CASE DIGESTS ON BUSINESS ORGANIZATION 1
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SECTION 3- OBLIGATIONS OF THE PARTNERS WITH
REGARD TO THIRD PERSONS
ARTICLE 1814
G.R. No. L-3704 December 12, 1907
LA COMPAÑIA MARITIMA, plaintiff-appellant,
vs.
FRANCISCO MUÑOZ, ET AL., defendants-appellees.
FACTS: In 1905, Francisco Muñoz, Emilio Muñoz, and Rafael
Naval formed an ordinary general mercantile partnership in
accordance with the Code of Commerce. They named the
partnership “Francisco Muñoz & Sons”. Francisco was the
capitalist partner while the other two were industrial partners. In
the articles of partnership, it was agreed upon by the three that
for profits, Francisco shall have a 3/4th share while the other
two would have 1/8th each. For losses, only Francisco shall
bear it.
Later, the partnership was sued by La Compañia Martitama for
collection of sum of money amounting to P26,828.30. The
partnership lost the case and was ordered to make said
payment; that in case the partnership can’t pay the debt, all the
partners should be liable for it.
The ruling is in accordance with Article 127 of the Code of
Commerce which states: “All the members of the general
copartnership, be they or be they not managing partners of the
same, are liable personally and in solidum with all their
property for the results of the transactions made in the name
and for the account of the partnership, under the signature of
the latter, and by a person authorized to make use thereof.”
Francisco now argues that the industrial partners should NOT
be liable pursuant to Article 141 of the Code of Commerce
which states: “Losses shall be charged in the same proportion
among the partners who have contributed capital, without
including those who have not, unless by special agreement the
latter have been constituted as participants therein.”
ISSUE: Whether or not the industrial partners are liable to third
parties like La Compañia Martitama.
HELD: Yes. The controlling law is Article 127. There is no
injustice in imposing this liability upon the industrial partners.
They have a voice in the management of the business, if no
manager has been named in the articles; they share in the
profits and as to third persons it is no more than right that they
should share in the obligations. It is admitted that if in this case
there had been a capitalist partner who had contributed only
P100 he would be liable for this entire debt of P26,000.
APODERADO DAYO JACELA  MARTINEZ  MASONGSONG  SUPNET VALLEJO  VELOSO YSMAEL
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Article 141 relates exclusively to the settlement of the
partnership affairs among the partners themselves and
has nothing to do with the liability of the partners to third
persons; that each one of the industrial partners is liable
to third persons for the debts of the firm; that if he has
paid such debts out of his private property during the life
of the partnership, when its affairs are settled he is
entitled to credit for the amount so paid, and if it results
that there is not enough property in the partnership to pay
him, then the capitalist partners must pay him.
In relation to this, the Supreme Court noted that
partnerships under the Civil Code provides for a scenario
where all partners are industrial partners (like when it is a
partnership for the exercise of a profession). In such case,
if it is permitted that industrial partners are not liable to
third persons then such third persons would get practically
nothing from such partnerships if the latter is indebted.
G.R. No. L-3146 September 14, 1907
NICOLAS CO-PITCO, plaintiff-appellee,
vs.
PEDRO YULO, defendant-appellant.
FACTS: Florencio Yulo and Jaime Palacios were partners in
the operation of a sugar estate in Victorias, Island of Negros,
and had commercial dealings with a Chinaman named Dy-
Sianco, who furnished them with money and goods, and used
to buy their crop of sugar.
In 1903, the defendant, Pedro Yulo, father of the said
Florencio, took charge of the latter's interest in the above-
mentioned partnership, and he became a general partner with
the said Jaime Palacios in the same business, and he continued
as such partner until about the end of 1904, dealing with Dy-
Sianco in the same manner as the old partnership had dealt
with the latter.
Pedro Yulo failed to the balance due of 1,638.40 pesos from the
firm hence Dy-Sianco filed a case against Yulo. The lower
court ordered the defendant to pay the entire amount with
interest.
ISSUE: W/N Pedro Yulo shall pay the entire amount for the
partnership debt. (NO)
HELD: Being a civil partnership, the partners are not liable
each for the whole debt of the partnership. The liability is pro
rata and in this case Pedro Yulo is responsible to plaintiff for
only one-half of the debt. The fact that the other partner, Jaime
1
CASE DIGESTS ON BUSINESS ORGANIZATION 1
Palacios, had left the country can not increase the liability of Pedro
Yulo.
The judgment of the court below is reversed and judgment is
ordered in favor of the plaintiff and against the defendant,
Pedro Yulo, for the sum of P819.20 pesos, Philippine Currency,
with interest thereon at the rate of 6 per cent per annum from
the 12th day of January, 1905, and the costs of the Court of
First Instance. No costs will be allowed to either party in this
court. So ordered.
G.R. No. L-11840 December 10, 1963
ANTONIO C. GOQUIOLAY, ET AL., plaintiffs-appellants,
vs.
WASHINGTON Z. SYCIP, ET AL., defendants-appellees.
Facts: Tan Sin An and Goquiolay entered into a general
commercial partnership under the partnership name “Tan Sin
An and Antonio Goquiolay” for the purpose of dealing in real
estate. The agreement lodged upon Tan Sin An the sole
management of the partnership affairs. The lifetime of the
partnership was fixed at ten years and the Articles of Co-
partnership stipulated that in the event of death of any of the
partners before the expiration of the term, the partnership will
not be dissolved but will be continued by the heirs or assigns
of the deceased partner.
The plaintiff partnership purchased 3 parcels of land which was
mortgaged to “La Urbana”. Another 46 parcels of land were
purchased by Tan Sin An in his individual capacity which he
assumed payment of a mortgage debt for P35K. The
downpayment and the amortization were advanced by Yutivo
and Co.
Tan Sin An died leaving his widow, Kong Chai Pin. The widow
subsequently became the administratrix of the estate.
Yutivo Sons and Sing Yee filed their claim in the intestate
proceedings of Tan Sin An for advances, interest and taxes
paid in amortizing and discharging their obligations to “La
Urbana”.
Kong Chai Pin filed a petition with the probate court for
authority to sell all the 49 parcels of land. She then sold it to
Sycip and Lee in consideration of P37K and of the vendees
assuming payment of the claims filed by Yutivo Sons and Sing
Yee.
When Goquiolay learned about the sale to Sycip and Lee, he
filed apetition in the intestate proceedings to set aside the order
of the probate court approving the sale in so far as his interest
over the parcels of land sold was concerned.
APODERADO DAYO JACELA  MARTINEZ  MASONGSONG  SUPNET VALLEJO  VELOSO YSMAEL
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Probate court annulled the sale executed by the
administratrix w/respect to the 60% interest of Goquiolay
over the properties. Administratrix appealed. Decision was
set aside, hence this petition.
Issues: 1)Did the lower court err in holding that the widow
succeeded her husband Tan Sin An in the sole
management of the partnership upon Tan’s death? Yes
2)WON the consent of the other partners was necessary
to perfectthe sale of the partnership properties to Sycip
and Lee? No.
Held: 1) Yes. While in the Articles of Co-Partnership and
the power of attorney executed by Goquiolay conferred
upon Tan the exclusive management of the business,
such power premised as it is upon trust and confidence,
was a mere personal right that terminated upon Tan’s
demise. The provision in the articles stating that “in the
event of death of any one of the partners within the 10
year term of the partnership, the deceased partner shall
be represented by his heirs” could not have referred to
the managerial right given to Tan. The heirs of the
deceased, by never repudiating or refusing to be bound
under the said provision in the articles became individual
partners with Goquiolay upon Tan’s demise. This is
sanctioned under Article 222 under the Code of
Commerce.
2)No. Strangers dealing with a partnership have the right
to assume,in the absence of restrictive clauses in the co-
partnership agreement that every general partner has
power to bind the partnership specially those acting with
ostensible authority. Also, inspite of the provision of Art
129 of the Code of Commerce to the effect that “if the
management of the general partnership has not been
limited by special agreement to any of the members, all
shall have the power to take part in the direction and
management of the common business, and the members
present shall come to an agreement for all contracts or
obligations which may concern the association,” such
obligation is one imposed by law on the partners among
themselves, that does not necessarily affect the validity of
the acts of a partner while acting within the scope of the
ordinary course of business of the partnership as regards
third persons without notice. The latter may rightfully
assume that th econtracting partner was duly authorized to
contract for and in behalf of the firm and that he would not
ordinarily act to the prejudice of his co-partners.Also, the
records fail to disclose that Goquiolay made any
opposition to the sale of the partnership realty to Sycip
and Lee. On the contrary, it appears that he only
interposed his objections after the deed of conveyance
2
was executed and approved by the probate court, and
consequently, his opposition came too late to be effetive.

PETITION FOR AUTHORITY TO CONTINUE USE OF THE

FIRM NAME "SYCIP, SALAZAR, FELICIANO, HERNANDEZ
& CASTILLO."

Inasmuch as "Sycip, Salazar, Feliciano, Hernandez and Castillo" and

"Ozaeta, Romulo, De Leon, Mabanta and Reyes" are partnerships,
the use in their partnership names of the names of deceased partners
will run counter to Article 1815 of the Civil Code which provides:
£îhq
Art. 1815. Every partnership shall operate under a
firm name, which may or may not include the
name of one or more of the partners.
Those who, not being members of the partnership,
include their names in the firm name, shall be
subject to the liability, of a partner.
It is clearly tacit in the above provision that names in a firm name of
a partnership must either be those of living partners and. in the case
of non-partners, should be living persons who can be subjected to
liability. In fact, Article 1825 of the Civil Code prohibits a third
person from including his name in the firm name under pain of
assuming the liability of a partner. The heirs of a deceased partner in
a law firm cannot be held liable as the old members to the creditors
of a firm particularly where they are non-lawyers. Thus, Canon 34
of the Canons of Professional Ethics "prohibits an agreement for the
payment to the widow and heirs of a deceased lawyer of a
percentage, either gross or net, of the fees received from the future
business of the deceased lawyer's clients, both because the recipients
of such division are not lawyers and because such payments will not
represent service or responsibility on the part of the recipient. "
Accordingly, neither the widow nor the heirs can be held liable for
transactions entered into after the death of their lawyer-predecessor.
There being no benefits accruing, there ran be no corresponding
liability.
Prescinding the law, there could be practical objections to allowing
the use by law firms of the names of deceased partners. The public
relations value of the use of an old firm name can tend to create
undue advantages and disadvantages in the practice of the
profession. An able lawyer without connections will have to make a
name for himself starting from scratch. Another able lawyer, who
can join an old firm, can initially ride on that old firm's reputation
established by deceased partners.
G.R. No. L-22493 July 31, 1975 appellant.
ISLAND SALES, INC., plaintiff-appellee,
vs. FACTS: Defendants-appellants Benjamin C. Daco,
UNITED PIONEERS GENERAL CONSTRUCTION COMPANY, Daniel A. Guizona, Noel C. Sim, Romulo B. Lumauig, and
ET. AL defendants. BENJAMIN C. DACO, defendant- Augusto Palisoc purchased a motor vehicle from plaintiff-
appellee Island Sales Inc. via their partnership firm, United
Pioneers General Construction Company.
United Pioneers was not able to pay Island Sales on
the installment of the motor vehicle, hence, a case was
pursued by herein plaintiff against the firm United Pioneers,
and its five (5) partners above-mentioned were included in their
capacity as general partners.
For reasons not mentioned in the case, the complaint
against partner Romulo B. Lumauig was dismissed upon
motion of the plaintiff.
The Court adjudged United Pioneers to pay Island
Sales the remaining unpaid amortization with 12% interest.
The trial court likewise sentenced the individual partners to pay
Island Sales if the defendant company has no more leviable
properties with which to satisfy the judgment against it.
The defendants Benjamin C. Daco and Noel C. Sim
moved to reconsider the decision claiming that since there are
five (5) general partners, the joint and subsidiary liability of
each partner should not exceed one-fifth ( 1/5 ) of the obligations
of the defendant company. But the trial court denied the said
motion notwithstanding the conformity of the plaintiff to limit the
liability of the defendants Daco and Sim to only one-fifth ( 1/ 5 )
of the obligations of the defendant company. Hence, this
appeal.
ISSUE: WON the dismissal of the complaint to favor
one of the general partners of a partnership increases the joint
and subsidiary liability of each of the remaining partners for the
obligations of the partnership. (NO!)
RULING: WHEREFORE, the appealed decision as thus
clarified is hereby AFFIRMED, without pronouncement as to
costs.
HELD: There were five (5) general partners when the
promissory note in question was executed for and in behalf of
the partnership. Since the liability of the partners is pro rata,
the liability of the appellant Benjamin C. Daco shall be limited
to only one-fifth ( 1/ 5 ) of the obligations of the defendant
company.
The Commission granted the claim and ordered the
The fact that the complaint against the defendant Romulo
B. Lumauig was dismissed, upon motion of the plaintiff,
does not unmake the said Lumauig as a general partner in
the defendant company. In so moving to dismiss the
complaint, the plaintiff merely condoned Lumauig's
individual liability to the plaintiff.
Article 1816 of the Civil Code provides:
Art. 1816. All partners including industrial
ones, shall be liable pro rata with all their property
and after all the partnership assets have been
exhausted, for the contracts which may be
entered into in the name and for the account of
the partnership, under its signature and by a
person authorized to act for the partnership.
However, any partner may enter into a separate
obligation to perform a partnership contract.
In the case of Co-Pitco vs. Yulo (8 Phil. 544) this
Court held:
The partnership of Yulo and Palacios was
engaged in the operation of a sugar estate in
Negros. It was, therefore, a civil partnership as
distinguished from a mercantile partnership. Being
a civil partnership, by the express provisions of
articles l698 and 1137 of the Civil Code, the
partners are not liable each for the whole debt of
the partnership. The liability is pro rata and in this
case Pedro Yulo is responsible to plaintiff for only
one-half of the debt. The fact that the other
partner, Jaime Palacios, had left the country
cannot increase the liability of Pedro Yulo.
G.R. No. L-12164 May 22, 1959
BENITO LIWANAG and MARIA LIWANAG REYES,
petitioners-appellants,
vs.
WORKMEN'S COMPENSATION COMMISSION, ET AL.,
respondents-appellees.
FACTS: Petitioners-appellants Benito Liwanag and
Maria Liwanag Reyes are co-owners of Liwanag Auto
Supply. Their security guard was killed in the line of duty
and his widow and children claimed compensation from
herein respondents-appellees, Workmen’s Compensation
Commission.
petitioners to pay jointly and severally the claimants in
lump sum.
Appellants do not question the right of appellees to
compensation nor the amount awarded. They only claim that,
under the Workmen's Compensation Act, the compensation is
divisible, hence the commission erred in ordering appellants to
pay jointly and severally the amount awarded.
PETITIONER’S ARGUMENT: That there is nothing in the
compensation Act which provides that the obligation of an
employer arising from compensable injury or death of an
employee should be solidary obligation, the same should have
been specifically provided, and that, in absence of such clear
provision, the responsibility of appellants should not be solidary
but merely joint.
ISSUE: What is the nature of the obligation of the
employers to pay compensation to the heirs of their employee
who died in line of duty, solidary or joint? (SOLIDARY!!)
RULING: Wherefore, finding no error in the award
appealed from, the same is hereby affirmed, with costs against
appellants.
HELD: Ordinarily, the liability of the partners in a
partnership is not solidary; but the law governing the liability of
partners is not applicable to the case at bar wherein a claim for
compensation by dependents of an employee who died in line
of duty is involved. And although the Workmen's Compensation
Act does not contain any provision expressly declaring solidary
obligation of business partners like the herein appellants, there
are other provisions of law (Arts. 1711 and 1712 of the new
Civil Code) from which it could be gathered that their liability
must be solidary.
Since the Workmen's Compensation Act was enacted
to give full protection to the employee, reason demands that
the nature of the obligation of the employers to pay
compensation to the heirs of their employee who died in line of
duty, should be solidary; otherwise, the purpose of the law
could not be attained.
ART. 1711. Owners of enterprises and other employers
are obliged to pay compensation for the death of or
injuries to their laborers, workmen, mechanics or other
employees, even though the event may have been
purely accidental or entirely due to a fortuitous cause,
if the death or personal injury arose out of and in the
course of the employment. . . . .
ART. 1712. If the death or injury is due to the
negligence of a fellow-worker, the latter and the
employer shall be solidarily liable for
compensation. . . . .
And section 2 of the Workmen's Compensation
Act, as amended reads in part as follows:
. . . The right to compensation as provided in this
Act shall not be defeated or impaired on the
ground that the death, injury or disease was due
to the negligence of a fellow servant or employee,
without prejudice to the right of the employer to
proceed against the negligence party.
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Separate Opinions
REYES, A., J., dissenting:
Whether the defendants herein be regarded as co-
partners or as mere co-owners, their liability for the
indemnity due their deceased employee would not be
solidary but only pro rata (Arts. 485 and 1815, new Civil
Code). The Workmen's Compensation Act does not
change the nature of that liability either expressly or by
intendment. To hold that it does, is to read into the Act
something that is not there. For this Court, therefore, to
declare that under the said Act the defendants herein are
liable solidarily is to play the role of legislator.
The injustice of the rule sought to be established
in the majority opinion may readily be made obvious with
an example. Suppose that one of two co-partners or co-
owners owns 99 percent of the business while his co-
partner or co-owners own only 1 percent. To hold that in
such case the latter's liability may run up to 100 percent
although his interest is only 1 percent would not only be
illogical but also inequitable.
For the foregoing reasons, I have no choice but to
dissent.
G.R. No. L-26937 October 5, 1927
PHILIPPINE NATIONAL BANK, plaintiff-appellee,
(2) Appellants admit, and it appears from the
vs.
context of Exhibit A, that the defendant association
SEVERO EUGENIO LO, ET AL., defendants.
formed by the defendants is a general partnership, as
SEVERIO EUGENIO LO, NG KHEY LING and YEP SENG,
defined in article 126 of the Code Commerce. This
appellants.
partnership was registered in the mercantile register of the
Province of Iloilo. The only anomaly noted in its
FACTS: The appellants Severo Eugenio Lo and Ng
organization is that instead of adopting for their firm name
Khey Ling, together with J. A. Say Lian Ping, Ko Tiao Hun, On
the names of all of the partners, of several of them, or
Yem Ke Lam and Co Sieng Peng formed a commercial
only one of them, to be followed in the last two cases, by
partnership under the name of "Tai Sing and Co.,".
the words "and to be followed in the last two cases, by the
words "and company" the partners agreed upon "Tai Sing
One of the partners, J. A. Say Lian Ping was appointed
& Co." as the firm name.
general manager of the partnership, with the powers specified
in said articles of copartnership. As general manager, he
executed a Power-of-Attorney in favor of A. Y. Kelam,
authorizing him to act in his stead as manager and
G.R. No. L-29182 October 24, 1928
administrator of "Tai Sing & Co.,", for which the latter obtained
LEONCIA VIUDA DE CHAN DIACO (alias LAO LIONG
several loans from plaintiff-appellee PNB, through the
NAW) appellee,
mortgage of the company’s properties.
vs.
JOSE S. Y. PENG, assignee, appellant.
Said loan was renewed several times until such time
that the firm was not able to sustain payment of its obligation,
FACTS:
hence a collection case was filed by PNB. The trial court ruled
Leoncia Vda. de Chan Diaco (Lao Liong Naw),
against the defendants, hence, this appeal.
owner of a grocery store (La Viuda de G. G. Chan Diaco),
formed a partnership (Lao Liong Naw & Co.) with her
PETITIONER’S ARGUMENT: The commercial credit in
relatives Chan Chiaco Wa, Cua Yuk, Chan Bun Suy, Cahn
current account which "Tai Sing & Co. obtained from PNB had
Bun Le, and Juan Maquitan Chan.
not been authorized by the board of directors of the company,
San Miguel Brewery, Porta Pueco & Co., and Ruiz
nor was the person who subscribed said contract authorized to
& Rementaria S. en C. instituted insolvency proceedings
make the same, under the article of copartnership.
against Vda. de Chan Diaco, alleging that the latter was
indebted to them.
ISSUE: (1) WON the partnership as well as the
The court declared Vda. de Chan Diaco insolvent
partners should be liable to third-parties with regard to actions
and ordered the sheriff to take possession of her property,
done by a third person authorized by the general manager of
consisting of some merchandise.
the firm. (YES)
Judge Simplicio del Rosario appointed Ricardo
Summers, as referee, authorizing him to take further
(2) WON the partnership formed was a
evidence.
general partnership. (YES)
Summers recommended that Vda. de Chan Diaco
deliver to Jose S. Y. Peng, assignee of SMB, PPC and
RULING: The judgment appealed from is in accordance
RRSC, a certain sum of money, accounts receivable, and
with the law, and must therefore be, as it is hereby, affirmed
books of account.
with costs against the appellants. So ordered.
Judge del Rosario approved Summers’
recommendation and ordered the merchants Cua Ico,
HELD: (1) The judgment against the appellants is in
Chan Keep, and Simon A. Chan Bona to show cause why
accordance with article 127 of the Code of Commerce which
they should not return the merchandise allegedly delivered
provides that all the members of a general partnership, be they
to them by Vda. de Chan Diaco, together with P5,000 in
managing partners thereof or not, shall be personally and
cash, allegedly received from Vda. de Chan Diaco by Ico.
solidarily liable with all their property, for the results of the
Attorney for Vda. de Chan Diaco filed a motion to
transactions made in the name and for the account of the
dismiss the proceedings, alleging that it should have been
partnership, under the signature of the latter, and by a person
brought against LLNC.
authorized to use it.
Judge del Rosario suspended his previous order,
appointing Summers as referee.
Summers found that LLNC was only a fictitious
organization created for the purpose of deceiving the Bureau of Customs and enabling some of the partner-relatives to
come to the Philippines under the status of merchants.
Judge Francisco Zandueta, who temporarily replaced
Judge del Rosario, disapproved Summers’ recommendation,
affirmed the suspension of Judge del Rosario’s previous order,
dismissed the insolvency proceedings, ordered the return of all
the properties of Vda. de Chan Diaco, and provided for leave of
Peng to file a new petition for insolvency against LLNC.
ISSUE:
WON Vda. de Chan Diaco may be held liable for the
debt allegedly contracted by LLNC.
HELD:
YES. LLNC has no visible assets. The partners,
individually, must jointly and severally respond for its debts
(Art. 127, Code of Commerce). As Vda. de Chan Diaco is one
of the partners and admits that she is insolvent, there is no
reason for the dismissal of the proceedings against her. Both
the partnership and the separate partners thereof may be
joined in the same action, though the private property of the
latter cannot be taken in payment of the partnership debts until
the common property of the concern is exhausted (Comapnia
Maritima vs. Munoz, 9 Phil., 326).
ARTICLE 1815
LIABILITY FOR INCLUSION OF NAME IN FIRM NAME
G.R. No. 19892 September 6, 1923
TECK SEING AND CO., LTD., petitioner-appellee.
SANTIAGO JO CHUNG, ET AL., partners,
vs.
PACIFIC COMMERCIAL COMPANY, ET AL., creditors-
appellants.
Facts: In an insolvency proceedings of petitioner-
establishment, “Sociedad Mercantil, Teck Seing &Co., Ltd.”,
creditors Pacific Commercial and others filed a motion with the
Court to declare the individual partners parties to the
proceeding, for each to file an inventory, and for each to be
adjudicated as insolvent debtors.
ISSUE: Whether the fact that the firm name "Teck Seing &
Co., Ltd." does not contain the name of all or any of the
partners as prescribed by the Code of Commerce prevents the
creation of
a general partnership.
HELD: Professor Jose A. Espiritu, as amicus curiæ,
states: “My opinion is that such a fact alone cannot and
will not be a sufficient cause of preventing the formation of
a general partnership, especially if the other requisites are
present and the requisite regarding registration of the
articles of association in the Commercial Registry has
been complied with, as in the present case. I do not
believe that the adoption of a wrong name is a material
fact to be taken into consideration in this case; first,
because the mere fact that a person uses a name not his
own does not prevent him from being bound in a contract
or an obligation he voluntarily entered into; second,
because such a requirement of the law is merely a formal
and not necessarily an essential one to the existence of
the partnership, and as long as the name adopted
sufficiently identity the firm or partnership intended to use
it, the acts and contracts done and entered into under
such a name bind the firm to third persons; and third,
because the failure of the partners herein to adopt the
correct name prescribed by law cannot shield them from
their personal liabilities, as neither law nor equity will
permit them to utilize their own mistake in order to put the
blame on third persons, and much less, on the firm
creditors in order to avoid their personal possibility.”
The legal intention deducible from the acts of the parties
controls in determining the existence of a partnership. If
they intend to do a thing which in law constitutes a
partnership, they are partners, although their purpose was
to avoid the creation of such relation. Here, the intention
of the persons making up Teck Seing & co., Ltd. was to
establish a partnership which they erroneously
denominated a limited partnership. If this was their
purpose, all subterfuges resorted to in order to evade
liability for possible losses, while assuming their
enjoyment of the advantages to be derived from the
relation, must be disregarded. The partners who have
disguised their identity under a designation distinct from
that of any of the members of the firm should be
penalized, and not the creditors who presumably have
dealt with the partnership in good faith.
Articles 127 and 237 of the Code of Commerce make all
the members of the general copartnership liable
personally and in solidum with all their property for the
results of the transactions made in the name and for the
account of the partnership. Section 51 of the Insolvency
Law, likewise, makes all the property of the partnership
and also all the separate property of each of the partners
liable. In other words, if a firm be insolvent, but one or
more partners thereof are solvent, the creditors may
proceed both against the firm and against the solvent
partner or partners, first exhausting the assets of the firm
before seizing the property of the partners. (Brandenburg of
Bankcruptcy, sec. 108; De los Reyes vs. Lukban and Borja
[1916], 35 Phil., 757; Involuntary Insolvency of Campos Rueda
& Co. vs. Pacific Commercial Co. [1922], 44 Phil., 916).
We reach the conclusion that the contract of partnership found
in the document hereinbefore quoted established a general
partnership or, to be more exact, a partnership as this word is
used in the Insolvency Law.
ARTICLE 1816
G.R. No. L-39780 November 11, 1985
ELMO MUÑASQUE, petitioner,
vs.
COURT OF APPEALS,CELESTINO GALAN, TROPICAL
COMMERCIAL COMPANY and RAMON PONS, respondents.
FACTS:
Elmo Muñasque entered into a contract, wherein
Celestino Galan was casually named as Muñasque’s partner,
with Tropical Commercial Co., Inc., through its Cebu Branch
Manager Ramon Pons, for remodeling a portion of TCCI’s
building.
Galan received compensation for having introduced
Muñasque to TCCI.
TCCI delivered the first check to Galan, who
succeeded in getting Muñasque's indorsement. Muñasque,
however, refused to indorse to Galan the second check,
alleging misappropriation of the amount of the first check to the
latter’s personal use.
Pons succeeded in changing the payee’s name from
Muñasque to Galan and Associates, the registered name of the
partnership between Muñasque and Galan and under which
name a permit to do construction business was issued.
Muñasque was placed in great financial difficulty in his
construction business, subjecting him to demands from
creditors to pay for construction materials. Muñasque
undertook the construction at his own expense and demanded
that TCCI and Pons pay to him the sum given to Galan.
Muñasque filed a complaint for payment of sum of
money and damages against Galan, TCCI, and Pons. Cebu
Southern Hardware Company and Blue Diamond Glass
Palace, which extended credit to and under which name a
permit to do construction business was issued by the mayor of
Cebu City, were allowed to intervene, both having legal interest
in the matter in litigation. The trial court ordered Muñasque
and Galan to pay jointly and severally CSHC and BDGP and
absolved TCCI and Pons from liability. The appellate court
affirmed with modification the trial court’s decision,
ordering Muñasque and Galan to pay jointly CSHC and
BDGP.
ISSUE:
WON (1) there was a partnership between
Muñasque and Galan, (2) TCCI was justified in disbursing
money to Galan, and (3) Muñasque and Galan are jointly
and severally liable to CSHC and BDGP.
HELD:
 YES. Muñasque entered into a contract with
TCCI, for the renovation of the latter's building, on behalf
of the partnership of "Galan and Muñasque," as
evidenced by the first paragraph of the contract:
This agreement made this 20th day of December
in the year 1966 by Galan and Muñasque
hereinafter called the Contractor, and Tropical
Commercial Co., Inc., hereinafter called the owner
do hereby for and in consideration agree on the
following: ... .
Likewise, when Muñasque received the first
check, he indorsed the same in favor of Galan. TCCI,
therefore, had every right to presume that Muñasque and
Galan were true partners. If they were not partners,
Muñasque has only himself to blame for making the
relationship appear otherwise, not only to TCCI but to their
other creditors as well. The payments made to the
partnership were, therefore, valid payments.
In the case of Singsong v. Isabela Sawmill (88
SCRA 643),we ruled:
Although it may be presumed that Margarita G.
Saldajeno had acted in good faith, the appellees
also acted in good faith in extending credit to the
partnership. Where one of two innocent persons
must suffer, that person who gave occasion for
the damages to be caused must bear the
consequences.
 Since Muñasque and Galan were partners when
the debts were incurred, they, are also both liable to third
persons who extended credit to their partnership. In the
case of George Litton v. Hill and Ceron, et al, (67 Phil.
513, 514), we ruled:
There is a general presumption that each
individual partner is an authorized agent for the
firm and that he has authority to bind the firm in
carrying on the partnership transactions. (Mills vs.
Riggle,112 Pan, 617).
The presumption is sufficient to permit third
persons to hold the firm liable on transactions
entered into by one of members of the firm acting
apparently in its behalf and within the scope of his
authority. (Le Roy vs. Johnson, 7 U.S. (Law. ed.),
 391.)
 YES. While it is true that under Article 1816 of the Civil
Code "All partners, including industrial ones, shall be liable
prorate with all their property and after all the partnership
assets have been exhausted, for the contracts which may be
entered into the name and on the account of the partnership,
under its signature and by a person authorized to act for the
partner-ship....", this provision should be construed together
with Article 1824, which provides that: "All partners are liable
solidarily with the partnership for everything chargeable to the
partnership under Articles 1822 and 1823." In short, while the
liability of the partners are merely joint in transactions entered
into by the partnership, a third person who transacted with said
partnership can hold the partners solidarily liable for the whole
obligation if the case of the third person falls under Articles
1822 or 1823.
Articles 1822 and 1823 of the Civil Code provide:
Art. 1822. Where, by any wrongful act or omission of
any partner acting in the ordinary course of the
business of the partner-ship or with the authority of his
co-partners, loss or injury is caused to any person, not
being a partner in the partnership or any penalty is
incurred, the partnership is liable therefor to the same
extent as the partner so acting or omitting to act.
Art. 1823. The partnership is bound to make good:
(1) Where one partner acting within the scope of
his apparent authority receives money or property
of a third person and misapplies it; and
(2) Where the partnership in the course of its business
receives money or property of a third person and t he
money or property so received is misapplied by any
partner while it is in the custody of the partnership.
The obligation is solidary, because the law protects
him, who in good faith relied upon the authority of a partner,
whether such authority is real or apparent. That is why under
Article 1824 of the Civil Code all partners, whether innocent or
guilty, as well as the legal entity, which is the partnership, are
solidarily liable.
However. as between the partners Muñasque and
Galan, justice also dictates that Muñasque be reimbursed by
Galan for the payments made by the former representing the
liability of their partnership to CSHC and BDGP, as it was
satisfactorily established that Galan acted in bad faith in his
dealings with Muñasque as a partner.
ARTICLE 1819
EFFECTS OF CONVEYANCE OF REAL PROPERTIES
BELONGING TO THE PARTNERSHIP
contemplates a situation duplicating the circumstances that
SANTIAGO SYJUCO INC VS CASTRO
175 SCRA 171 (1989)
FACTS: The Lims loaned from Syjuco 80k, secured by
two titles thereof. Lims defaulted despite numerous
demands issued by Syjuco. Syjuco then attempted to
extra-judicially foreclose the properties. Lims opposed the
moved and the legal battle for 20 years began.
Lims lawyers claimed that the mortgage was void, being
usurious for stipulating interest of 23% on top of 11 %
that they had been required to pay as "kickback." Also,
the mortgage which they, together with their mother, had
individually constituted (and thereafter amended during
the period from 1964 to 1967) over lands standing in their
names in the Property Registry as owners pro indiviso, in
fact no longer belonged to them at that time, having been
earlier deeded over by them to the partnership, "Heirs of
Hugo Lim", more precisely, on March 30, 1959, hence,
said mortgage was void because executed by them
without authority from the partnership.
Judge Castro issued a restrining order to the foreclosure
of the properties.
Syjuco, embattled, opposed the same claiming that judge
castro never acted on his motions!
Issue: won the partnership can shield the Lims from extra
judicial foreclosure n(no)
Held:The legal fiction of a separate juridical personality
and existence will not shield it from the conclusion of
having such knowledge which naturally and irresistibly
flows from the undenied facts. It would violate all precepts
of reason, ordinary experience and common sense to
propose that a partnership, as commonly known to all the
partners or of acts in which all of the latter, without
exception, have taken part, where such matters or acts
affect property claimed as its own by said partnership.
If, therefore, the respondent partnership was inescapably
chargeable with knowledge of the mortgage executed by
all the partners thereof, its silence and failure to impugn
said mortgage within a reasonable time, let alone a space
of more than seventeen years, brought into play the
doctrine of estoppel to preclude any attempt to avoid the
mortgage as allegedly unauthorized.
Equally or even more preclusive of the respondent
partnership's claim to the mortgaged property is the last
paragraph of Article 1819 of the Civil Code, which
attended the execution of the mortgage in favor of Syjuco
and therefore applies foursquare thereto:
Where the title to real property is in the names of all the
Issue: won Lawa's issuance and statement justifies and
partners a conveyance executed by all the partners passes all
proves that there was no more outstanding liabilities for
their rights in such property.
Trillana. (NO)
The term "conveyance" used in said provision, which is taken
Held: The partneship was already dissolved and Lawa
from Section 10 of the American Uniform Partnership Act,
has no more authority to issue such sworn proof in behalf
includes a mortgage.
of the business.
Interpreting Sec. 10 of the Uniform Partnership Act, it has been
Seeing that the amounts stated in the vales acknowledged
held that the right to mortgage is included in the right to convey.
by the debtor were advanced to him in part payment of the
This is different from the rule in agency that a special power to
price of certain qualities of tuba or liquor of the nipa palm
sell excludes the power to mortgage (Art. 1879).
which he had contracted to deliver at the distillery, and as
long as he is able to comply with these stipulations within
a reasonable time, the Trillana cannot be compelled to pay
ARTICLE 1820
his debt in cash. The amounts stated in the vales were
advanced under the condition that the same would be
EXISTENCE OF PARTNERSHIP MUST BE PROVED
paid or satisfied with the value of the tuba received by the
distillery; therefore, the decision of the court below, which
moreover appears to have been acquiesced in by the
Congco vs Trillana
Congco for the reason that it was undoubtedly so
13 Phil 194 (1909)
stipulated, is in accordance with the law.
Facts: Tin-Conngco and Ong Cueco were partners in a
Thus, the non existence of the partnership in validates the
distillery business in Hagonoy, Bulacan. Their Manager Lawa
statement of Lawa, but still Trillana shall pay by means of
advanced vales to their debtor Trillana prior to the dissolution
nipa liquior, concurring with the agreement of co-
of the partnership. Subsequent to the dissolution, Lawa was still
partnership.
issuing transaction receipts in effect thereby, and in one
issuance, he absolved Trillana of debts incurred. Tin-Congco,
heir to the after transactions on dissolution, filed a suit for
collection of sum of money representing mechandize obtained
ARTICLE 1825
by Trillana amounting to 4K plus interest totaling to 5,5K. The
lower Court decided Trillana to pay an amount less than 3K in
tuba or nipa liquior, thru custom of the place and as agreed
PARTNER BY ESTOPPEL
thereupon.

Tusay, (+)Tin-Congco's administrator, appealed with a bill of

exception, averring that Trillana cannot pay in tuba because the
G.R. No. L-7991. May 21, 1956
debt was in form of vale, and that it was issued by their
manager. He also prayed for a new trial for evidence adduced PAUL MACDONALD, ET AL., Petitioners, vs. THE
were not sufficient to justify the payments made because it was NATIONAL CITY BANK OF NEW YORK, Respondent.
subscribed by a third person, manager Lawa.

As a special defense, Trillana presented a document that was
executed by Lawa, the manager absolving him of such
libilities with the said partnership. Hence, the said vales are
reputed as unpaid; and finally, that if the debt is payable in
tuba, unless it is shown and it does not so appear that the
Trillana refused to pay it in that manner or has failed to comply
with his obligations, there is no reason to compel him to pay,
therefore he should not be ordered to do so, much less to pay
the costs.
Facts: Alan W. Gorcey, Louis F. da Costa, Jr., William
Kusik and Emma Badong Gavino formed a partnership
named as STASIKINOCEY. STASIKINOCEY was denied
registration before the Securities and Exchange
Commission. Despite this, its partners thru another name
“CARDINAL RATTAN” were still conducting their business
in behalf of the STASIKINOCEY. Prior to June 3, 1949,
Defendant Stasikinocey had an overdraft account of
P6,134.92 with The National City Bank of New York, a
foreign banking association duly licensed to do business
in

the Philippines. Failing to pay pay its debt, they mortgaged Benjamin Gonzales is also void, as the buyer cannot
some of its vehicles to the said bank in the name of have a
STASIKINOCEY. The mortgages were registered in the
Register of Deeds of Rizal.

However, during the existence of the debt obligation,

STASIKINOCEY sold the mortgaged vehicles to the petitioner,
Paul MacDonald. Despite of the knowledge of the prior
mortgages, the latter sold to one Benjamin Gonzales the
vehicles. Upon knowing of the said sale, National Bank filed an
action against Stasikinocey and its alleged partners Gorcey
and Da Costa, as well as Paul McDonald and Benjamin
Gonzales, to recover its credit and to foreclose the
corresponding chattel mortgage.

The CFI sentenced the partners of STASIKINOCEY, Gonzales

and MacDonald joint and severally liable to the National Bank.
MacDonald and Gonzales appealed on certiorari before the
Supreme Court.

Issue: Whther or not an unregistered partnership can bind a

third person in an obligation incurred against another person.
YES

Held: While an unregistered commercial partnership has no

juridical personality, nevertheless, where two or more persons
attempt to create a partnership failing to comply with all the
legal formalities, the law considers them as partners and the
association is a partnership in so far as it is a favorable to third
persons, by reason of the equitable principle of estoppel. In Jo
Chung Chang vs. Pacific Commercial Co., 45 Phil., 145, it was
held “that although the partnership with the firm name of ‘Teck
Seing and Co. Ltd.,’ could not be regarded as a partnership de
jure, yet with respect to third persons it will be considered a
partnership with all the consequent obligations for the purpose
of enforcing the rights of such third persons.” Da Costa and
Gorcey cannot deny that they are partners of the partnership
Stasikinocey, because in all their transactions with the
Respondent they represented themselves as such. Petitioner
McDonald cannot disclaim knowledge of the partnership
Stasikinocey because he dealt with said entity in purchasing
two of the vehicles in question through Gorcey and Da Costa.
As was held in Behn Meyer & Co. vs. Rosatzin, 5 Phil., 660,
where a partnership not duly organized has been recognized
as such in its dealings with certain persons, it shall be
considered as “partnership by estoppel” and the persons
dealing with it are estopped from denying its partnership
existence. The sale of the vehicles in question being void as to
Petitioner McDonald, the transfer from the latter to Petitioner
better right than the seller.
LIABILITY AS GENERAL PARTNERS OF PERSONS
WHO ASSUME TO ACT AS A CORPORATION
G.R. No. 84197 July 28, 1989
PIONEER INSURANCE & SURETY CORPORATION,
petitioner, vs. THE HON. COURT OF APPEALS,
BORDER MACHINERY & HEAVY EQUIPMENT, INC.,
(BORMAHECO), CONSTANCIO M. MAGLANA and
JACOB S. LIM, respondents. G.R.
No. 84157 July 28, 1989
JACOB S. LIM, petitioner, vs. COURT OF APPEALS,
PIONEER INSURANCE AND SURETY CORPORATION,
BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,,
FRANCISCO and MODESTO CERVANTES and
CONSTANCIO MAGLANA, respondents.
Facts: Private respondent Jacob S. Lim was engaged in an
airline business as owner-operator of Southern Air Lines as a
single proprietor. Sometimes in 1965, he entered into a contract
with the Japan Domestic Airlines (JDA) to purchase a
him, Maglana and the Cevanteses to incorporate (that is to
register in the SEC), a a de facto partnership (with regard to
third person) among them was created, and that as a
consequence of such relationship all must share in the losses
and/or gains of the venture in proportion to their contribution.
This is in view of his protest that he should reimburse the share
of Maglana and the Cervanteses for the intended corporation.
Issue: Whether or not in view of the failure of the parties to
incorporate, a de facto partnership was thus created with
respect with their dealing with third persons. What is the liability
of a general partner of persons who assume to act as a
corporation?
Held: NO.
While 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 relating thereto and not by the rules governing
partners (Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446,
94 Am. S.R. 584), it is ordinarily held that persons who
attempt, but fail, to form a corporation and who carry on
business under the corporate name occupy the position of
partners inter se (Lynch v. Perryman, 119 P. 229, 29 Okl. 615,
Ann. Cas. 1913A 1065). Thus, where persons associate
themselves together under articles to purchase property to
carry on a business, and their organization is so defective as
necessary spare parts and aircrafts. The petitioner
Pioneer Insurance & Surety Corp. (Pioneer) acted as the
surety of Jacob Lim. It executed surety bond in favor of
JDA.
It appears that respondents Maglana and the Cervanteses
contributed certain amount of money for the purchase of
the aircraft and the spare parts. This is under the
understanding that Lim was planning to establish another
corporation to expand his airline business. In this regard,
they executed indemnity agreements in favor of Pioneer.
Under the agreement, in case of default, Maglana and the
Cervanteses will be jointly liable with Lim. On the other
hand, Lim executed a chattel mortgage of the aircraft and
the spare parts in favor of Pioneer as security for its surety
bond.
Lim failed to pay the aircraft and the spare parts to JDA.
In effect, Pioneer paid JDA. Pioneer thenceforth filed a
foreclosure of chattel mortgage against Lim. Maglana and
the Cervanteses filed a third-party complaint alleging that
they are co-owners of the mortgaged properties. As result,
Pioneer filed a foreclosure case against Lim, Maglana,
and the Cervanteses. The Trial Court found Lim as the
sole person to be liable with Pioneer.
Jacob Lim’s main proposition is that: Due to the failure of
to come short of creating a corporation within the statute,
they become in legal effect partners inter se, and their
rights as members of the company to the property acquired
by the company will be recognized (Smith v. Schoodoc
Pond Packing Co., 84 A. 268,109 Me. 555; Whipple v.
Parker, 29 Mich. 369). So, where certain persons
associated themselves as a corporation for the
development of land for irrigation purposes, and each
conveyed land to the corporation, and two of them
contracted to pay a third the difference in the proportionate
value of the land conveyed by him, and no stock was ever
issued in the corporation, it was treated as a trustee for the
associates in an action between them for an accounting,
and its capital stock was treated as partnership assets,
sold, and the proceeds distributed among them in
proportion to the value of the property contributed by each
(Shorb v. Beaudry, 56 Cal. 446). However, such a relation
does not necessarily exist, for ordinarily persons cannot be
made to assume the relation of partners, as between
themselves, when their purpose is that no partnership shall
exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442,
116
U.S. 461, 472, 29 L.Ed. 688), and it should be implied only
when necessary to do justice between the parties; 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 other subscribers who engage in
business under the name of the pretended corporation, so as to
contribution (Ward v. Brigham, 127 Mass. 24). A
be liable as such in an action for settlement of the alleged
partnership relation between certain stockholders and
partnership and
other stockholders, who were also directors, will not be
implied in the absence of an agreement, so as to make
the former liable to contribute for payment of debts
illegally contracted by the latter (Heald v. Owen, 44 N.W.
210, 79 Iowa 23). (Corpus Juris Secundum, Vol. 68, p.
464). (Italics supplied).

It is therefore clear that the petitioner never had the

intention to form a corporation with the respondents
despite his representations to them. This gives credence
to the cross-claims of the respondents to the effect that
they were induced and lured by the petitioner to make
contributions to a proposed corporation which was never
formed because the petitioner reneged on their
agreement.

Applying therefore the principles of law earlier cited to the

facts of the case, necessarily, no de facto partnership was
created among the parties which would entitle the
petitioner to a reimbursement of the supposed losses of
the proposed corporation. The record shows that the
petitioner was acting on his own and not in behalf of his
other would-be incorporators in transacting the sale of the
airplanes and spare parts.

ARTICLE 1827

PREFERENCE OF PARTNERSHIP CREDITOR IN

PARTNERSHIP PROPERTY

G.R. No. L-29182 October 24, 1928

LEONCIA VIUDA DE CHAN DIACO (alias LAO LIONG
NAW) appellee,
vs.
JOSE S. Y. PENG, assignee, appellant.

FACTS:
Leoncia Vda. de Chan Diaco (Lao Liong Naw),
owner of a grocery store (La Viuda de G. G. Chan Diaco),
formed a partnership (Lao Liong Naw & Co.) with her
relatives Chan Chiaco Wa, Cua Yuk, Chan Bun Suy, Cahn
Bun Le, and Juan Maquitan Chan.
San Miguel Brewery, Porta Pueco & Co., and Ruiz
& Rementaria S. en C. instituted insolvency proceedings
against Vda. de Chan Diaco, alleging that the latter was
indebted to them.
The court declared Vda. de Chan Diaco insolvent
and ordered the sheriff to take possession of her property,
consisting of some merchandise. Judge Simplicio del Rosario appointed Ricardo
Summers, as referee, authorizing him to take further evidence.
EFFECTS OF CHANGES IN MEMBERSHIP OF A
Summers recommended that Vda. de Chan Diaco
PARTNERSHIP
deliver to Jose S. Y. Peng, assignee of SMB, PPC and
RRSC, a certain sum of money, accounts receivable, and
books of account.
Judge del Rosario approved Summers’
G.R. No. 97212 June 30, 1993
recommendation and ordered the merchants Cua Ico, Chan
BENJAMIN YU, petitioner, vs. NATIONAL LABOR
Keep, and Simon A. Chan Bona to show cause why they
RELATIONS COMMISSION and JADE MOUNTAIN
should not return the merchandise allegedly delivered to them
PRODUCTS COMPANY LIMITED, WILLY CO,
by Vda. de Chan Diaco, together with P5,000 in cash, allegedly
RHODORA D. BENDAL, LEA BENDAL, CHIU SHIAN
received from Vda. de Chan Diaco by Ico.
JENG and CHEN HO-FU, respondents.
Attorney for Vda. de Chan Diaco filed a motion to
dismiss the proceedings, alleging that it should have been
Facts: Benjamin Yu was the former Assistant General
brought against LLNC.
Manager of “Jade Mountain products Company Limited”
Judge del Rosario suspended his previous
(Jade Mountain). This company initially established as a
order, appointing Summers as referee.
result of the partnership between Lea Bendal and Rhodora
Summers found that LLNC was only a fictitious
Bendal as general partners and Chin Shian Jeng, Chen
organization created for the purpose of deceiving the Bureau of
Ho-Fu and Yu Chang as limited partners. The company
Customs and enabling some of the partner-relatives to come to
was enaged in the exploitation of marble deposits found
the Philippines under the status of merchants.
on the land owned by a Cruz spouses.
Judge Francisco Zandueta, who temporarily replaced
Judge del Rosario, disapproved Summers’ recommendation,
As the Assistant General Manager, Benjamin Yu received
affirmed the suspension of Judge del Rosario’s previous order,
as his monthly salary theamount of P4,000.00. However,
dismissed the insolvency proceedings, ordered the return of all
in reality, he only receives the half of it with the
the properties of Vda. de Chan Diaco, and provided for leave of
understanding with the original partners that the other half
Peng to file a new petition for insolvency against LLNC.
shall be paid unto him when the company had its
expansion abroad.
ISSUE:
WON Vda. de Chan Diaco may be held liable for the
However, sometime in 1988, without the knowledge of
debt allegedly contracted by LLNC.
Benjamin Yu, the general partners Lea Bendal and
Rhodora Bendal sold and transferred their interests in the
HELD:
partnership to private respondent Willy Co and to one
YES. LLNC has no visible assets. The
Emmanuel Zapanta. The limited partners likewise sold
partners, individually, must jointly and severally respond for its
their interests to the former. The new partners retained the
debts (Art. 127, Code of Commerce). As Vda. de Chan Diaco is
name “Jade Mountain” Upon knowing of the incident,
one of the partners and admits that she is insolvent, there is no
Benjamin Yu confronted Willy Co for his unpaid salary, but
reason for the dismissal of the proceedings against her. Both
the latter said that in view of the fact that the original
the partnership and the separate partners thereof may be
partners had already sold their interests to them, it is now
joined in the same action, though the private property of the
dependent upon his discretion whether he should
latter cannot be taken in payment of the partnership debts until
continue his employment or not. Also that the payment of
the common property of the concern is exhausted (Comapnia
the original partners’ obligations rests upon his discretion.
Maritima vs. Munoz, 9 Phil., 326).
As a result, Benjamin Yu’s position as Assistant General
Manager was abolished by the new partners.

Upon appeal to the NLRC on illegal dismissal case, the

CHAPTER THREE- DISSOLUTION AND WINDING UP
latter stated that: “there was no law requiring the new
partnership to absorb the employees of the old
ARTICLE 1828
partnership. Benjamin Yu, therefore, had not been illegally
dismissed by the new partnership which had simply
declined to retain him in his former managerial position or
any other position.”

Issue:
Whether or not the change of partners in a partnership shall affect its obligations over the third person. Or, simply
stated, whether or not the new partners shall be liable to the
the debts of the preceding partnership. In Singson, et al. v.
obligation incurred by the old partners with regard to third
Isabela Saw Mill, et al, 8 the Court held that under facts
persons.
very similar to those in the case at bar, a withdrawing
partner remains liable to a third party creditor of the old
Held: NO.
partnership. 9 The liability of the new partnership, upon
The applicable law in this connection — of which the NLRC
the other hand, in the set of circumstances obtaining in the
seemed quite unaware — is found in the Civil Code provisions
case at bar, is established in Article 1840 of the Civil
relating to partnerships. Article 1828 of the Civil Code provides
Code.
as follows:
Art. 1828. The dissolution of a partnership is the change in the
HENCEFORTH: [the] petitioner Benjamin Yu is entitled to
relation of the partners caused by any partner ceasing to be
interest at the legal rate of six percent (6%) per annum on
associated in the carrying on as distinguished from the winding
the amount of unpaid wages, and of his separation pay,
up of the business.
computed from the date of promulgation of the award of
In the case at bar, just about all of the partners had sold their
the Labor Arbiter.
partnership interests (amounting to 82% of the total
partnership interest) to Mr. Willy Co and Emmanuel Zapanta.
G.R. No. L-10040 January 31, 1916
The record does not show what happened to the remaining
EUGENIA LICHAUCO, ET AL., plaintiffs-appellants,
18% of the original partnership interest. The acquisition of 82%
vs.
of the partnership interest by new partners, coupled with the
FAUSTINO LICHAUCO, defendant-appellant.
retirement or withdrawal of the partners who had originally
owned such 82% interest, was enough to constitute a new
Facts: This action was brought by two of the partners of
partnership.
an enterprise of which the defendant was manager
(gestor), to secure an accounting of its affairs, and the
The occurrence of events which precipitate the legal
payment to the plaintiffs of their respective shares of
consequence of dissolution of a partnership do not, however,
capital and profits.
automatically result in the termination of the legal personality of
the old partnership. Article 1829 of the Civil Code states that:
A notarial instrument was executed in Manila, by the
[o]n dissolution the partnership is not terminated, but continues
terms of which a partnership was duly organized for the
until the winding up of partnership affairs is completed.
purpose of carrying on a rice-cleaning business at
Dagupan, and for the purchase and sale of “palay” and
In the ordinary course of events, the legal personality of the
rice. The articles of association, which were not recorded
expiring partnership persists for the limited purpose of winding
in the mercantile registry, contain, among others, the
up and closing of the affairs of the partnership. In the case at
following provisions:
bar, it is important to underscore the fact that the business of
2. The association will be named F. Lichauco Hermanos
the old partnership was simply continued by the new partners,
and will be domiciled in the center of its operations, that
without the old partnership undergoing the procedures relating
is, in the pueblo of Dagupan, Province of Pangasinan.
to dissolution and winding up of its business affairs. In other
3. The association cannot be dissolved except by the
words, the new partnership simply took over the business
consent and agreement of two-thirds of its partners and
enterprise owned by the preceeding partnership, and continued
in the event of the death of any of the latter, the heirs of
using the old name of Jade Mountain Products Company
the deceased, if they be minors or otherwise
Limited, without winding up the business affairs of the old
incapacitated, shall be represented in the association by
partnership, paying off its debts, liquidating and distributing its
their legal representatives or if two-thirds of the surviving
net assets, and then re-assembling the said assets or most of
partners agree thereto, the participation of the deceased
them and opening a new business enterprise. There were, no
partner may be liquidated.
doubt, powerful tax considerations which underlay such an
informal approach to business on the part of the retiring and the
The business thus organized was carried on until when it
incoming partners. It is not, however, necessary to inquire into
was found to be unprofitable and discontinued by the
such matters.
defendant manager (gestor); and thereafter, the machinery
What is important for present purposes is that, under the above
of the rice mil was dismantled by his orders, and offered
described situation, not only the retiring partners (Rhodora
for sale. No accounting ever was made to his associates
Bendal, et al.) but also the new partnership itself which
by the defendant until this action was instituted , although
continued the business of the old, dissolved, one, are liable for
it appears that, Mariano Limjap, one of the participants in
the venture, demanded a rendition of accounts; and that
Eugenia Lichauco, one of the plaintiffs in this action, made
repeated unsuccessful demands for the return of her
share of the capital invested in the enterprise. And yet it further
the event the dissolution of the association was effected,
appears that during all that time the defendant manager of the
not by any act of theirs, but by the express mandate of
defunct enterprise had in his possession not less than P20,000,
statutory law. It would be absurd and unreasonable to hold
the cash balance on hand, over and above all claims of
that such an association could never be dissolved and
indebtedness after suspending operations in ; and that since
liquidated without the consent and agreement of two-thirds
that time he received or should have received substantial sums
of its partners notwithstanding that it had lost all its capital,
of money from the sale of the machinery of the dismantled mill.
or had become bankrupt, or that the enterprise for which it
had been organized had been concluded or utterly
There is evidence in the record tending to show that the
abandoned.
defendant informed some of his associates, a that the whole
enterprise was bankrupt.

Counsel for defendant says in his brief:

G.R. No. 109248 July 3, 1995
It is our contention, and we believe it to be unanswerable, that
GREGORIO F. ORTEGA, TOMAS O. DEL CASTILLO,
the dissolution and liquidation, either in whole or in part, of the
JR., and BENJAMIN T. BACORRO, petitioners,
association is absolutely prohibited by paragraph 10 of the
vs.
articles of association, except by and with the conformity and
HON. COURT OF APPEALS, SECURITIES AND
agreement of two-thirds of the partners, and that as a
EXCHANGE COMMISSION and JOAQUIN L. MISA,
consequence thereof the court, without allegations or proof of
respondents.
compliance with that paragraph and without making the other
partners parties to the action, had no power to decree a
distribution either in whole or in part of the capital or assets of
Facts: The law firm of ROSS, LAWRENCE, SELPH and
the association.
CARRASCOSO was duly registered in the Mercantile
Registry and reconstituted with the SEC. The SEC records
It certainly cannot be seriously contended that part of the
show that there were amendments to the articles of
capital and assets of this association can be lawfully returned
partnership, to change the firm [name] to BITO, MISA &
to and distributed between the plaintiffs who constitute one-fifth
LOZADA, [Joaquin L. Misa] respondent Jesus B. Bito and
of the total number of partners, as required by paragraph 10 of
Mariano M. Lozada associated themselves together, as
the articles of association.
senior partners with petitioners Gregorio F. Ortega, Tomas
O. del Castillo, Jr., and Benjamin Bacorro, as junior
It is elementary that no lawful liquidation and distribution of
partners.
capital and assets of any company or association can ever
take place except upon dissolution thereof.
Misa wrote petitioners for withdrawing and retiring from
Lower court ruled in favor of plaintiffs.
the firm of Bito, Misa and Lozada and trust that the
accountants will be instructed to make the proper
Issue :WON the trial court erred in rendering judgment against
liquidation of his participation in the firm. Misa filed with
the defendant for any sum, without first decreeing a dissolution
this Commission's Securities Investigation and Clearing
of the association and final liquidation of its assets in
Department (SICD) a petition for dissolution and
accordance with paragraph 10 of the articles of association,
liquidation of partnership,. SEC en banc held that the
and because such judgment is not within the issues joined.
withdrawal of Attorney Joaquin L. Misa had dissolved the
partnership of "Bito, Misa & Lozada." The Commission
Ruling: No. These contentions of counsels for the defendant
ruled that, being a partnership at will, the law firm could be
take no account of the provisions of both the Civil and
dissolved by any partner at anytime, such as by his
Commercial Codes for the dissolution and liquidation of the
withdrawal therefrom, regardless of good faith or bad faith,
different classes of partnerships and mercantile associations
since no partner can be forced to continue in the
upon the occurrence of certain contingencies not within the
partnership against his will. The Court of Appeals
control of the partners. The provisions of paragraph 10 of the
AFFIRMED in toto the SEC decision.
articles of partnership prohibiting the dissolution of the
association under review, except by the consent and
Issue: WON CA has erred in holding that the partnership
agreement of two-thirds of its partners, denied the right to a
of Bito, Misa & Lozada (now Bito, Lozada, Ortega &
less number of the partners to effect a dissolution of the
Castillo) is a partnership at will;
partnership through judicial intervention or otherwise; but in no
wise limited or restricted the rights of the individual partners in
Ruling: No. A partnership that does not fix its term is a
had receivables and stocks worth P1,800,000.00. Alarilla’s
partnership at will. That the law firm "Bito, Misa & Lozada," and
share of the assets was P900,000.00 to pay for which Idos
now "Bito, Lozada, Ortega and Castillo," is indeed such a
issued postdated checks. Alarilla was able to encash the
partnership need not be unduly belabored.
first, second, and fourth checks, but the third check which
The birth and life of a partnership at will is predicated on the
is the subject of this case, was for insufficiency of funds.
mutual desire and consent of the partners. The right to choose
with whom a person wishes to associate himself is the very
PETITIONER'S CONTENTION: The subject check was
foundation and essence of that partnership. Its continued
issued by petitioner to apply on account or for value, that
existence is, in turn, dependent on the constancy of that mutual
is, as part of the consideration of a “buy-out” of said
resolve, along with each partner's capability to give it, and the
complainant’s interest in the partnership, and not merely
absence of a cause for dissolution provided by the law itself.
as a commitment on petitioner’s part to return the
Verily, any one of the partners may, at his sole pleasure, dictate
investment share of complainant, along with any profit
a dissolution of the partnership at will. He must, however, act in
pertaining to said share, in the partnership.
good faith, not that the attendance of bad faith can prevent the
dissolution of the partnership 4 but that it can result in a liability
ISSUE: W/N the accused as a partner shall be held liable
for damages.
for estafa. (NO)
In passing, neither would the presence of a period for its
HELD: There is sufficient basis for the assertion that the
specific duration or the statement of a particular purpose for its
petitioner issued the subject check to evidence only
creation prevent the dissolution of any partnership by an act or
complainant’s share or interest in the partnership, or at
will of a partner. Among partners, mutual agency arises and the
best, to show her commitment that when receivables are
doctrine of delectus personae allows them to have the power,
collected and goods are sold, she would give to private
although not necessarily the right, to dissolve the partnership.
complainant the net amount due him representing his
An unjustified dissolution by the partner can subject him to a
interest in the partnership. It did not involve a debt of or
possible action for damages.
any account due and payable by the petitioner.
The dissolution of a partnership is the change in the relation of
Two facts stand out. Firstly, three of four checks were
the parties caused by any partner ceasing to be associated in
properly encashed by complainant; only one (the third)
the carrying on, as might be distinguished from the winding up
was not. But eventually even this one was redeemed by
of, the business. Upon its dissolution, the partnership continues
petitioner. Secondly, even private complainant admitted
and its legal personality is retained until the complete winding
that there was no consideration whatsoever for the
up of its business culminating in its termination. WHEREFORE,
issuance of the check, whose funding was dependent on
the decision appealed from is AFFIRMED. No pronouncement
future sales of goods and receipts of payment of account
on costs.
receivables.

Now, it could not be denied that though the parties –

petitioners and complainant – had agreed to dissolve the
[G.R. No. 110782. September 25, 1998]
partnership, such agreement did not automatically put an
IRMA IDOS, petitioner, vs. COURT OF APPEALS and
end to the partnership, since they still had to sell the
PEOPLE OF THE PHILIPPINES, respondents.
goods on hand and collect the receivables from debtors.
In short, they were still in the process of “winding up” the
FACTS: Irma L. Idos, is a businesswoman engaged in leather
affairs of the partnership, when the check in question was
tanning. Her accuser for violation of B.P. 22 is her erstwhile
issued.
supplier and business partner, Eddie Alarilla. Alarilla supplied
chemicals and rawhide to Idos for use in the latter’s business of
Under the Civil Code, the three final stages of a
manufacturing leather.
partnership are (1) dissolution; (2) winding-up; and (3)
termination. These stages are distinguished, to wit:
In 1985, he joined Idos and formed with her a partnership
“(1) Dissolution Defined
under the style ‘Tagumpay Manufacturing,’ with offices in
Dissolution is the change in the relation of the partners
Bulacan and Cebu City.
caused by any partner ceasing to be associated in the
carrying on of the business (Art. 1828). It is that point of
In January, 1986 the parties agreed to terminate their
time the partners cease to carry on the business together.
partnership. Upon liquidation of the business the partnership
[Citation omitted]
(2) Winding Up Defined Winding up is the process of settling business affairs
after dissolution.
deemed as having been drawn without consideration at
(NOTE: Examples of winding up: the paying of previous
the time of issue.
obligations; the collecting of assets previously demandable;
even new business if needed to wind up, as the contracting
WHEREFORE, the instant petition is hereby GRANTED
with a demolition company for the demolition of the garage
AND THE PETITIONER ACQUITTED.
used in a ‘used car’ partnership.)
(3) Termination Defined
Additional:
Termination is the point in time after all the partnership affairs
have been wound up.”[16] [Citation omitted] (Underscoring
As decided by this Court, the elements of the offense
supplied.)
penalized under B.P. 22, are as follows: ‘(1) the making,
drawing and issuance of any check to apply to account or
These final stages in the life of a partnership are recognized
for value; (2) the knowledge of the maker, drawer or issuer
under the Civil Code that explicitly declares that upon
that at the time of issue he does not have sufficient funds
dissolution, the partnership is not terminated, to wit:
in or credit with the drawee bank for the payment of such
“Art. 1828. The dissolution of a partnership is the change in the
check in full upon its presentment; and (3) subsequent
relation of the partners caused by any partner ceasing to be
dishonor of the check by the drawee bank for insufficiency
associated in the carrying on as distinguished from the winding
of funds or credit or dishonor for the same reason had not
up of the business.
the drawer, without any valid cause, ordered the bank to
Art. 1829. On dissolution the partnership is not terminated, but
stop payment.
continues until the winding up of partnership affairs is
completed.” (Underscoring supplied.)
Absent the first element of the offense penalized under
B.P. 22, which is “the making, drawing and issuance of
The best evidence of the existence of the partnership, which
any check to apply on account or for value”, petitioner’s
was not yet terminated (though in the winding up stage), were
issuance of the subject check was not an act
the unsold goods and uncollected receivables, which were
contemplated in nor made punishable by said statute.
presented to the trial court. Since the partnership has not been
terminated, the petitioner and private complainant remained as
ARTICLE 1829
co-partners. The check was thus issued by the petitioner to
complainant, as would a partner to another, and not as
payment from a debtor to a creditor. G.R. No. 126334 November 23, 2001

The more tenable view, one in favor of the accused, is that the
check was issued merely to evidence the complainant’s share
in the partnership property, or to assure the latter that he
would receive in time his due share therein. The alternative
view that the check was in consideration of a “buy out” is but a
theory, favorable to the complainant, but lacking support in the
record; and must necessarily be discarded.
For there is nothing on record which even slightly suggests that
petitioner ever became interested in acquiring, much less
keeping, the shares of the complainant. What is very clear
therefrom is that the petitioner exerted her best efforts to sell
the remaining goods and to collect the receivables of the
partnership, in order to come up with the amount necessary to
satisfy the value of complainant’s interest in the partnership at
the dissolution thereof. To go by accepted custom of the trade,
we are more inclined to the view that the subject check was
issued merely to evidence complainant’s interest in the
partnership. Thus, we are persuaded that the check was not
intended to apply on account or for value; rather it should be
EMILIO EMNACE, petitioner,
vs.
COURT OF APPEALS, ESTATE OF VICENTE
TABANAO, SHERWIN TABANAO, VICENTE WILLIAM
TABANAO, JANETTE TABANAO DEPOSOY, VICENTA
MAY TABANAO VARELA, ROSELA TABANAO and
VINCENT TABANAO, respondents.
Facts: Petitioner Emilio Emnace, Vicente Tabanao and
Jacinto Divinagracia were partners in a business concern
known as Ma. Nelma Fishing Industry. They decided to
dissolve their partnership and executed an agreement of
partition and distribution of the partnership properties
among them, consequent to Jacinto Divinagracia's
withdrawal from the partnership.1 Among the assets to be
distributed were five (5) fishing boats, six (6) vehicles, two
(2) parcels of land located at Sto. Niño and Talisay,
Negros Occidental, and cash deposits in the local
branches of the Bank of the Philippine Islands and
Prudential Bank.
Throughout the existence of the partnership, and even after
1986, prescribing four (4) years thereafter, prescription
Vicente Tabanao's untimely demise in 1994, petitioner failed to
had not even begun to run in the absence of a final
submit to Tabanao's heirs any statement of assets and
accounting. Article 1842 of the Civil Code provides:
liabilities of the partnership, and to render an accounting of the
partnership's finances. Petitioner also reneged on his promise
to turn over to Tabanao's heirs the deceased's 1/3 share in the
total assets of the partnership, amounting to P30,000,000.00, The right to an account of his interest shall accrue
or the sum of P10,000,000.00, despite formal demand for to any partner, or his legal representative as
payment thereof.2 against the winding up partners or the surviving
partners or the person or partnership continuing
the business, at the date of dissolution, in the
absence of any agreement to the contrary.
Consequently, Tabanao' s heirs, respondents herein, filed
against petitioner an action for accounting, payment of shares,
division of assets and damages.
Applied in relation to Articles 1807 and 1809, which also
deal with the duty to account, the above-cited provision
states that the right to demand an accounting accrues at
Respondents filed an amended complaint,7 incorporating the
the date of dissolution in the absence of any agreement to
additional prayer that petitioner be ordered to "sell all (the
the contrary. When a final accounting is made, it is only
partnership's) assets and thereafter
then that prescription begins to run. In the case at bar, no
pay/remit/deliver/surrender/yield to the plaintiffs" their
final accounting has been made, and that is precisely
corresponding share in the proceeds thereof. In due time,
what respondents are seeking in their action before the
petitioner filed a manifestation and motion to dismiss,8 arguing
trial court, since petitioner has failed or refused to render
that the trial court did not acquire jurisdiction over the case due
an accounting of the partnership's business and assets.
to the plaintiffs' failure to pay the proper docket fees.
Hence, the said action is not barred by prescription.

Petitioner contends that the trial court should have dismissed

the complaint on the ground of prescription, arguing that
respondents' action prescribed four (4) years after it accrued in
1986. T
Issue: WON respondent Judge acted without jurisdiction or
with grave abuse of discretion in not dismissing the case on
the ground of prescription.
In fine, the trial court neither erred nor abused its
discretion when it denied petitioner's motions to dismiss.
Likewise, the Court of Appeals did not commit reversible
error in upholding the trial court's orders. Precious time
has been lost just to settle this preliminary issue, with
petitioner resurrecting the very same arguments from the
trial court all the way up to the Supreme Court. The
litigation of the merits and substantial issues of this
controversy is now long overdue and must proceed
without further delay.

Ruling: No. The three (3) final stages of a partnership are: (1)
dissolution; (2) winding-up; and (3) termination.36 The WHEREFORE, in view of all the foregoing, the instant
partnership, although dissolved, continues to exist and its legal petition is DENIED for lack of merit.
personality is retained, at which time it completes the winding
up of its affairs, including the partitioning and distribution of the
net partnership assets to the partners.37 For as long as the
partnership exists, any of the partners may demand an
accounting of the partnership's business. Prescription of the
said right starts to run only upon the dissolution of the G.R. No. L-24243 January 15, 1926
partnership when the final accounting is done.38 ILDEFONSO DE LA ROSA, administrator of the
intestate estate of the deceased Go-Lio, plaintiff-
appellant,
vs.
Contrary to petitioner's protestations that respondents' right to ENRIQUE ORTEGA GO-COTAY, defendant-appellant.
inquire into the business affairs of the partnership accrued in
Crispin Oben for palintiff-appellant.
period between 1906 an 1912, which in seven years make
Paredes, Buencamino and Yulo for defendant-appellant.
a total of P20,141.45. The assets of the partnership, as
VILLA-REAL, J.:
well as the value of its property, could not be determined
when making the liquidation because there was no
FACTS:
inventory and for this reason it was not possible to
During the Spanish regime the Chinamen Go-Lio and Vicente
determine the capital of the partnership. The plaintiff,
Go-Sengco formed a society for the purchase and sale of
however, seems to be agreeable to considering the initial
articles of commerce, and for this purpose they opened a store
partnership capital as the capital at the time of the winding
in the town of San Isidro, Nueva Ecija. Later Go-Lio went to
up of the business.
China. Vicenyte Go-Sengco died and his son Enrique Ortega
Go-Cotay took charge of the businesses. Go-Lio died in China
August 3, 1918, defendant assumed complete
in October, 1916, leaving a widow and three children, one of
responsibility for the business by objecting to the
whom came to the Philippines and filed a petition for the
appointment of a receiver as prayed for by plaintiff,
appointment of Ildefonso de la Rosa as administrator of the
and giving a bond therefor. Until that date his acts
intestate estate of his deceased father, which petition was
were those of a managing partner, binding against
granted by the Court of First Instance of Nueva Ecija. Ildefonso
the partnership; but thereafter his acts were those of
de la Rosa, in his capacity as administrator of the intestate
a receiver whose authority is contained in section
estate of the deceased Go-Lio, requested Enrique Go-Cotay to
175 of the Code of Civil Procedure.
wind up the business and to deliver to him the portion
corresponding to the deceased Go-Lio. Enrique Ortega Go-
A receiver has no right to carry on and conduct a
Cotay denied the petition, alleging that the business was his
business unless he is authorized or directed by the
exclusively. In view of this denial, Ildefonso de la Rosa, as
court to do some, and such authority is not derived
administratorm, on July 2, 1918, filed with the Court of First
from an order of appointment to take and preserve
Instance of Nueva Ecija a complaint against Enrique Ortega
the property (34 Cyc., 283; 23 R. C. L., 73). It does not
Co-Cotay in which he prayed that the defendant be sentenced
appear that the defendant as a receiver was
to deliver to the plaintiff one-half of all the property of the
authorized by the court to continue the business of
partnership formed by Go-lIo and Vicente Go-Sengco, with
the partnership in liquidation. This being so, he is
costs against the defendant, and that the said plaintiff be
personally liable for the losses that the business any
appointed receiver for the property of the said partnership.
have sustained. (34 Cyc., 296.) The partnership must
not, therefore, be liable for the acts of the defendant
After trial and the parties having introduced all their evidence,
in connection with the management of the business
the lower court, by order of December 13, 1924, disapproved
until August 3, 1918, the date when he ceased to be a
the report of the commissioners Tantengco and Cua Poco, but
member and manager in order to become receiver.
approved, with slight modifications, the report of commissioner
Cabo-Chan, holding that the result of the liquidation showed
As to the first semester of 1918, during which time the
liabilities to the amount of P89,690.45 in view of which plaintiff
defendant had seen managing the business of the
had nothing to recover from defendant, as there was no profit
partnership as a member and manager, taking into
to divide.
account that the profits had been on the increase, said
profits having reached the amount of P10,174.69 in the
RULING:
year 1917, it would not be an exaggeration to estimate
that the profits for 1918 would have been at least the
From the evidence it appears that the partnership capital was
same as the profits of 1917; so that for the first half of
P4,779.39, and the net profits until the year 1915 amounted to
1918, the profit would be P5,087.34.
P5,551.40. Because some books of account had been
destroyed by white ants (anay), the liquidation of the business
of the partnership for the period from 1906 to 1912 could not be One-half of this total, that is, P30,299.14 pertains to the
made. But knowing the net profit for the period between 1904 plaintiff as administrator of the intestate estate of Go-Lio.
and 1905, which is P5,551.40, and findng the average of the In view of the foregoing, we are of the opinion that the
profits for each of these years, which is P2,775.70; and case must be, as is hereby, decided by the reversing the
knowing the net profit for the year 1913, which is P2,979, we judgment appealed from, and sentencing the defendant to
can find the average between the net profit for 1905, namely, pay the plaintiff the sum of P30,299.14 with legal interest
P2,979. Said average is the sum of P2,877.35, which may be at the rate of 6 per cent per annum from July 1, 1918,
considered as the average of the net annual profits for the until fully paid, with costs. So ordered.

G.R. No. L-22825 February 14, 1925 TESTATE ESTATE OF LAZARO MOTA, deceased,
ET AL.,plaintiffs-appellants,
vs.
SALVADOR SERRA, defendant-appellee.
VILLAMOR, J.:
FACTS:
On February 1, 1919, plaintiffs and defendant entered into a
contract of partnership, for the construction and exploitation of
a railroad line from the "San Isidro" and "Palma" centrals to
the place known as "Nandong." The original capital stipulated
was P150,000. It was covenanted that the parties should pay
this amount in equal parts and the plaintiffs were entrusted
with the administration of the partnership. The agreed capital
of P150,000, however, did not prove sufficient, as the
expenses up to May 15, 1920, had reached the amount of
P226,092.92, presented by the administrator and O.K.'d by the
defendant.
January 29, 1920, the defendant entered into a contract of sale
with Venancio Concepcion, Phil. C. Whitaker, and Eusebio R.
de Luzuriaga, whereby he sold to the latter the estate and
central known as "Palma" with its running business, as well as
all the improvements, machineries and buildings, real and
personal properties, rights, choses in action and interests,
including the sugar plantation of the harvest year of 1920 to
1921, covering all the property of the vendor.
Before the delivery to the purchasers of the hacienda thus sold,
Eusebio R. de Luzuriaga renounced all his rights under the
contract of January 29, 1920, in favor of Messrs. Venancio
Concepcion and Phil. C. Whitaker. This gave rise to the fact
that on July 17, 1920, Venancio Concepcion and Phil. C.
Whitaker and the herein defendant executed before Mr. Antonio
Sanz, a notary public in and for the City of Manila, another
deed of absolute sale of the said "Palma" Estate for the
amount of P1,695,961.90, of which the vendor received at the
time of executing the deed the amount of P945,861.90, and the
balance was payable by installments in the form and manner
stipulated in the contract. The purchasers guaranteed the
unpaid balance of the purchase price by a first and special
mortgage in favor of the vendor upon the hacienda and the
central with all the improvements, buildings, machineries, and
appurtenances then existing on the saidhacienda.
Afterwards, on January 8, 1921, Venancio Concepcion and
Phil. C. Whitaker bought from the plaintiffs the one-half of the
railroad line pertaining to the latter, executing therefor the
document Exhibit 5. The price of this sale was P237,722.15,
excluding any amount which the defendant might be owing to
the plaintiffs. Of the purchase price, Venancio Concepcion and
Phil. C. Whitaker paid the sum of P47,544.43 only. In the deed
Exhibit 5, the plaintiffs and Concepcion and Whitaker agreed,
among other things, that the partnership "Palma" and "San
Isidro," formed by the agreement of February 1, 1919,
between Serra, Lazaro Mota, now deceased, and Juan J.
Vidaurrazaga for himself and in behalf of his brother, Felix
and Dionisio Vidaurrazaga, should be dissolved upon the
execution of this contract, and that the said partnership
agreement should be totally cancelled and of no force and
effect whatever.
So it results that the "Hacienda Palma," with the entire
railroad, the subject-matter of the contract of partnership
between plaintiffs and defendant, became the property of
Whitaker and Concepcion. Phil. C. Whitaker and Venancio
Concepcion having failed to pay to the defendant a part of
the purchase price, that is, P750,000, the vendor, the
herein defendant, foreclosed the mortgage upon the
saidhacienda, which was adjudicated to him at the public
sale held by the sheriff for the amount of P500,000, and
the defendant put in possession thereof, including what
was planted at the time, together with all the
improvements made by Messrs. Phil. C. Whitaker and
Venancio Concepcion.
Since the defendant Salvador Serra failed to pay one-half
of the amount expended by the plaintiffs upon the
construction of the railroad line, that is, P113,046.46, as
well as Phil. C. Whitaker and Venancio Concepcion, the
plaintiffs instituted the present action praying: (1) That the
deed of February 1, 1919, be declared valid and binding;
(2) that after the execution of the said document the
defendant improved economically so as to be able to pay
the plaintiffs the amount owed, but that he refused to pay
either in part or in whole the said amount notwithstanding
the several demands made on him for the purpose; and
(3) that the defendant be sentenced to pay plaintiffs the
aforesaid sum of P113,046.46, with the stipulated interest
at 10 per cent per annum beginning June 4, 1920, until full
payment thereof, with the costs of the present action.
Defendant set up three special defenses: (1) The novation
of the contract by the substitution of the debtor with the
conformity of the creditors; (2) the confusion of the rights
of the creditor and debtor; and (3) the extinguishment of
the contract, Exhibit A.
ISSUES:
1. Whether there was a valid novation between the original
debtor (Serra), new debtor (Whitaker and Luzuriaga) and
the creditor(Mota and Vidaurrazaga, the old partners of
Serra). (NONE, there was no valid novation!)
2.
Whether the obligation of Serra to pay the agreed amount (1/2
of the cost of constructing the railroad) to the old partners was
extinguished because of the subsequent dissolution made by
the partners. (NO, it was not extinguished by mere dissolution
of the partnership.)
RULING:
Taking for granted that the defendant was under obligation to
pay the plaintiffs one-half of the cost of the construction of the
railroad line in question, by virtue of the contract of partnership
Exhibit A, the decisive point here to determine is whether there
was a novation of the contract by the substitution of the debtor
with the consent of the creditor, as required by article 1205 of
the Civil Code. If so, it is clear that the obligation of the
defendant was, in accordance with article 1156 of the same
code, extinguished.
It should be noted that in order to give novation its legal
effect, the law requires that the creditor should consent
to the substitution of a new debtor. This consent must be
given expressly for the reason that, since novation
extinguishes the personality of the first debtor who is to
be substituted by new one, it implies on the part of the
creditor a waiver of the right that he had before the
novation which waiver must be express under the
principle that renuntiatio non praesumitur, recognized by
the law in declaring that a waiver of right may not be
performed unless the will to waive is indisputably shown
by him who holds the right.
The fact that Phil. C. Whitaker and Venancio Concepcion were
willing to assume the defendant's obligation to the plaintiffs is of
no avail, if the latter have not expressly consented to the
substitution of the first debtor. Neither can the letter, Exhibit 6,
on page 87 of the record be considered as proof of the consent
of the plaintiffs to the substitution of the debtor, because that
exhibit is a letter written by plaintiffs to Phil. C. Whitaker and
Venancio Concepcion for the very reason that the defendant
had told them (plaintiffs) that after the sale of the "Hacienda
Palma" to Messrs. Phil. C. Whitaker and Venancio Concepcion,
the latter from then on would bear the cost of the repairs and
maintenance of the railroad line and of the construction of
whatever addition thereto might be necessary.
It was but natural that the plaintiffs should have done this.
Defendant transferred his hacienda to Messrs. Phil. C.
Whitaker and Venancio Concepcion and made it known to the
plaintiffs that the new owners would hold themselves liable for
the cost of constructing the said railroad line. Plaintiffs could
not prevent the defendant from selling to Phil. C. Whitaker and
Venancio Concepcion his "Hacienda Palma" with the rights
that he had over the railroad in question. The defendant
ceased to
be a partner in said line and, therefore, the plaintiffs had
to take the vendees as their new partners. Plaintiffs had to
come to an understanding with the new owners of the
"Hacienda Palma" in connection with the railroad line
"Palma-San Isidro-Nandong." But in all of this, there was
nothing to show the express consent, the manifest and
deliberate intention of the plaintiffs to exempt the
defendant from his obligation and to transfer it to his
successors in interest, Messrs. Phil. C. Whitaker and
Venancio Concepcion.
As has been said, in all contracts of novation consisting in
the change of the debtor, the consent of the creditor is
indispensable, pursuant to article 1205 of the Civil Code
which reads as follows:
Novation which consists in the substitution of a
new debtor in the place of the original one may be
made without the knowledge of the latter, but not
without the consent of the creditor.
Notwithstanding the doctrines above quoted, defendant's
counsel calls our attention to the decision of the supreme
court of Spain of June 16, 1908, wherein it was held that
the provisions of article 1205 of Code do not mean nor
require that the consent of the creditor to the change of a
debtor must be given just at the time when the debtors
agree on the substitution, because its evident object being
the full protection of the rights of the creditor, it is sufficient
if the latter manifests his consent in any form and at any
time as long as the agreement among the debtors holds
good. And defendant insists that the acts performed by the
plaintiffs after the "Hacienda Palma" was sold to Messrs.
Phil. C. Whitaker and Venancio Concepcion constitute
evidence of the consent of the creditor.
By comparing the facts of that case with the defenses of
the case at bar, it will be seen that, whereas in the former
case the creditor sued the new debtor, in the instant case
the creditor sues the original debtor. The supreme court of
Spain in that case held that the fact that the creditor sued
the new debtor was proof incontrovertible of his assent to
the substitution of the debtor. This would seem evident
because the judicial demand made on the new debtor to
comply with the obligation of the first debtor is the best
proof that the creditor accepts the change of the debtor.
His complaint is an authentic document where his consent
is given to the change of the debtor. We are not holding
that the creditor's consent must necessarily be given in
the same instrument between the first and the new debtor.
The consent of the creditor may be given subsequently,
but in either case it must be expressly manifested. In the
present case, however, the creditor makes judicial
demand upon the first debtor for the fulfillment of his
obligation, evidently showing by this act that he does not give
his consent to the substitution of the new debtor. We are of the
opinion that the decision of the supreme court of Spain of June
16, 1908, cannot be successfully invoked in support of
defendant's contention.
Wherefore, we hold that in accordance with article 1205 of the
Civil Code, in the instant case, there was no novation of the
contract, by the change of the person of the debtor.
Appellants assign also as a ground of their appeal the holding
of the court that by the termination of the partnership, as
shown by the document Exhibit 5, no legal rights can be
derived therefrom.
Counsel for appellee in his brief and oral argument maintains
that the plaintiffs cannot enforce any right arising out of that
contract of partnership, which has been annulled, such as the
right to claim now a part of the cost of the construction of the
railroad line stipulated in that contract.
Defendant's contention signifies that any person, who has
contracted a valid obligation with a partnership, is exempt from
complying with his obligation by the mere fact of the
dissolution of the partnership. Defendant's contention is
untenable. The dissolution of a partnership must not be
understood in the absolute and strict sense so that at the
termination of the object for which it was created the
partnership is extinguished, pending the winding up of some
incidents and obligations of the partnership, but in such case,
the partnership will be reputed as existing until the juridical
relations arising out of the contract are dissolved.
The dissolution of a firm does not relieve any of its
members from liability for existing obligations, although
it does save them from new obligations to which they
have not expressly or impliedly assented, and any of
them may be discharged from old obligations by
novation of other form of release. It is often said that a
partnership continues, even after dissolution, for the
purpose of winding up its affairs. (30 Cyc., page 659.)
For all of the foregoing, the judgment appealed from is
reversed, and we hold that the defendant Salvador Serra is
indebted to the plaintiffs, the Testate Estate of Lazaro Mota, et
al., in the amount of P113,046.46, and said defendant is hereby
sentenced to pay the plaintiffs the said amount, together with
the agreed interest at the rate of 10 per cent per annum from
the date of the filing of the complaint.
Without special pronouncement as to costs, it is so ordered.
G.R. No. L-12371 March 23, 1918
LEOPOLDO CRIADO, plaintiff-appellant,
vs.
GUTIERREZ HERMANOS, defendant-appellant.
Background: Leopoldo Criado filed a complaint against
the firm of Gutierrez Hermanos for the recovery of a sum
of money. Criado wanted to recover his share of the
capital stock of the firm of Gutierrez Hermanos, since he
began his connection therewith, on January 1, 1900, until
his separation on December 31, 1911.
Leopoldo Criado alleged that accounts presented by the
defendant referring to his capital in that firm were based
upon a false debit balance of P26,349.13 — a balance
which had been previously impeached by the affiant as
well as the accounts from which said sum is sought to be
derived. Wherefore he again assailed them in their totality
on the grounds that some of the entries thereof were
improper, other fraudulent, and still other false.
Therefore Criado’s counsel moved that defendant be
ordered to place immediately at the disposal of
Commissioner Wicks all the books, accounts, bills,
vouchers, and other documents that might be necessary,
in order that said liquidation might be made by defendants
counsel, by an order of September 2, 1915, the court ruled
in conformity therewith, authorizing the firm of Gutierrez
Hermanos to appoint another expert accountant who,
together with the one already designated.
After a rehearing of the case and an examination of
George B. Wicks was made regarding the contents of the
report that he submitted after studying for that purpose the
books and other documents placed at his disposal by the
defendant. In view of the result and the evidence adduced
by the parties, and by the said commissioner's report duly
supported by vouchers, the court rendered the judgment
aforementioned, on September 11, 1916.
Counsel for the firm of Gutierrez Hermanos assails in
general the judgment appealed from because the trial
court did not determine the issues raised in the first,
second, third, fourth, sixth, seventh, eighth, ninth, and
tenth causes of action, and in defendant's cross-
complaint.
Second Cause of Action:
Facts: In the second cause of action Criado demands the
payment of P43,410.86, and alleges that, pursuant to a notarial
instrument of March 29, 1900, he became a partner of the firm
of Gutierrez Hermanos; and that said document stipulated that
the partnership should last for four years from January 1, 1900,
and, among other conditions, it contained the following:
Second. Therefore the partnership is organized among
the parties to this instrument, Don Placido Gutierrez de
Celis, Don Miguel Gutierrez de Celis, Don Miguel
Alonso y Gutierrez, Don Daniel Perez y Alberto, and
Don Leopoldo Criado y Garcia, the first three as
capitalist partners, and the last two as industrial
partners.
Eighth. All earnings or profits that may be obtained
shall be distributed among the partners in the following
proportion: 37 per cent shall go to Don Placido
Gutierrez de Celis; 37 per cent to Don Miguel Gutierrez
de Celis; 16 per cent to Don Miguel Alfonso y
Gutierrez; 5 per cent, to Don Daniel Perez y Alberto;
and 5 per cent to Don Leopoldo Criado y Garcia. In the
same proportion above established for the profits the
capitalist partners shall be liable for all losses or
damages that may be sustained.
Plaintiff also alleged that his capital was P56,796.25 in 1902
and, according to the balance had on December 31, 1903, the
profits obtained amounted to P256,025.31, 5 per cent of which,
or P12,801.26, belonged to him, although the manager Miguel
Gutierrez de Celis, by means of false and erroneous entries in
the books, succeeded in concealing such profits, thereby
injuring him in said amount of P43,410.86. Plaintiff testified that
as soon as he learned of such entries, he at once protested,
but that said manager assured him that as soon as the probate
proceedings concerning the estate of the decedent Miguel
Alfonso should be determined said amount would be refunded
although in spite of his efforts said promise has not been
fulfilled.
In its answer the defendant firm admitted that plaintiff Criado
was an industrial partner entitled to 5 per cent of the profits,
but denied all the other averments of the complaint. In special
defense it alleged that on December 31, 1903, there was made
a liquidation and balance of the business of the firm —
operations which were approved by all the partners with no
protest made by the plaintiff before or after said liquidation, but
contrary, he gave his assent thereto and without reserve
whatsoever he executed a new partnership contract, inasmuch
as the sum shown by said liquidation and balance of the
business of the firm at the end of December, 1903, formed the
basis of the capital mentioned in the articles of partnership
executed before a notary on May 9, 1904.
In order to determine whether plaintiff still has a right to
demand the sum that is the subject of his complaint in the
second cause of action, it becomes necessary first too
decide whether in fact the plaintiff is in estoppel and
unable to oppose any valid objection against said
liquidation and balance; inasmuch as, according to the
inventory of the firm's business, made on December 31,
1903, which was signed by Leopoldo Criado, Miguel
Gutierrez de Celis and Daniel Perez de Celis, plaintiff
Criado's capital on that date was only P25,129.09 which
were in force during the second period from January,
1904. From clause 7 of said contract, and according to
said inventory of December 31, 1903, it appears that the
firm's capital stock amounted to P1,605,497.30, of which
the sum of P25,129.09 belonged to Leopoldo Criado.
In an affidavit plaintiff stated that when he learned of the
contents of the firm's books, he protested against the
entries therein, but that the manager Guiterrez de Celis
assured him that he would lose nothing by those entries
made in connection with a serious matter then pending.
Criado alleged that the reason why said false and
erroneous entries were made in the firm's books by
Gutierrez de Celis was to show the family of the
deceased Miguel Alonso that the losses of the firm of
Gutierrez Hermanos were due to his poor management of
the firm's business
Where there appears an entry which reads thus:
P501,513.57, amount of the bills cancelled in the
books in this date which should have been
cancelled in previous years on account of difficulty
in their collection, some of these bills being of
such a nature that they should be charged to the
account of the management as they are contrary
to the provisions of the 5th and 10th clauses of
the partnership contract . . . but, in view of the fact
that the author of these irregularities is not living
so that compliance with the contract may be
demanded of him, we have distributed the losses
equally among the three principal partners . . . and
5 per cent against each of the industrial partners,
Leopoldo Criado's share of the losses being
P25,080.68.
Issue: WON the losses of the firm of Gutierrez Hermanos
was duly deducted from the share of Criado.
Ruling: No, without doubt this entry was made for the
purpose of showing that Miguel Alonso, former manger of
the partnership, was to blame for these losses. It is to be
noted that, according to the contract that plaintiff Criado,
as one of the industrial partners is not liable for the losses
which the firm may have sustained according to the eighth
clause of the notarial instrument of May 29, 1900. The
allotment to the industrial partner Leopoldo Criado of the
amount of P25,080.68 as losses suffered by the firm in its
business during the years 1900 to 1903 was notoriously illegal,
inasmuch as he, being merely an industrial partner, was not
liable for any loss whatever.
For the practical application and the fulfillment of the
stipulations made by the partners, in the second and eighth
clauses of said articles of partnership of March 29, 1900, it
should be understood that, for the purpose of determining the
profits that correspond to an industrial partner who shares in
the profits from the different transactions carried on by the firm
must be added together from which sum must be subtracted
that of the losses sustained in its business, and in the
difference which represents the net profits — if these are
greater than the losses — the industrial partner shares, i. e., in
the sum total of the profits. But if, on the contrary, the losses
are greater and exceed the profits in said difference the
industrial partner should not be liable, for this constitutes a real
loss to the firm.
Wherefore, according to the articles of partnership, it follows
that, at the termination of the partnership in 1903, plaintiff's
assets were P56,793.25, and his liabilities P1,054.56, there
being in his favor consequently a balance of P55,738.69; but as
in the instrument of May, 1904, he was credited with only
P25,129.09, as capital brought into the new company, the
plaintiff is entitled to demand that the firm of Gutierrez
Hermanos pay him in the sum of P30,609.60.
Fifth Cause of Action:
Facts: According to the document presented by the defendant,
which appears to be a copy of plaintiff's stock account, certified
as authentic by the defendant's bookkeeper, the capital stock of
the plaintiff Leopoldo Criado, prior to December 29, 1911, was
P73,147.87, an amount which also appears in the document
and tends to prove that on December 31, 1911, plaintiff's
capital was the amount stated, before the annotation of the
entries assailed as false and fraudulent by plaintiff.
The eighth and sixteenth clauses of the articles of partnership
executed in May, 1904, which ratified and approved the
transactions of the firm of Gutierrez Hermanos from January of
that year state the following:
Eighth. The earnings or profits which may be obtained
shall be distributed among the partners in the following
proportion:
Forty per cent to D. Placido Gutierrez de Celis;
Forty per cent to D. Miguel Gutierrez de Celis;
Ten per cent to D. Daniel Perez Albertos; and
Ten per cent to D. Leopoldo Criado Garcia.
In the same proportion provided for the profits,
the partners shall be liable for the losses that may
be incurred.
Sixteenth. In case the partnership business
should incur such losses as to prevent a
continuance of the business or to make a
dissolution of the partnership advisable, same
shall be liquidated, each capitalist partner bearing
such loss in a pro rata proportion to the capital he
represents, the expenses necessary for the
prosecution of the business being chargeable to
the firm as a whole. Notwithstanding these
provisions the partners Don Placido and Don
Miguel as principal capitalist partners may
liquidate the partnership or alienate its rights
whenever they deem proper so to do.
By a notarial instrument of January 2, 1908, the life of the
partnership was extended to another term of four years,
upon the same bases and conditions (Exh. X, p. 100).
Issue: WON Criado having a capital stock with the firm of
Hermanos Gutierrez should be liable for the losses.
Ruling: Yes, from the two preinstated clauses of the
partnership contract it is deduced that the partners should
be liable for all the losses incurred by the partnership in
the proportion fixed in the 8th clause; but that, in case
such losses should be of so great importance as to
prevent a continuation of the partnership business, or to
make advisable the dissolution of the partnership, then
due action should be taken in conformity with the
provisions of said clause 16, and the partners should be
liable from the losses in a proportion pro rata to their
share in the partnership assets. The firm of Hermanos
Gutierrez shows a loss of P56,716.57. Consequently, there
should be deducted from plaintiff's capital 10 per cent of
this sum or P5,671.64 as his share of the loss.