Pioneer Insurance v.
CA o Supposedly as part of their contributions to a new corporation
G.R. No. 84197 | July 28, 1989 | Gutierrez
Nature of Case: Appeal
Digest maker: Rojo
SUMMARY: Jacob Lim under SAL (a single proprietorship) purchased 2
aircrafts from Japan Domestic Airlines. Pioneer acted as surety for Lim.
Bormaheco, the Cervanteses and Maglana contributed funds to purchase the
aircraft as well as the spare parts supposedly as part of their contributions to
the expansion of Lim’s airline business. The aircrafts were also the security in
favor of Pioneer if they ever failed to pay for the purchase. Lim defaulted in the
payments and Pioneer then executed foreclosure proceedings. TC found Lim
liable to pay Pioneer but dismissed the complaint against the other
defendants. CA dismissed the complaint against all of them. Both Pioneer and
Jacob Lim filed an appeal. Lim claims that the defendants are partners since
they failed to incorporate but the SC disagreed in this case because it was
found that there was no intention to form a corporation with the other
respondents.
DOCTRINE: It has been held that as between themselves the rights of the
stockholders in a defectively incorporated association should be governed by
the supposed charter and the laws of the state, it is ordinarily held that the
persons who attempt but fail, to form a corporation and who carry on
business under the corporate name occupy a position of partners inter
se.
However, such a relation does not necessarily exist, for ordinary persons
cannot be made to assume the relation of partners, as between themselves,
when their purpose is that no partnership shall exist and it should be implied
only when necessary to do justice between the parties.
FACTS:
 Jacob Lim was engaged in airline business as owner-operator of
Southern Air Lines (SAL) a single proprietorship.
 Lim and Japan Domestic Airlines (JDA) entered into and executed a
sales contract at Tokyo.
o For the sale and purchase of: 2 DC-3A Type aircrafts, 1 set of
necessary spare parts
o Total of $109,000 to be paid in installments
o Pioneer Insurance and Surety Corporation executed and issued
a surety bond in favor of JDA, in behalf of Lim for the balance
price of the aircrafts.
 It appear that Border Machinery and Heavy Equipment Company ISSUE/S & RATIO:
(Bormaheco), Francisco and Modesto Cervantes and Constancio
Maglana contributed some funds in the purchase of the aircraft and the
spare parts.
proposed by Lim to expand the airline business.
 They executed 2 indemnity agreements in favor of Pioneer.
o One signed by Maglana and one jointly signed by Lim for SAL,
Bormaheco and the Cervanteses.
o It stipulated the indemnitors principally agree and bind
themselves to hold and save harmless Pioneer from and against
any/all damages, losses, costs, damages etc. which Pioneer
may incur in consequence of being surety upon bond/note to
pay, reimburse and make good Pioneer…
 Lim, under name and style of SAL executed in favor of Pioneer a deed
of chattel mortgage as security the two aircrafts.
o Such deed was duly registered with the Register of Deeds
 Lim defaulted on the subsequent installment payments prompting JDA to
request payments from Pioneer for a total of P298,626.12.
 Sheriff of Davao City: Pioneer filed a petition for extrajudicial
foreclosure of the chattel mortgage.
o Cervanteses and Maglana filed a third-party claim alleging to be
co-owners of the aircraft.
 CFI: Pioneer filed an action for judicial foreclosure with an application for
a writ of preliminary attachment against Lim and other respondents.
o Answer: Maglana, Bormaheco and Cervanteses filed cross-
claims against Lim claiming they were not privies to the
contracts signed by Lim
 Also filed a counterclaim seeking damages for being
exposed to litigation and for recovery of the sums of
money advanced to Lim for the purchase of the
aircrafts.
 Trial court found Lim liable to pay Pioneer but
dismissed Pioneer’s complaints against the other
defendants.
 CA: Dismissed complaint against all defendants.
 G.R NO. 84197: Pioneer files the present petition.1
o Claims CA erred in dismissing appeal on the sole ground that
the petitioner already collected the proceeds of the reinsurance
bond in favor of JDA and that it cannot represent a reinsurer to
recover the amount from the respondents
 G.R. No. 84157: Petitioners Jacob Lim files a petition. [Sycip as counsel]
o Questions what rules govern the relationship among co-
investors whose agreement was to do business through the
corporate vehicle but who failed to incorporate the entity in
which they invested.
1It was found that Pioneer reinsured its risk of liability under the surety bond, collected the proceeds of
such reinsurance and paid the said amount to its alleged liability to JDA.
[G.R. No. 84157] – TOPIC
1. W/N the failure to incorporate gave rise to a de facto partnership
between the respondents? NO
 CA found that Lim was liable to pay his co-defendants’ cross-claims in
the total amount of P184,878.74.
o ½ to Bormaheco and the Cervanteses and ½ to Maglana
o As established in the records that the defendant Lim received
P151,000 from the defendants as well as the incurred additional
expenses
 Lim claims that as a result of the failure the defendants to incorporate, a
de facto partnership among them was created, and that as a
consequence, all must share in the losses and/or gains of the venture in
proportion to the contribution.
 It has been held that as between themselves the rights of the
stockholders in a defectively incorporated association should be
governed by the supposed charter and the laws of the state, it is 2. W/N Pioneer still has any claim against defendants considering the
ordinarily held that the persons who attempt but fail, to form a
corporation and who carry on business under the corporate name
occupy a position of partners inter se.
o Thus when persons associate themselves together under
articles to purchase property to carry on a business, and their
organization is so defective as to come short of creating a
corporation, they become in legal effect partners inter se, and
their rights as members of the company to the property acquired
will be recognized.
 However, such a relation does not necessarily exist, for ordinary
persons cannot be made to assume the relation of partners, as between
themselves, when their purpose is that no partnership shall exist and it
should be implied only when necessary to do justice between the
parties.
o Thus, one who takes no part except to subscribe for stock in a
proposed corporation which is never legally formed does not
become a partner with the other subscribers who engage in
business under the name of the pretended corporation.
 IN THIS CASE, the lower courts found that petitioner received
Php151,000 representing the participation of Bormaheco and Maglana in
the ownership of the subject airplanes and spare parts.
o It is therefore clear that petitioner never had the intention to form
a corporation with the respondents despite his representations
to them.
o Thus, there is merit to the cross-claims of the other respondents
to the effect that they were lured and induced by petitioner to
make contributions to a proposed corporation which was never
formed because petitioner reneged on their agreement.
[G.R. NO. 84197]
1. W/N Pioneer still has a cause of action considering that the reinsurer
already paid the proceeds for the surety agreement? NO
 Pioneers claims to be representing the reinsurer as attorney in fact but
there is no indication in the complaint that Pioneer is suing as attorney-
in-fact of the reinsurers for any amount.
o Pioneer then has no right to institute and maintain in its own
name an action for the benefit of the reinsurers.
 Since Pioneer has collected the amount from reinsurers, the uninsured
portion of what it paid to JDA is the only amount it can claim from the
defendants.
 By virtue of payment, the reinsurers were subrogated into the rights of
Pioneer under Art. 2207 NCC.
 Not being a real party in interest in the complaint, Pioneer has no cause
of action.
amount it has realized from the sale of the mortgaged properties? NO
 Court find that there was sufficient evidence to show that Pioneer
could not claim from the other defendants
o Pioneer knew there were conflicting claims over the
mortgaged property which impaired and rendered
insufficient the security for the claim. Since there is no other
security for the claim, it means that the indemnity agreement
has ceased to have any force and effect at the time the
action was instituted.
o Pioneer having foreclosed the chattel mortgage no longer
has any further action to recover any unpaid balance of the
price. The election of such remedy precludes further action
to recover the unpaid balance.
 SAL/Lim failed to pay the installments to JDA and Pioneer as surety
made the payments. Thereby the alternative remedies to Pioneer
were under the Recto Law.
o Pioneer has already been subrogated into the rights of JDA
as vendor. Under such law, by choosing to exercise the
remedy of foreclosure of the chattel mortgage by both
extrajudicial and judicial foreclosure, Pioneer shall have no
further action.
 There was also a restructuring of the obligations by changing the
maturity dates thereby extinguishing the original obligations through
novations thus discharging the indemnitors.
o The restructuring was done without the knowledge of
Pioneer.
o Thereby, the consequence is the extinguishment of the
obligations and of the surety bond secured by the indemnity
agreement.
RULING: Petitions denied.