" trade-mark was used by John Bordman and the Menzi-
Bordman Co. in the continuation of the fertilizer business that had
belonged to Behn, Meyer & Co., Ltd.
The business of Menzi & Co., Inc., was divided into several
different departments, each of which was in charge of a manager,
who received a fixed salary and a percentage of the profits. The
corporation had to borrow money or obtain credits f rom time to
time and to pay interest thereon. The amount paid for interest was
charged against the department concerned, and the interest
charges were taken into account in determining the net profits of
each department. The practice of the corporation was to debit or
credit each department with interest at the bank rate on its daily
balance. The fertilizer business of Menzi & Co., Inc., was carried on
in accordance with this practice under the "Sundries Department"
until July, 1923, and after that as a separate department.
In November, 1921, the plaintiff, who had had some
experience in mixing and selling fertilizer, went to see Toehl, the
manager of the sundries department of Menzi & Co., Inc., and told
him that he had a written contract with the Philippine Sugar
Centrals Agency for 1,250 tons of mixed fertilizers, and that he
could obtain other contracts, including- one from the Calamba
Sugar Estates for 450 tons, but that he did not have the money to
buy the ingredients to fill the order and carry on the business. He
offered to assign to Menzi & Co., Inc., his contract with the
Philippine Sugar Centrals Agency and to supervise the mixing of the
fertilizer and to obtain other orders for fifty per cent of the net
profits that Menzi & Co., Inc., might derive therefrom. J. M. Menzi,
the general manager of Menzi & Co., accepted plaintiff's offer.
Plaintiff assigned to Menzi & Co., Inc., his contract with the Sugar
Centrals Agency, and the defendant corporation proceeded to fill
the order. Plaintiff supervised the mixing of the f ertilizer.
On January 10, 1922 the defendant corporation at plaintiff's request
gave him the following letter, Exhibit B:
"MANILA, 10 de enero de 1922
"Sr. FRANCISCO BASTIDA
"Manila
"MUY SR. NUESTRO : Interin f ormalizamos el contrato que, en
principio, tenemos convenido para la explotación del negocio de
abono y fertilizantes, por la presente venimos en confirmar su
derecho de 50 por ciento de las utilidades que se deriven del
contrato obtenido por Vd. de la Philippine Sugar Centrals (por 1250
tonel.) y del contrato con la Calamba Sugar Estates, así como de
cuantos contratos se cierren con compradores de abonos
preparados antes de la formalización definitiva de nuestro contrato
mutuo, lo que hacemos para garantía y seguridad de Vd.
"MENZI & CO.
"Por (Fdo.) W. TOEHL"
Menzi & Co., Inc., continued to carry on its fertilizer business
under this arrangement with the plaintiff. It ordered ingredients
from the United States and other countries, and the interest on the
drafts for the purchase of these materials was charged to the
business as a part of the cost of the materials. The mixed fertilizers
were sold by Menzi & Co., Inc., between January 19 and April 1,
1922 under its "CoRONA" brand. Menzi & Co., Inc., had only one
bank account for its whole business. The fertilizer business had no
separate capital. A fertilizer account was opened in the general
ledger, and interest at the rate charged by the Bank of the
Philippine Islands was debited or credited to that account on the
daily balances of the f ertilizer business. This was in accordance
with appellant's established practice, to which the plaintiff assented.
On or about April 24, 1922 the net profits of the business
carried on under the oral agreement were determined by Menzi &
Co., Inc., after deducting interest charges, proportional part of
warehouse rent and salaries and wages, and the other expenses of
said business, and the plaintiff was paid some twenty thousand
pesos in full satisfaction of his share of the profits.
Pursuant to the aforementioned verbal agreement, confirmed
by the letter, Exhibit B, the defendant corporation on April 27, 1922
entered into a written contract with the plaintiff, marked Exhibit A,
which is the basis of the present action.
The fertilizer business was carried on by Menzi & Co., Inc.,
after the execution of Exhibit A in practically the same manner as it
was prior thereto. The intervention of the plaintiff was limited to
supervising the mixing of the fertilizers in Menzi & Co.'s, Inc.,
bodegas.
The trade-marks used in the sale of the fertilizer were
registered in the Bureau of Commerce & Industry in the name of
Menzi & Co., Inc., and the fees were paid by that company. They
were not charged to the fertilizer business, in which the plaintiff
was interested. Only the fees for registering the formulas in the
Bureau of Science were charged to the fertilizer business, and the
total amount thereof was credited to this business in the final
liquidation on April 27, 1927.
On May 3, 1924 the plaintiff made a contract with Menzi & Co.,
Inc., to furnish it all the stems and scraps of tobacco that it might
need for its fertilizer business either in the Philippine Islands or for
export to other countries. This contract is referred to in the record
as the "Vastago Contract". Menzi & Co., Inc., advanced the plaintiff
large sums of money f or buying and installing machinery, paying
the salaries of his employees, and other expenses in perf orming his
contract.
White, Page & Co., certified public accountants, audited the
books of Menzi & Co., Inc., every month, and at the end of each
year they prepared a balance sheet and a profit and loss statement
of the fertilizer business. These statements were delivered to the
plaintiff for examination, and after he had had an opportunity of
verifying them he approved them without objection and returned
them to Menzi & Co., Inc.
Plaintiff collected from Menzi & Co., Inc., as his share or 35
per cent of the net profits of the fertilizer business the following
amounts:
1922 ............................................
1923 ............................................
1924 ............................................
1925 ............................................
1926 ............................................
Total ....................
To this amount must be added plaintiff's share of the net profits
from January 1 to April 27, 1927, amounting to P34,766.87, making
a total of P231,250.79.
Prior to the expiration of the contract, Exhibit A, the manager
of Menzi & Co., Inc., notified the plaintiff that the contract for his
services would not be renewed.
When plaintiff's contract expired on April 27, 1927, the
fertilizer department of Menzi & Co., Inc., had on hand materials
and ingredients and two Ford trucks of the book value of
approximately P75,000, and accounts receivable amounting to
P103,000. There were claims outstanding and bills to pay. Before
the net profits could be finally determined, it was necessary to
dispose of the materials and equipment, collect the outstanding
accounts, and pay the debts of the business. The accountants f or
Menzi & Co., Inc., prepared a balance sheet and a profit and loss
statement for the period from January 1 to April 27, 1927 as a basis
of settlement, but the plaintiff refused to accept it, and filed the
present action.
Menzi & Co., Inc., then proceeded to liquidate the fertilizer
business in question. In October, 1927 it proposed to the plaintiff
18
that the old and damaged stocks on hand having a book value of
P40,000, which the defendant corporation had been unable to
dispose of, be sold at public or private sale, or divided between the
parties. The plaintiff refused to agree to this. The defendant
corporation then applied to the trial court for an order for the sale
of the remaining property at public auction, but apparently the
court did not act on the petition.
The old stocks were taken over by Menzi & Co., Inc., and the
final liquidation of the fertilizer business was completed in
December, 1928, and a final balance sheet and a profit and loss
statement were submitted to the plaintiff during the trial. During
the liquidation the books of Menzi & Co., Inc., for the whole period
of the contract in question were reaudited by White, Page & Co.,
certain errors of bookkeeping were discovered by them. After
making the corrections they found the balance due the plaintiff to
be P21,633.20.
Plaintiff employed a certified public accountant, Vernon
Thompson, to examine the books and vouchers of Menzi & Co.
Thompson assumed the plaintiff and Menzi & Co., Inc., to be
partners, and that Menzi & Co., Inc., was obliged to furnish free of
charge all the capital the partnership should need. He naturally
reached very different conclusions from those of the auditors of
Menzi & Co., Inc.
We come now to a consideration of appellant's assignments of
error. After considering the evidence and the arguments of counsel,
we are unanimously of the opinion that under the facts of this case
the relationship established between Menzi & Co. and the plaintiff
by the contract, Exhibit A, was not that of partners, but that of
employer and employee, whereby the plaintiff was to receive 35 per
cent of the net profits of the fertilizer business of Menzi & Co., Inc.,
in compensation for his services of supervising the mixing of the
fertilizers. Neither the provisions of the contract nor the conduct of
the parties prior or subsequent to its execution justified the finding
that it was a contract of copartnership. Exhibit A, as appears from
the statement of facts, was in effect a continuation of the verbal
agreement between the parties, whereby the plaintiff worked for
the defendant corporation for one-half of the net profits derived by
the corporation from certain fertilizer contracts.
Plaintiff was paid his share of the profits from those transactions
after Menzi & Co., Inc., had deducted the same items of expense
which he now protests. Plaintiff never made any objection to
defendant's manner of keeping the accounts or to the charges. The
business was continued in the same manner under the written
agreement, Exhibit A, and for four years the plaintiff never made
any objection. On the contrary he approved and signed every year
the balance sheet and the profit and loss statement. It was only
when plaintiff's contract was about to expire and the defendant
corporation had notified him that it would not renew it that the
plaintiff began to make objections.
The trial court relied on article 116 of the Code of Commerce,
which provides that articles of association by which two or more
persons obligate themselves to place in a common f und any
property, industry, or any of these things, in order to obtain profit,
shall be commercial, no matter what its class may be, provided it
has been established in accordance with the provisions of this
Code; but in the case at bar there was no common fund, that is, a
fund belonging to the parties as joint owners or partners. The
business belonged to Menzi & Co., Inc. The plaintiff was working f
or Menzi & Co., Inc. Instead of receiving a fixed salary or a fixed
salary and a small percentage of the net profits, he was to receive
35 per cent of the net profits as compensation for his services.
Menzi & Co., Inc., was to advance him P300 a month on account of
his participation in the profits. It will be noted that no provision was
made f or reimbursing Menzi & Co., Inc., in case there should be no
net profits at the end of the year. It is now well settled that the old
rule that sharing profits as profits made one a partner is
overthrown. (Mechem, second edition, p. 89.)
It is nowhere stated in Exhibit A that the parties were
establishing a partnership or intended to become partners. Great
stress is laid by the trial judge and plaintiff's attorneys on the fact
that in the sixth paragraph of Exhibit A the phrase "en sociedad
con" is used in providing that defendant corporation shall not
engage in the business of prepared fertilizers except in association
with the plaintiff (en sociedad con). The fact is that en sociedad
con as there used merely means en reunion con or in association
with, and does not carry the meaning of "in partnership with".
The trial judge found that the defendant corporation had not
always regarded the contract in question as an employment
agreement, because in its answer to the original complaint it stated
that before the expiration of Exhibit A it notified the plaintiff that it
would not continue associated with him in said business. The trial
judge concluded that the phrase "associated with", used by the
defendant corporation, indicated that it regarded the contract,
Exhibit A, as an agreement of copartnership.
In the first place, the complaint and answer having been
superseded by the amended complaint and the answer thereto, and
the answer to the original complaint not having been presented in
evidence as an exhibit, the trial court was not authorized to take it
into account. "Where amended pleadings have been filed,
allegations in the original pleadings are held admissible, but in such
case the original pleadings can have no effect, unless formally
offered in evidence." (Jones on Evidence, sec.
273; Lucido vs. Calupitan, 27 Phil., 148.)
In the second place, although the word "associated" may be
related etymologically to the Spanish word "socio", meaning
partner, it does not in its common acceptation imply any
partnership relation.
The 7th, 8th, and 9th paragraphs of Exhibit A, whereby the
defendant corporation obligated itself to pay to the plaintiff 35 per
cent of the net profits of the fertilizer business, to advance to him
P300 a month on account of his share of the profits, and to grant
him permission during 1923 to absent himself from the Philippines
for not more than one year are utterly incompatible with the claim
that it was the intention of the parties to form a copartnership.
Various other reasons for holding that the parties were not partners
are advanced in appellant's s brief. We do not deem it nec-
essary to discuss them here. We merely wish to add that in the
Vastago contract, Exhibit A, the plaintiff clearly recognized Menzi &
Co., Inc., as the owners of the fertilizer business in question.
As to the various items of expense rejected by the trial judge,
they were in our opinion proper charges and erroneously
disallowed, and' this would be true even if the parties had been
partners. Although Menzi & Co., Inc., agreed to f urnish the
necessary financial aid for the fertilizer business, it did not obligate
itself to contribute any fixed sum as capital or to defray at its own
expense the cost of securing the necessary credit. Some of the
contentions 'of the plaintiff and his expert witness Thompson are so
obviously without merit as not to merit serious consideration. For
instance, they objected to the interest charges on draft for
materials purchased abroad. Their contention is that the corporation
should have f urnished the money to purchase these materials for
cash, overlooking the fact that the interest was added to the cost
price, and that the plaintiff was not prejudiced by the practice
complained of. It was also urged, and this seems to us the height of
absurdity, that the defendant corporation should have f urnished f
ree of charge such financial assistance as would have made it
unnecessary to discount customers' notes, thereby enabling the had a perf ect right to do. There was really nothing to which any
business to reap the interest. In other words, the defendant good-will could attach. Plaintiff maintains, however, that the trade-
corporation should have enabled the fertilizer department to do marks used in the fertilizer business during the time that he was
business on a credit instead of a cash basis. connected with it acquired great value, and that they have been
The charges now complained of, as we have already stated, appropriated by the appellant to its own use. That seems to be the
are the same as those made under the verbal agreement, upon the only basis of the alleged good-will, to which a fabulous valuation
termination of which the parties made a settlement; the charges in was given. As we have seen, the trademarks were not new. They
question were acquiesced in by the plaintiff for years, and it is now had been used by Behn, Meyer & Co. in its business for other goods
too late for him to contest them. The decision of this court in the and one of them for fertilizer. They belonged to Menzi & Co., Inc.,
case of Kriedt vs. E. C. McCullough & Co. (37 Phil., 474), is in point. and were registered in its name; only the expense of registering the
A portion of the syllabus of that case reads as f ollows: formulas in the Bureau of Science was charged to the business in
"1. CONTRACTS; INTERPRETATION; CONTEMPORANEOUS which the plaintiff was interested. These trademarks remained the
ACTS OF PARTIES.—Acts done by the parties to a contract in the exclusive property of Menzi & Co., and the plaintiff had no interest
course of its performance are admissible in evidence upon the therein on the expiration of his contract.
question of its meaning, as being their own contemporaneous The balance due the plaintiff, as appears from Exhibit 52, is
interpretation of its terms. P21,633.20. We are satisfied by the evidence that said balance is
"2. ID.; ID.; ACTION OF PARTIES UNDER PRIOR correct.
CONTRACT.—In an action upon a contract containing a provision of For the foregoing reasons, the decision appealed from is modified
doubtful application it appeared that under a similar prior contract and the defendant corporation is sentenced to pay the plaintiff
the parties had, upon the termination of said contract, adjusted twenty-one thousand, six hundred and thirtythree pesos and twenty
their rights and made a settlement in which the doubtful clause had centavos (P21,633.20), with legal interest thereon from the date of
been given effect in conformity with the interpretation placed the filing of the complaint or June 17, 1927, without a special
thereon by one of the parties. Held: That this action of the parties finding as to costs.
under the prior contract could properly be considered upon the Street, Villamor, and Villa-Real, JJ., concur.
question of the interpretation of the same clause in the later Justice Hull participated in this case, but on account of his
contract. absence on leave at the time of the promulgation of the decision he
"3. ID. ; ID. ; ACQUIESCENCE.—Where one of the parties to a authorized the undersigned to certify that he voted to modify the
contract acquiesces in the interpretation placed by the other upon a decision of the trial court as appears in the foregoing decision of
provision of doubtful application, the party so acquiescing is bound this court.—VILLAMOR, J., Presiding.
by such interpretation. Judgment modified.
"4. ID. ; ID. ; ILLUSTRATION.—One of the parties to a
contract, being aware at the time of the execution thereof that the
other placed a certain interpretation upon a provision of doubtful
application, nevertheless proceeded, without raising any question
upon the point, to perform the services which he was bound to
render under the contract. Upon the termination of the contract by
mutual consent a question was raised as to the proper
interpretation of the doubtful provision. Held: That the party raising
such question had acquiesced in the interpretation placed upon the
contract by the other party and was bound thereby."
The trial court held that the plaintiff was entitled to P6,578.38
or 35 per cent of the net profits derived by Menzi & Co., Inc., from
its contract for fertilizers with the Tabacalera. This finding in our
opinion is not justified by the evidence. This contract was obtained
by Menzi & Co., Inc., shortly before plaintiff's contract with the
defendant corporation expired. Plaintiff tried to get the Tabacalera
contract for himself. When this contract was filled, plaintiff had
ceased to work for Menzi & Co., Inc., and he has no right to
participate in the profits derived therefrom.
Appellant's sixth assignment of error is that the trial court
erred in finding the value of the good-will of the f ertilizer business
in question to be P562,312, and that the plaintiff was entitled to 35
per cent thereof or P196,709.20. In reaching this conclusion the
trial court unfortunately relied on the opinion of the accountant,
Vernon Thompson, who assumed, erroneously as we have seen,
that the plaintiff and Menzi & Co., Inc., were partners; but even if
they had been partners there would have been no good-will to
dispose of. The defendant corporation had a fertilizer business
before it entered into any agreement with the plaintiff; plaintiff's
agreement was for a fixed period, five years, and during that time
the business was carried on in the name of Menzi & Co., Inc., and
in Menzi & Co.'s warehouses and after the expiration of plaintiff's
contract Menzi & Co., Inc., continued its f ertilizer business, as it
19