e. Relations and Dealings with Third Persons (Arts.
1815-1827) had not been authorized by the board of directors of the company,
1PHILIPPINE NATIONAL BANK vs. LO
G.R. No. L-26937 October 5, 1927
On September 29, 1916, the appellants Severo Eugenio Lo and Ng
Khey Ling, together with J. A. Say Lian Ping, Ko Tiao Hun, On Yem
Ke Lam and Co Sieng Peng formed a commercial partnership under
the name of "Tai Sing and Co.," with a capital of P40,000 contributed
by said partners. In the articles of co-partnership, Exhibit A, it appears
that the partnership was to last for five years from after the date of its
organization, and that its purpose was to do business in the City of
Iloilo, Province of Iloilo, or in any other part of the Philippine Islands
the partners might desire, under the name of "Tai Sing & Co.," for the
purchase and sale of merchandise, goods, and native, as well as
Chinese and Japanese, products, and to carry on such business and
speculations as they might consider profitable. One of the partners, J.
A. Say Lian Ping was appointed general manager of the partnership,
with the appointed general manager of the partnership, with the
powers specified in said articles of co-partnership.
On June 4, 1917, general manager A. Say Lian Ping executed a
power of attorney (Exhibit C-1) in favor of A. Y. Kelam, authorizing
him to act in his stead as manager and administrator of "Tai Sing &
Co.," on July 26, 1918, for, and obtained a loan of P8,000 in current
account from the plaintiff bank. (Exhibit C). As security for said loan,
he mortgaged certain personal property of "Tai Sing & Co., (Exhibit
C.)
This credit was renew several times and on March 25, 1919, A. Y.
Kelam, as attorney-in-fact of "Tai Sing & Co., executed a chattel
mortgage in favor of plaintiff bank as security for a loan of P20,000
with interest (Exhibit D). This mortgage was again renewed on April
16, 1920 and A. Y. Kelam, as attorney-in-fact of "Tai Sing & Co.,
executed another chattel mortgage for the said sum of P20,000 in
favor of plaintiff bank. (Exhibit E.) According to this mortgage
contract, the P20,000 loan was to earn 9 per cent interest per annum.
On April 20, 1920, Yap Seng, Severo Eugenio Lo, A. Y. Kelam and
Ng Khey Ling, the latter represented by M. Pineda Tayenko,
executed a power of attorney in favor of Sy Tit by virtue of which Sy
Tit, representing "Tai Sing & Co., obtained a credit of P20,000 from
plaintiff bank on January 7, 1921, executing a chattel mortgage on
certain personal property belonging to "Tai Sing & Co.
Defendants had been using this commercial credit in a current
account with the plaintiff bank, from the year 1918, to May 22, 1921,
and the debit balance of this account, with interest to December 31,
1924, is as follows: xxxxxx
This total is the sum claimed in the complaint, together with interest
on the P16,518.74 debt, at 9 per cent per annum from January 1,
1925 until fully paid, with the costs of the trial.
Defendant Eugenio Lo sets up, as a general defense, that "Tai Sing &
Co. was not a general partnership, and that the commercial credit in
current account which "Tai Sing & Co. obtained from the plaintiff bank
P22,727.74 up to August 31, 1926, and interest on P16,518.74 from
nor was the person who subscribed said contract authorized to make
the same, under the article of co-partnership. The other defendants,
Yap Sing and Ng Khey Ling, answered the complaint denying each
and every one of the allegations contained therein.
After the hearing, the court found:
(1) That defendants Eugenio Lo, Ng Khey Ling and Yap Seng Co.,
Sieng Peng indebted to plaintiff Philippine National Bank in sum of
P22,595.26 to July 29, 1926, with a daily interest of P4.14 on the
balance on account of the partnership "Tai Sing & Co. for the sum of
P16,518.74 until September 9, 1922;
(2) Said defendants are ordered jointly and severally to pay the
Philippine National Bank the sum of P22,727.74 up to August 31,
1926, and from the date, P4.14 daily interest on the principal; and
(3) The defendants are furthermore ordered to pay the costs of the
action.
Defendants appealed, making the following assignments of error:
I. The trial court erred in finding that article 126 of the Code of
Commerce at present in force is not mandatory.
II. The trial court erred in finding that the partnership agreement of
"Tai Sing & Co., (Exhibit A), is in accordance with the requirements of
article 125 of the Code of Commerce for the organization of a regular
partnership.
III. The trial court erred in not admitting J. A. Sai Lian Ping's death in
China in November, 1917, as a proven fact.
IV. The trial court erred in finding that the death of J. A. Say Lian Ping
cannot extinguish the defendants' obligation to the plaintiff bank,
because the last debt incurred by the commercial partnership "Tai
Sing & Co., was that evidence by Exhibit F, signed by Sy Tit as
attorney-in-fact of the members of "Tai Sing & Co., by virtue of Exhibit
G.
V. The trial court erred in not finding that plaintiff bank was not able to
collect its credit from the goods of "Tai Sing & Co., given as security
therefor through its own fault and negligence; and that the action
brought by plaintiff is a manifest violation of article 237 of the present
Code of Commerce.
VI. The trial court erred in finding that the current account of "Tai Sing
& Co. with plaintiff bank shows a debit balance of P16,518.74, which
in addition to interest at 9 per cent per annum from July 29, 1926,
amount to P16,595.26, with a daily interest of P4.14 on the sum of
P16,518.74.
VII. The trial court erred in ordering the defendants appellants to pay
jointly and severally to the Philippine National Bank the sum of
that date until fully paid, with the costs of the action.
VIII. The trial court erred in denying the motion for a new trial filed by
defendants-appellants.
Appellants admit, and it appears from the context of Exhibit A, that
the defendant association formed by the defendants is a general
partnership, as defined in article 126 of the Code Commerce. This
partnership was registered in the mercantile register of the Province
of Iloilo. The only anomaly noted in its organization is that instead of
adopting for their firm name the names of all of the partners, of
several of them, or only one of them, to be followed in the last two
cases, by the words "and to be followed in the last two cases, by the
words "and company" the partners agreed upon "Tai Sing & Co." as
the firm name.
In the case of Hung-Man-Yoc, under the name of Kwong-Wo-Sing vs.
Kieng-Chiong-Seng, cited by appellants, this court held that, as the
company formed by defendants had existed in fact, though not in law
due to the fact that it was not recorded in the register, and having
operated and contracted debts in favor of the plaintiff, the same must
be paid by someone. This applies more strongly to the obligations
contracted by the defendants, for they formed a partnership which
was registered in the mercantile register, and carried on business
contracting debts with the plaintiff bank. The anomalous adoption of
the firm name above noted does not affect the liability of the general
partners to third parties under article 127 of the Code of Commerce.
And the Supreme Court so held in the case of Jo Chung Cang vs.
Pacific Commercial Co., (45 Phil., 142), in which it said that the object
of article 126 of the Code of Commerce in requiring a general
partnership to transact business under the name of all its members,
of several of them, or of one only, is to protect the public from
imposition and fraud; and that the provision of said article 126 is for
the protection of the creditors rather than of the partners themselves.
And consequently the doctrine was enunciated that the law must be
unlawful and unenforceable only as between the partners and at the
instance of the violating party, but not in the sense of depriving
innocent parties of their rights who may have dealt with the offenders
in ignorance of the latter having violated the law; and that contracts
entered into by commercial associations defectively organized are
valid when voluntarily executed by the parties, and the only question
is whether or not they complied with the agreement. Therefore, the
defendants cannot invoke in their defense the anomaly in the firm
name which they themselves adopted.
As to the alleged death of the manager of the company, Say Lian
Ping, before the attorney-in-fact Ou Yong Kelam executed Exhibits C,
D and E, the trial court did not find this fact proven at the hearing. But
even supposing that the court had erred, such an error would not
justify the reversal of the judgment, for two reasons at least: (1)
Because Ou Yong Kelam was a partner who contracted in the name
of the partnership, without any objection of the other partners; and (2)
because it appears in the record that the appellant-partners Severo
Eugenio Lo, Ng Khey Ling and Yap Seng, appointed Sy Tit as
manager, and he obtained from the plaintiff bank the credit in current
Page 1 of 19
account, the debit balance of which is sought to be recovered in this
action.
Appellants allege that such of their property as is not included in the
partnership assets cannot-be seized for the payment of the debts
contracted by the partnership until after the partnership property has
been exhausted. The court found that the partnership property
described in the mortgage Exhibit F no longer existed at the time of
the filing of the herein complaint nor has its existence been proven,
nor was it offered to the plaintiff for sale. We find no just reason to
reverse this conclusion of the trial court, and this being so, it follows
that article 237 of the Code of Commerce, invoked by the appellant,
can in no way have any application here.
Appellants also assign error to the action of the trial court in ordering
them to pay plaintiff, jointly and severally, the sums claimed with 9
per cent interest on P16,518.74, owing from them.
The judgment against the appellants is in accordance with article 127
of the Code of Commerce which provides that all the members of a
general partnership, be they managing partners thereof or not, shall
be personally and solidarily liable 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 use it.
As to the amount of the interest suffice it to remember that the credit
in current account sued on in this case as been renewed by the
parties in such a way that while it appears in the mortgage Exhibit D
executed on March 25, 1919 by the attorney-in-fact Ou Yong Kelam
that the P20,000 credit would earn 8 per cent interest annually, yet
from that executed on April 16, 1920, Exhibit E, it appears that the
P20,000 would earn 9 per cent interest per annum. The credit was
renewed in January, 1921, and in the deed of pledge, Exhibit F,
executed by "Tai Sing & Co., represented by the attorney-in-fact Sy
Tit, it appears that this security is for the payment of the sums
received by the partnership, not to exceed P20,000 with interest and
collection fees. There can be no doubt that the parties agreed upon
the rate of interest fixed in the document Exhibit E, namely 9 per cent
per annum.
The judgment appealed from is in accordance with the law, and must
therefore be, as it is hereby, affirmed with costs against the
appellants. So ordered.
2ISLAND SALES, INC. vs. UNITED PIONEERS GENERAL
CONSTRUCTION COMPANY, ET. AL
G.R. No. L-22493 July 31, 1975
This is an appeal interposed by the defendant Benjamin C. Daco from
the decision of the Court of First Instance of Manila, Branch XVI, in
Civil Case No. 50682, the dispositive portion of which reads:
WHEREFORE, the Court sentences defendant United Pioneer
General Construction Company to pay plaintiff the sum of P7,119.07
with interest at the rate of 12% per annum until it is fully paid, plus
attorney's fees which the Court fixes in the sum of Eight Hundred
Pesos (P800.00) and costs.
The defendants Benjamin C. Daco, Daniel A. Guizona, Noel C. Sim
and Augusto Palisoc are sentenced to pay the plaintiff in this case
with the understanding that the judgment against these individual
defendants shall be enforced only if the defendant company has no
more leviable properties with which to satisfy the judgment against
it. .
The individual defendants shall also pay the costs.
On April 22, 1961, the defendant company, a general partnership
duly registered under the laws of the Philippines, purchased from the
plaintiff a motor vehicle on the installment basis and for this purpose
executed a promissory note for P9,440.00, payable in twelve (12)
equal monthly installments of P786.63, the first installment payable
on or before May 22, 1961 and the subsequent installments on the
22nd day of every month thereafter, until fully paid, with the condition
that failure to pay any of said installments as they fall due would
render the whole unpaid balance immediately due and demandable.
Having failed to receive the installment due on July 22, 1961, the
plaintiff sued the defendant company for the unpaid balance
amounting to P7,119.07. Benjamin C. Daco, Daniel A. Guizona, Noel
C. Sim, Romulo B. Lumauig, and Augusto Palisoc were included as
co-defendants in their capacity as general partners of the defendant
company.
Daniel A. Guizona failed to file an answer and was consequently
declared in default.
Subsequently, on motion of the plaintiff, the complaint was dismissed
insofar as the defendant Romulo B. Lumauig is concerned.
When the case was called for hearing, the defendants and their
counsels failed to appear notwithstanding the notices sent to them.
Consequently, the trial court authorized the plaintiff to present its
evidence ex-parte, after which the trial court rendered the decision
appealed from.
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.4 Hence, this appeal.
The only issue for resolution is whether or not 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.
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.
In the instant case, 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 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.
WHEREFORE, the appealed decision as thus clarified is hereby
AFFIRMED, without pronouncement as to costs. SO ORDERED.
3LA COMPAÑIA MARITIMA vs. MUÑOZ
G.R. No. L-3704 December 12, 1907
The plaintiff brought this action in the Court of First Instance of Manila
against the partnership of Franciso Muñoz & Sons, and against
Francisco Muñoz de Bustillo, Emilio Muñoz de Bustillo, and Rafael
Naval to recover the sum of P26,828.30, with interest and costs.
Judgment was rendered in the court below acquitting Emilio Muñoz
de Bustillo and Rafael Naval of the complaint, and in favor of the
plaintiff and against the defendant partnership, Francisco Muñoz &
Sons, and Francisco Muñoz de Bustillo form the sum of P26,828.30
with interest at the rate of 8 per cent per annum from the 31st day of
March, 1905, and costs. From this judgment the plaintiff appealed.
On the 31st day of March, 1905, the defendants Francisco Muñoz,
Emilio Muñoz, and Rafael Naval formed on ordinary general
mercantile partnership under the name of Francisco Muñoz & Sons
for the purpose of carrying on the mercantile business in the Province
of Albay which had formerly been carried on by Francisco Muñoz.
Francisco Muñoz was a capitalist partner and Emilio Muñoz and
Rafael Naval were industrial partners.
Page 2 of 19
It is said in the decision of the court below that in the articles of
partnership it was called an ordinary, general mercantile partnership,
but that from the article it does not appear to be such a partnership.
In the brief of the appellees it is also claimed that it is not an ordinary,
general commercial partnership. We see nothing in the case to
support either the statement of the court below in its decision or the
claim of the appellees in their brief. In the articles of partnership
signed by the partners it is expressly stated that they have agreed to
form, and do form, an ordinary, general mercantile partnership. The
object of the partnership, as stated in the fourth paragraph of the
articles, is a purely mercantile one and all the requirements of the
Code of Commerce in reference to such partnership were complied
with. The articles of partnership were recorded in the mercantile
registry in the Province of Albay. If it should be held that the contract
made in this case did not create an ordinary, general mercantile
partnership we do not see how one could be created.
The claim of the appellees that Emilio Muñoz contributed nothing to
the partnership, either in property, money, or industry, can not be
sustained. He contributed as much as did the other industrial partner,
Rafael Naval, the difference between the two being that Rafael Naval
was entitled by the articles of agreement to a fixed salary of P2,500
as long as he was in charge of the branch office established at Ligao.
If he had left that branch office soon after the partnership was
organized, he would have been in the same condition then that Emilio
Muñoz was from the beginning. Such a change would have deprived
him of the salary P2,500, but would not have affected in any way the
partnership nor have produced the effect of relieving him from liability
as a partner. The argument of the appellees seems to be that,
because no yearly or monthly salary was assigned to Emilio Muñoz,
he contributed nothing to the partnership and received nothing from it.
By the articles themselves he was to receive at the end of five years
one-eighth of the profits. It cannot be said, therefore, that he received
nothing from the partnership. The fact that the receipt of this money
was postponed for five years is not important. If the contention of the
appellees were sound, it would result that, where the articles of
partnership provided for a distribution of profits at the end of each
year, but did not assign any specific salary to an industrial partner
during that time, he would not be a member of the partnership.
Industrial partners, by signing the articles, agree to contribute their
work to the partnership and article 138 of the Code of Commerce
prohibits them from engaging in other work except by the express
consent of the partnership. With reference to civil partnerships,
section 1683 of the Civil Code relates to the same manner.
It is also said in the brief of the appellees that Emilio Muñoz was
entirely excluded from the management of the business. It rather
should be said that he excluded himself from such management, for
he signed the articles of partnership by the terms of which the
management was expressly conferred by him and the others upon
the persons therein named. That partners in their articles can do this,
admits of no doubt. Article 125 of the Code of Commerce requires
them to state the partners to whom the management is intrusted. This
right is recognized also in article 132. In the case of Reyes vs. The
Compania Maritima (3 Phil. Rep., 519) the articles of association
provided that the directors for the first eight years should be certain
persons named therein. This court not only held that such provision
was valid but also held that those directors could not be removed
from office during the eight years, even by a majority vote of all the
stockholders of the company.
Emilio Muñoz was, therefore, a general partner, and the important
question in the case is whether, as such general partner, he is liable
to third persons for the obligations contracted by the partnership, or
whether he relieved from such liability, either because he is an
industrial partner or because he was so relieved by the express terms
of the articles of partnership.
Paragraph 12 of the articles of partnership is as follows:
Twelfth. All profits arising from mercantile transactions carried on, as
well as such as may be obtained from the sale of property and other
assets which constitute the corporate capital, shall be distributed, on
completion of the term of five years agreed to for the continuation of
the partnership, in the following manner: Three-fourths thereof for the
capitalist partner Francisco Muñoz de Bustillo and one-eighth thereof
for the industrial partner Emilio Muñoz de Bustillo y Carpiso, and the
remaining one-eighth thereof for the partner Rafael Naval y Garcia. If,
in lieu of profits, losses should result in the winding up of the
partnership, the same shall be for the sole and exclusive account of
the capitalist partner Francisco Muñoz de Bustillo, without either of
the two industrial partners participating in such losses.
Articles 140 and 141 of the Code of Commerce are as follows:
ART. 140. Should there not have been stated in the articles of co-
partnership the portion of the profits to be received by each partner,
said profits shall be divided pro rata, in accordance with the interest
each one has on the co-partnership, partners who have not
contributed any capital, but giving their services, receiving in the
distribution the same amount as the partner who contributed the
smallest capital.
ART. 141. 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.
A comparison of these articles with the twelfth paragraph above
quoted will show that the latter is simply a statement of the rule laid
down in the former. The article do not, therefore, change the rights of
the industrial partners as they are declared by the code, and the
question may be reduced to the very simple one namely, Is an
industrial partner in an ordinary, general mercantile partnership liable
to third persons for the debts and obligations contracted by the
partnership?
In limited partnership the Code of Commerce recognizes a difference
between general and special partners, but in a general partnership
there is no such distinction-- all the members are general partners.
The fact that some may be industrial and some capitalist partners
does not make the members of either of these classes alone such
general partners. There is nothing in the code which says that the
industrial partners shall be the only general partners, nor is there
anything which says that the capitalist partners shall be the only
general partners.
Article 127 of the Code of Commerce is as follows:
All the members of the general co-partnership, 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.
Do the words "all the partners" found in this article include industrial
partners? The same expression is found in other articles of the code.
In article 129 it is said that, if the management of the partnership has
not been limited by special act to one of the partners, all shall have
the right to participate in the management. Does this mean that the
capitalist partners are the only ones who have that right, or does it
include also industrial partners? Article 132 provides that, when in the
articles of partnership the management has been entrusted to a
particular person, he cannot be deprived of such management, but
that in certain cases the remaining partners may appoint a
comanager. Does the phrase "remaining partners" include industrial
partners, or is it limited to capitalist partners, and do industrial
partners have no right to participate in the selection of the
comanager? Article 133 provides that all the partners shall have the
right to examine the books of the partnership. Under this article are
the capitalist partners the only ones who have such right? Article 135
provides that the partners cannot use the firm name in their private
business. Does this limitation apply only to capitalist partners or does
it extend also to industrial partners? Article 222 provides that a
general partnership shall be dissolve by the death of one of the
general partners unless it is otherwise provided in the articles. Would
such a partnership continue if all the industrial partners should die?
Article 229 provides that upon a dissolution of a general partnership it
shall be liquidated by the former managers, but, if all the partners do
not agree to this, a general meeting shall be called, which shall
determine to whom the settlement of the affairs shall be entrusted.
Does this phrase "all the partners" include industrial partners, or are
the capitalist partners the only ones who have a voice in the selection
of a manager during a period of liquidation? Article 237 provides that
the private property of the general partners shall not be taken in
payment of the obligations of the partnership until its property has
been exhausted. Does the phrase "the general partners" include
industrial partners?
In all of these articles the industrial partners must be included. It
cannot have been intended that, in such a partnership as the one in
question, where there were two industrial and only one capitalist
partner, the industrial partners should have no voice in the
management of the business when the articles of partnership were
silent on that subject; that when the manager appointed mismanages
the business the industrial partners should have no right to appoint a
comanager; that they should have no right to examine the books; that
they might use the firm name in their private business; or that they
Page 3 of 19
have no voice in the liquidation of the business after dissolution. To
give a person who contributed no more than, say, P500, these rights
and to take them away from a person who contributed his services,
worth, perhaps, infinitely more than P500, would be discriminate
unfairly against industrial partners.
If the phrase "all the partners" as found in the articles other than
article 127 includes industrial partners, then article 127 must include
them and they are liable by the terms thereof for the debts of the firm.
But it is said that article 141 expressly declares to the contrary. It is to
be noticed in the first place that this article does not say that they
shall not be liable for losses. Article 140 declares how the profits shall
be divided among the partners. This article simply declares how the
losses shall be divided among the partners. The use of the words se
imputaran is significant. The verb means abonar una partida a alguno
en su cuenta o deducirla de su debito. Article 141 says nothing about
third persons and nothing about the obligations of the partnership.
While in this section the word "losses" stands alone, yet in other
articles of the code, where it is clearly intended to impose the liability
to third persons, it is not considered sufficient, but the word
"obligations" is added. Thus article 148, in speaking of the liability of
limited partners, uses the phrase las obligaciones y perdidas. There
is the same use of the two same words in article 153, relating to
anonymous partnership. In article 237 the word "obligations" is used
and not the word "losses."
The claim of the appellees is that this article 141 fixes the liability of
the industrial partners to third persons for the obligations of the
company. If it does, then it also fixes the liability of the capitalist
partners to the same persons for the same obligations. If this article
says that industrial partners are not liable for the debts of the
concern, it also says that the capitalist partners shall be only liable for
such debts in proportion to the amount of the money which they have
contributed to the partnership; that is to say, that if there are only two
capitalist partners, one of whom has contributed two-thirds of the
capital and the other one-third, the latter is liable to a creditor of the
company for only one-third of the debt and the former for only two-
thirds. It is apparent that, when given this construction, article 141 is
directly in conflict with article 127. It is not disputed by the appellees
that by the terms of article 127 each one of the capitalist partners is
liable for all of the debts, regardless of the amount of his contribution,
but the construction which they put upon article 141 makes such
capitalist partners liable for only a proportionate part of the debts.
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.
Our construction of the article is that it 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 this particular case that view is
strengthened by the provisions of article 12, above quoted. There it is
stated that if, when the affairs of the partnership are liquidated — that
is, at the end of five years — it turns out that there had been losses
instead of gains, then the capitalist partner, Francisco Muñoz, shall
pay such losses — that is, pay them to the industrial partners if they
have been compelled to disburse their own money in payment of the
debts of the partnership.
While this is a commercial partnership and must be governed
therefore by the rules of the Code of Commerce, yet an examination
of the provisions of the Civil Code in reference to partnerships may
throw some light upon the question here to be resolved. Articles 1689
and 1691 contain, in substance, the provisions of articles 140 and
141 of the Code of Commerce. It is to be noticed that these articles
are found in section 1 of Chapter II [Title VIII] of Book IV. That section
treats of the obligations of the partners between themselves. The
liability of the partners as to third persons is treated in a distinct
section, namely, section 2, comprising articles from 1697 to 1699.
If industrial partners in commercial partnerships are not responsible
to third persons for the debts of the firm, then industrial partners in
civil partnerships are not. Waiving the question as to whether there
can be a commercial partnership composed entirely of industrial
partners, it seems clear that there can be such civil partnership, for
article 1678 of the Civil Code provides as follows:
A particular partnership has for its object specified things only, their
use of profits, or a specified undertaking, or the exercise of a
profession or art.
It might very easily happen, therefore, that a civil partnership could be
composed entirely of industrial partners. If it were, according to the
claim of the appellees, there would be no personal responsibility
whatever for the debts of the partnership. Creditors could rely only
upon the property which the partnership had, which in the case of a
partnership organized for the practice of any art or profession would
be practically nothing. In the case of Agustin vs. Inocencio, just
decided by this court, it was alleged in the complaint, and admitted by
the answer —
That is partnership has been formed without articles of association or
capital other than the personal work of each one of the partners,
whose profits are to be equally divided among themselves.
Article 1675 of the Civil Code is as follows:
General partnership of profits include all that the partners may
acquire by their by their industry or work during the continuation of
the partnership.
Personal or real property which each of the partners may possess at
the time of the celebration of the agreement shall continue to be their
private property, the usufruct only passing to the partnership.
It might very well happen in partnership of this kind that no one of the
partners would have any private property and that if they did the
usufruct thereof would be inconsiderable.
Having in mind these different cases which may arise in the practice,
that construction of the law should be avoided which would enable
two persons, each with a large amount of private property, to form
and carry on a partnership and, upon the bankruptcy of the latter, to
say to its creditors that they contributed no capital to the company but
only their services, and that their private property is not, therefore,
liable for its debts.
But little light is thrown upon this question by the authorities. No
judgment of the supreme court of Spain has been called to our
attention, and we have been able to find none which refers in any
way to this question. There is, therefore, no authority from the tribunal
for saying that an industrial partner is not liable to third persons for
the debts of the partnership.
In a work published by Lorenzo Benito in 1889 (Lecciones de
derecho mercantil) it is said that industrial partners are not liable for
debts. The author, at page 127, divides general partnership into
ordinary and irregular. The irregular partnerships are those which
include one or more industrial partners. It may be said in passing that
his views cannot apply to this case because the articles of
partnership directly state that it is an ordinary partnership and do not
state that it is an irregular one. But his view of the law seems to be
derived from something other than the Code of Commerce now in
force. He says:
. . . but it has not been very fortunate in sketching the characters of a
regular collective partnership (since it says nothing conclusive in
reference to the irregular partnership) (p. 127.)
And again:
This article would not need to be commented upon were it not
because the writer entirely overlooked the fact that there might exist
industrial partners who did not contribute with capital in money,
credits, or goods, which partners generally participate in the profits
but not in the losses, and whose position must also be determined in
the articles of co-partnership. (p. 128.)
And again: lawphil.net
The only defect that can be pointed out in this article is the fact that it
has been forgotten that in collective partnerships there are industrial
partners who, not being jointly liable for the obligations of the co-
partnership, should not include their names in that of the firm. (p.
129.)
Page 4 of 19
As a logical result of his theory he says that an industrial partner has
no right to participate in the administration of the partnership and that
his name cannot appear in the firm name. In this last respect his view
is opposed to that of Manresa, who says (Commentaries on the
Spanish Civil Code, vol. 11, p. 330):
It only remains to us to state that a partner who contributes his
industry to the concern can also confer upon it the name or the
corporate name under which such industry should be carried on. In
this case, so long as the co-partnership lasts, it can enjoy the credit,
reputation, and name or corporate name under which such industry is
carried on; but upon dissolution thereof the aforesaid name or
corporate name pertains to the partner who contributed the same,
and he alone is entitled to use it, because such a name or style is an
accessory to the work of industrial partner, and upon recovering his
work or his industry he also recovers his name or the style under
which he exercised his activity. It has thus been decided by the
French court of cassation in a decision dated June 6, 1859.
In speaking of limited partnerships Benito says (p. 144) that here are
found two kinds of partners, one with unlimited responsibility and the
other with limited responsibility, but adopting his view as to industrial
partners, it should be said that there are three kinds of partners, one
with unlimited responsibility, another with limited responsibility, and
the third, the industrial partner, with no responsibility at all. In
Estasen's recent publication on mercantile partnerships (Tratado de
las Sociedades Mercantiles) he quotes from the work of Benito, but
we do not understand that he commits himself to the doctrines therein
laid down. In fact, in his former treatise, Instituciones de Derecho
Mercantil (vol. 3, pp. 1-99), we find nothing which recognizes the
existence of these irregular general partnerships, or the exemption
from the liability to third persons of the industrial partners. He says in
his latter work (p. 186) that according to Dr. Benito the irregular
general partner originated from the desire of the partnership to
associate with itself some old clerk or employee as a reward for his
services and the interest which he had shown in the affairs of the
partnership, giving him in place of a fixed salary a proportionate part
of the profits of the business. Article 269 of the Code of Commerce of
1829 relates to this subject and apparently provides that such
partners shall not be liable for debts. If this article was the basis for
Dr. Benito's view, it can be so no longer, for it does not appear in the
present code. We held in the case of Fortis vs. Gutirrez Hermanos (6
Phil. Rep., 100) that a mere agreement of that kind does not make
the employee a partner.
An examination of the works of Manresa and Sanchez Roman on the
Civil Code, and of Blanco's Mercantile Law, will shows that no one of
these mentions in any way the irregular general partnership spoken
of by Dr. Benito, nor is there anything found in any one of these
commentaries which in any way indicates that an industrial partner is
not liable to third persons for the debts of the partnership. An
examination of the French law will also show that no distinction of that
kind is therein anywhere made and nothing can be found therein
which indicates that the industrial partners are not liable for the debts
of the partnership. (Fuzier-Herman, Repertoire de Droit Francais, vol.
34, pp. 256, 361, 510, and 512.)
Our conclusion is upon this branch of the case that neither on
principle nor on authority can the industrial partner be relieved from
liability to third persons for the debts of the partnership.
It is apparently claimed by the appellee in his brief that one action
cannot be maintained against the partnership and the individual
partners, this claim being based upon the provisions of article 237 of
the Code of Commerce which provides that the private property of the
partners shall not be taken until the partnership property has been
exhausted. But this article furnishes to argument in support of the
appellee's claim. An action can be maintained against the partnership
and partners, but the judgment should recognize the rights of the
individual partners which are secured by said article 237.
The judgment of the court below is reversed and judgment is ordered
against all of the defendants for the sum of P26,828.30, with interest
thereon at the rate of 8 per cent per annum since the 31st day of
March, 1905, and for the cost of this action. Execution of such
judgment shall not issue against the private property of the
defendants Francisco Muñoz, Emilio Muñoz, or Rafael Naval until the
property of the defendant Francisco Muñoz & Sons is exhausted. No
costs will be allowed to their party in this court. So ordered.
Torres, Johnson and Tracey, JJ., concur.
Separate Opinions
ARELLANO, C. J., dissenting:
I consider that the judgment appealed from is entirely in accordance
with the law.lawphil.net
The question set up in the majority decision, "In a regular collective
commercial company, is an industrial partner liable as to third
persons by reason of the debts and obligations contracted by the co-
partnership?" I decide in a negative sense; he is not; by express
provision of the law he cannot be held to be liable, save, of course,
and agreement to the contrary, which in such case would be a special
law, and would set aside the general law.
The basis for the contrary opinion and decision is article 127 of the
Code of Commerce:
All the members of the general co-partnership, be they or be they not
managing partners of the same, are personally and in solidum liable
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.
Now, do the words "all the members" found in this article include the
industrial partners?
At first it would appear that they do. In order to complete such
reasoning the following premise will be sufficient: That the industrial
partners from the collective partnership; therefore the industrial
partners are personally and jointly liable with all their property for the
results of the transactions made in the name and for account of the
partnership.
But they form the collective partnership in the manner in which our
laws allows the same to be formed — that is, by contributing with
their industry, not with property.
And the word all, in reference to property, which is common with the
three classes of partnership defined by the code, to wit, collective,
limited co-partnership (comanditaria), and corporation (anonima),
gives the rule for such personal and joint liability, which is the
purpose of the provision in the above-quoted article.
The above three classes of partnership agree in that property must in
each of them be contributed. "The articles of general copartnership
must state . . . the capital which each partner contributes in cash,
credits, or property, stating the value given the latter or the basis on
which their appraisal is to be made." (Art. 125.) "The same
statements shall be included in articles of limited copartnerships
(compañias en comandita) which are required for those of general
copartnerships" — that is, among other things, the capital which each
partner contributes. (Art. 145.) "The articles of incorporation (of
corporations) must include . . . the corporate capital, stating the value
at which property, not cash, contributed has been appraised, or the
basis on which the appraisal is to be made; and the number of shares
into which the corporate capital is divided and represented." (Art.
151.)
Now, then, "The liability of the members of a corporation for the
obligations and losses of the same shall be limited to the funds they
contributed or bound themselves to contribute to the corporate
capital." (Art. 153.) "The liability of special partners for the obligations
and losses of the copartnership shall be limited to the funds which
they contributed or bound themselves to contribute to the limited
copartnership, with the exception of the sense mentioned in article
147" — that is, if any of them include his name or permit its
conclusion in the firm name. (Art. 148, par. 3.) However, in a
collective partnership the liability is not limited to the funds or property
contributed, but extends to all the property which partners may own
within or without the copartnership.
In every mercantile copartnership it is the corporate capital that
responds for the obligations of the same; this is elemental. The
members of a joint stock, a limited, or a collective company respond
with their capital for the obligations of the association; in the joint
stock concerns, with their shares; in the limited class, with the amount
contributed; in the collective, with their constituted capital. An
industrial partner, with what principal sum, share, or quota in the
corporate capital does he or can he respond for the obligations of the
collective partnership? Evidently with none whatever.
If the capital of the association is exhausted, the extreme case of
losses incurred by the company arises, and third persons cannot
recover the amount of the obligations of the company from the
corporate capital, because the latter is sufficient to recover them.
Shareholders in the case of a joint stock company, beyond the value
of their stock, have no longer to think of any ulterior subsidiary
Page 5 of 19
responsibility. Neither do the partners of a limited company. In either
case the partners are only liable to the extent of their corporate
capital. Collective partners have to respond not only with their
corporate capital but also with the whole of their property outside of
the association. And it is desired that the industrial partner who, in a
collective copartnership, did not primarily respond with his corporate
capital, because he had none, shall subsidiary respond with such
property as he may have outside of the company, and with which
nobody, either within or without the copartnership, had counted upon,
since both inside and outside of the company his industry or work
only had been reckoned with. Therefore, the word all, of article 127
cited above, simply denoted the extent of the ulterior or subsidiary
responsibility, and that which does not appear, which does not
materially exist, can hardly be made to apply.
An industrial partner cannot engage in transactions of any class
whatever, otherwise he would be subject to serious consequences
(art. 138), while a capitalist partner, as a rule, may so engage without
extending profits or liabilities to the company (arts. 134 and 136); an
industrial partner, as regards profits, can only receive in the
distribution the same amount as the partner who contributed the
smallest amount of capital (art. 140); in the case at bar, one-eighth
goes to each of the two industrial partners, three-fourths being for the
capitalist, and even at the expiration of the copartnership they run the
risk of having the one-eighth of the profits earned in former years
absorbed by a total loss incurred during the last year of the contract
of copartnership; and it is claimed that such industrial partner, so
much delayed with regard to profits, who has not the same rights,
shall be under the same obligations as regards obligations because
he is a collective partner? This seems neither just nor logical.
And it is not so. Article 141 reads:lawphil.net "Losses shall be
charged in the same proportion among the partners who have
contributed capital, without including" the industrial partners (since
they have not the same rights), and they should not be included
therein nor in the corporation of the partner who contributed the
smallest capital, simply for the reason that the industrial partner has
nothing to lose, he not having contributed anything which the
company may lose when the losses of the copartnership are
considered, either among the partners thereof or with regard to third
persons.
There need be no distinction made between obligations and losses.
During the existence of a company the gains or the losses are set off
the one against the other, and the difference is either in favor of or
against the concern. As to the industrial partner, in connection with
the question submitted, it is not a matter of striking a balance from
time to time, but one of the final adjustment of assets and liabilities,
because the matter under discussion refers only to his private
property, which has nothing to do with the company nor with losses in
liquidating the same. Article 127 is affected by article 237: "The
private property of the general partners which is not included in the
assets of the copartnership when it is established cannot be seized
for the payment of the obligations contracted by the copartnership
until after the common assets have been attached." And such
condition is stated in the majority decision. As long as there is
property belonging to the company, obligations in favor of third
persons are covered by the primary and direct responsibility of the
company; the question arises when the assets of the company are
exhausted and it becomes necessary to appeal to the ulterior or
subsidiary liability of the private property of the partners; in this case
such obligations constitute the extreme losses in the liquidation of the
company.
The case at bar could only thus be set forth: Should an industrial
partner be responsible for such losses, for such obligations in favor of
third persons? Article 141 expressly states that he shall not. In order
to state the contrary it would be necessary to appeal to
discriminations in the wording of said article; and this is neither
permitted where the law does not make them nor would they lead to
anything after all. In the aforesaid article 237 the corroboration of the
word all of article 127 may be found: "The private property of the
general partners which is not included in the assets of the
copartnership," differing from such as were included, cannot seized
for the payment of obligations contracted by the copartnership, until
after the common assets have been attached; after such attachment
all the assets, according to article 127, such as were included, and
those that were not included, in this order, shall be subject to the
results of the transactions of the copartnership. An industrial partner
has not contributed any property whatever; he therefore offers no
subject for the principal and direct seizure when the assets of the
copartnership are attached. How is it possible to conceive any
ulterior, subsidiary, indirect responsibility over the property which it
was not even thought to be included, since he only contributed to the
company his industry and work, not property of any class whatever?
It seems very anomalous that one who has not obligated himself in
the least should be responsible or the greater part, that he who is not
comprehended within the explicit terms should be included by
implication, and that he who pledge nothing should be held to
respond with his property.
As to the nature of the defendant company in this action, I take it to
be:
1. That the defendant company is really a collective one such as is
described in the Code of Commerce; the firm of "F. Muñoz & Sons"
and the terms of the articles of association prove it so beyond all
doubt.
2. That it is a regular collective company; the word regular means, as
employed in the Code of Commerce, that the collective company is
the rule, the standard in all commercial associations, the one
combining all the effects which are consequent upon this form of
convention; and the limited and the joint-stock companies are the
exception.
3. That it is not irrelevant in view of the manner in which the present
Code of Commerce, like the former one of 1829, has defined the
collective company, that such a distinguished professor of law as
Doctor Lorenzo de Benito should have established in his "Lessons on
Mercantile Law" a difference between the regular collective
associations and irregular collective companies; "regular are those
wherein, as article 122 reads, all the members in a collective name
and under a firm name bind themselves to participate in the
proportion which they may establish with the same rights and
obligations." "And irregular, those wherein one or more members
who, though not contributing toward the company with anything but
their industry, participate in the profits in the manner agreed to in the
articles of association or as determined by law, and ordinarily do not
share in the losses which the copartnership may sustain. Such
members are called industrial partners, and the collective
copartnership having a member of said class is also sometimes
called an association of capital and industry.
This is what the law says (he continues), but it has not been very
fortunate in sketching the characters of a regular collective
partnership (since in conclusion it says nothing in reference to the
irregular partnership), because precisely the collective name and the
corporate name are applicable to both the collective and the limited
companies; and as to the covenant entered into by the partners to
participate in the proportion which they may establish with the same
rights and obligations, this is inherent to all partnerships without
distinction as to class. What characterizes this partnership is that all
the members, "with the exception of the industrial partners," are
jointly responsible and with all their property for the corporate
obligations.
4. That the code in force, by means of three articles, 138, 140, and
141, among those which regulate collective partnerships, has
involved this association of capital and industry; whence irregularity
necessarily arises; the irregularity of such an irregular system is that
in a collective partnership wherein, besides the element property,
common or generic to the three aforesaid classes, there appears this
one, to wit, industry, a special features only in collective partnerships,
according to the system of the code.
Had the system adopted by the codes of Portugal, Brazil, and the
Argentine Republic been followed, a different classification would
have been made of the association of capital and industry which,
according to the last of the codes cited, is properly characterized by
means of the following articles:
435. Habilitacion or association of capital and industry is the name
given to the partnership formed on the one part by one or more
persons who furnish funds for a general business, or for some
particular commercial transaction, and on the other part by one or
more individuals who join the copartnership with their industry alone.
438. The obligation of the partners who furnished capital is in
solidum, and extends beyond the capital contributed by them to the
concern.
439. The articles of association, besides the requirements contained
in article 395, must specify the obligations of the industrial partner or
partners and the share in the profits to which they are entitled in the
apportionment.
Page 6 of 19
In the absence of such declaration, the industrial partner shall draw
from the profits a share equal to those of the partner who furnished
the smallest capital.
440. An industrial partner cannot contract on behalf of the partnership
nor is he obligated with his own property toward the creditors of the
company.
Nevertheless, if besides his industry he should contribute some
capital toward the company either in money or thing of value, the
association shall then be considered as a collective one, and the
industrial partner, whatever might have been stipulated, shall respond
in solidum.
In my opinion it cannot be denied that there is no substantial
difference between the three articles of our code and those
transcribed from that of the Argentine Republic as regards the rights
and obligations of industrial partners in conjunction with partners who
furnish capital; there is no difference except in the system, the code
of the Argentine Republic dealing with this class of association of
capital and industry separately from the only three defined in our
code, all of them of capital only or essentially of partners who furnish
capital. Therefore, as said code has an article almost literally identical
with article 127 of our code, this question cannot possibly arise in that
country. That code contains article 454, which reads: "All those who
form a collective commercial company, whether managing the
corporate funds or not, are obligated in solidum (with all their
property, as our code would state) for the results of the transactions
made in the name and for account of the partnership," etc. To the
question, Do the words "all the partners" found in said article include
the industrial partners? undoubtedly the answer would be no.
And it would not suffice to say that the above article of the code of the
Argentine Republic, namely, "on collective copartnership," involves
no section which may refer to industrial partners, and that, therefore,
there can be no question as to the words "all the members;" it is
because, by reason of the nature thereof, whether under one system
or another, the provisions and the principles being identical, the
conclusions cannot otherwise than identical. In a copartnership, and
as the result of the obligations thereunder, an industrial partner
cannot lose except what he has actually contributed thereto for a
limited or an unlimited purpose, subject ultimately to company or
personal obligations; this is all that law and logic may demand of him;
anything else would not come under the law, but may be demanded
of him by reason of his express covenant, because he has consented
to something beyond the character and the effects of the contract of
partnership of capital and industry entered into by him, called
collective; nothing else has been the subject of his consent and
obligation.
Manuel Duran y Bas, a former professor of the University of
Barcelona, in his addition to the work of Marti de Eixala, which is so
generally and specially consulted in that eminently commercial and
industrial city, has offered no remarks to the original text of said work
which establish as an elemental doctrine that "When the
copartnership is purely a collective one, each of its members is jointly
obligated for the result of the transactions which should be charged to
the copartnership . . . . From the general rule which we have just set
up the industrial partners who contract no obligation to secure the
liabilities of the company should be excepted, unless there be an
express covenant to the contrary." (Art. 319 of the code of 1829,
identical with art. 141 of the code now in force.)
During almost half a century no obligation has been raised by the
professors of law, the press, or the bar, to this doctrine regarding the
exemption, not merely with respect to losses but to company
obligations of the industrial partner, on the suppositions, which I do
not admit, as already shown, that it may be possible to discriminate
between losses and obligations in connection with an industrial
partner, for whom there are none but the final losses, such as absorb
the assets of the company, which cannot be otherwise than
outstanding obligations in favor of third parties inasmuch as, so long
as there are company assets, no recourse can be held to the private
property of any partner.
4DIETRICH vs. FREEMAN
G.R. No. L-6252 January 28, 1911
This action was brought against O.K. Freeman, James L. Pierce, and
Burton Whitcomb, as owners and operators of the Manila Steam
Laundry, to recover the sum of P952 alleged to be the balance due
the plaintiff for services performed during the period from January 9,
1907, to December 31, 1908. Judgment was rendered in favor of the
plaintiff and against Freeman and Whitcomb, jointly and severally, for
the sum of P752, with interest at the rate of 6 per cent per annum
from the 27th day of August, 1909, and the costs of the cause. The
complaint as to Pierce was dismissed, Whitcomb alone appealing.
When the plaintiff was first employed on the 9th of January, 1907, this
steam laundry was owned and operated by Freeman and Pierce.
Pierce, on the 18th of January, 1907, sold all of his right, title, and
interest in the said laundry to Whitcomb, who, together with Freeman,
then became the owners of this laundry and continued to operate the
same as long as the plaintiff was employed.
The trial court found that the balance due the plaintiff for services
performed amounted to the sum of P752. This finding is fully
supported by the evidence of record.
Counsel for the appellant Whitcomb now insists -
1. That the court erred in giving, jointly and severally, a judgment
against Freeman and Whitcomb for any sum whatever; and
chanrobles virtual law library
2. That the court erred in holding the appellant Whitcomb liable.
It appears from the record that Whitcomb never knew the plaintiff,
never had anything to do with personally, and that the plaintiff's
contract was with Freeman, the managing partner of the laundry. It
further appears from the record that Pierce, after he sold his interest
in this laundry to Whitcomb, continued to look after Whitcomb's
interest by authority of the latter.
Articles 17 and 119 of the Code of Commerce provide:
Art. 17. The record in the commercial registry shall be optional for
private merchants and compulsory for associations established in
accordance with this code or with special laws, and for vessels.
Art. 119 Every commercial association before beginning business
shall be obliged to record its establishment, agreements, and
conditions in a public instrument, which shall be presented for record
in the commercial registry, in accordance with the provisions of article
17.
Additional instrument which modify or alter in any manner whatsoever
the original contracts of the association are subject to the same
formalities, in accordance with the provisions of article 25.
Partners cannot make private agreements, but all must appear in the
articles of copartnership.
In the organization of this partnership by Freeman and Whitcomb the
above provisions of law were not complied with; that is, no formal
partnership was ever entered into by them, notwithstanding the fact
that they were engaged in the operation of this laundry.
The purpose for which this partnership was entered into by Freeman
and Whitcomb show clearly that such partnership was not a
commercial one; hence the provisions of the Civil Code and not the
Code of Commerce must govern in determining the liability of the
partners. (Manresa, vol. 1, p. 184; Aramburo, Civil Capacity, 407,
432; Prautch vs. Hernandez, 1 Phil. Rep., 705; and Co Pitco vs. Yulo,
8 Phil. Rep., 544.)
In support of the second assignment of error our attention has been
called to the cases of Hung-Man-Yoc vs. Kieng-Chiong-Seng (6 Phil.
Rep., 498); Ang Quian Cieg vs. Te Chico (12 Phil. Rep., 533); Bourns
vs. Carman (7 Phil. Rep., 117). In the first of these cases the
partnership was a mercantile one, as it was engaged in the
importation of goods for sale at a profit. This was also true in the
second case. In neither of these cases were the provisions of articles
17 and 119 of the Code of Commerce complied with. Those
partnerships, although commercial, were not organized in accordance
with the provisions of the Code of Commerce as expressed in those
articles. In determining the liability of the partners in these cases the
court, after making the finding of facts, was governed by the
provisions of article 120 of the Commercial Code. In the last case
cited the partnership was one of cuentas en participacion. "A
partnership," quoting from the syllabus in this case, "constituted in
such a manner that its existence was only known to those who had
an interest in the same, there being no mutual agreement between
the partners, and without a corporate name indicating to the public in
some way that there were other people besides the one who
Page 7 of 19
ostensibly managed and conducted the business, is exactly the
accidental partnership of cuentas en participacion defined in article
239 of the Code of Commerce."
In a partnership of cuentas en participacion, under the provisions of
article 242 of the Code of Commerce, those who contract with the
person in whose name the business of such a partnership was
conducted shall have only the right of action against such person and
not against other persons interested. So this case is easily
distinguished from the case at bar, in that the one did not have the
corporate name while the other was known as the Manila Steam
Laundry.
The plaintiff was employed by and performed services for the Manila
Steam Laundry and was not employed by nor did he perform services
for Freeman alone. The public did not deal with Freeman and
Whitcomb personally, but with the Manila Steam Laundry. These two
partners were doing business under this name and, as we have said,
it was not a commercial partnership. Therefore, by the express
provisions of articles 1698 and 1137 of the Civil Code the partners
are not liable individually for the entire amount due the plaintiff. The
liability is pro rata and in this case the appellant is responsible to the
plaintiff for only one-half of the debt.
For these reasons the judgment of the court below is reversed and
judgment entered in favor of the plaintiff and against the defendant
Whitcomb for the sum of P376, with interest as fixed by the court
below. No costs will be allowed either party in this court.
A motion was filed on the 22nd of August, 1910, by O'Brien and De
Witt, asking this court to strike from the record certain allegations in
the printed brief of counsel for the appellee. These allegations are as
follows: "Does the receipt bear the earmarks of newly discovered
evidence? Or of newly manufactured evidence?" These questions
were directed against O'Brien, one of the counsel for appellant in this
case, and were intended to have the court believe that O'Brien had
manufactured the receipt referred to. There is nothing in this record
which shows that O'Brien did falsify or manufacture the receipt.
These questions are clearly impertinent. It is our duty to keep our
records clean and free from such unwarranted statements. It is,
therefore, ordered that the same be stricken from the record. So
ordered.
5SANTIAGO SYJUCO, INC. vs. CASTRO
G.R. No. 70403 July 7, 1989
This case may well serve as a textbook example of how judicial
processes, designed to promote the swift and efficient disposition of
disputes at law, can be so grossly abused and manipulated as to
produce precisely the opposite result; how they can be utilized by
parties with small scruples to forestall for an unconscionably long
time so essentially simple a matter as making the security given for a
just debt answer for its payment.
The records of the present proceedings and of two other cases
already decided by this Court expose how indeed the routine
procedure of an extrajudicial foreclosure came by dint of brazen
forum shopping and other devious maneuvering to grow into a
veritable thicket of litigation from which the mortgagee has been
trying to extricate itself for the last twenty years.
Back in November 1964, Eugenio Lim, for and in his own behalf and
as attorney-in-fact of his mother, the widow Maria Moreno (now
deceased) and of his brother Lorenzo, together with his other
brothers, Aramis, Mario and Paulino, and his sister, Nila, all
hereinafter collectively called the Lims, borrowed from petitioner
Santiago Syjuco, Inc. (hereinafter, Syjuco only) the sum of
P800,000.00. The loan was given on the security of a first mortgage
on property registered in the names of said borrowers as owners in
common under Transfer Certificates of Title Numbered 75413 and
75415 of the Registry of Deeds of Manila. Thereafter additional loans
on the same security were obtained by the Lims from Syjuco, so that
as of May 8, 1967, the aggregate of the loans stood at
P2,460,000.00, exclusive of interest, and the security had been
augmented by bringing into the mortgage other property, also
registered as owned pro indiviso by the Lims under two titles: TCT
Nos. 75416 and 75418 of the Manila Registry.
There is no dispute about these facts, nor about the additional
circumstance that as stipulated in the mortgage deed the obligation
matured on November 8, 1967; that the Lims failed to pay it despite
demands therefor; that Syjuco consequently caused extra-judicial
proceedings for the foreclosure of the mortgage to be commenced by
the Sheriff of Manila; and that the latter scheduled the auction sale of
the mortgaged property on December 27, 1968. 1 The attempt to
foreclose triggered off a legal battle that has dragged on for more
than twenty years now, fought through five (5) cases in the trial
courts, 2 two (2) in the Court of Appeals, 3 and three (3) more in this
Court, 4 with the end only now in sight.
1. CIVIL CASE NO. 75180, CFI MANILA, BR.5; CA-G.R. NO. 00242-
R; G.R. NO. L-34683
To stop the foreclosure, the Lims — through Atty. Marcial G.
Mendiola, who was later joined by Atty. Raul Correa — filed Civil
Case No. 75180 on December 24,1968 in the Court of First Instance
of Manila (Branch 5). In their complaint they alleged that their
mortgage was void, being usurious for stipulating interest of 23% on
top of 11 % that they had been required to pay as "kickback." An
order restraining the auction sale was issued two days later, on
December 26,1968, premised inter alia on the Lims' express waiver
of "their rights to the notice and re-publication of the notice of sale
which may be conducted at some future date." 5
On November 25,1970, the Court of First Instance (then presided
over by Judge Conrado M. Vasquez 6 rendered judgment finding that
usury tained the mortgage without, however, rendering it void,
declaring the amount due to be only Pl,136,235.00 and allowing the
foreclosure to proceed for satisfaction of the obligation reckoned at
only said amount .7
Syjuco moved for new trial to enable it to present additional evidence
to overthrow the finding of usury, and the Court ordered the case
reopened for that purpose. The Lims tried to negate that order of
reopening in the Court of Appeals, the proceedings being docketed
as CA-G.R. No. 00242-R. They failed. The Court of Appeals upheld
the Trial Court. The Lims then sought to nullify this action of the
Appellate Court; towards that end, they filed with this Court a petition
for certiorari and prohibition, docketed as G.R. No. L-34683. But here,
too, they failed; their petition was dismissed.8
Thereafter, and on the basis of the additional evidence adduced by
Syjuco on remand of the case from this Court, the Trial Court
promulgated an amended decision on August 16, 1972, reversing its
previous holding that usury had flawed the Lims' loan obligation. It
declared that the principal of said obligation indeed amounted to
P2,460,000.00, exclusive of interest at the rate of 12% per annum
from November 8, 1967, and, that obligation being already due, the
defendants (Syjuco and the Sheriff of Manila) could proceed with the
extrajudicial foreclosure of the mortgage given to secure its
satisfaction.9
2. APPEAL FROM CIVIL CASE NO. 75180; CA-G.R. NO. 51752;
G.R. NO. L-45752
On September 9, 1972, Atty. Paterno R. Canlas entered his
appearance in Civil Case No. 75180 as counsel for the Lims in
collaboration with Atty. Raul Correa, and on the same date appealed
to the Court of Appeals from the amended decision of August 16,
1972. 10 In that appeal, which was docketed as CA G.R. No. 51752,
Messrs. Canlas and Correa prayed that the loans be declared
usurious; that the principal of the loans be found to be in the total
amount of Pl,269,505.00 only, and the interest thereon fixed at only
6% per annum from the filing of the complaint; and that the mortgage
be also pronounced void ab initio.
The appeal met with no success. In a decision promulgated on
October 25,1976, the Court of Appeals affirmed in toto the Trial
Court's amended decision.
The Lims came to this Court seeking reversal of the appellate Court's
decision. However, their petition for review-filed in their behalf by
Canlas, and Atty. Pio R. Marcos, and docketed as G.R. No. L-45752-
was denied for lack of merit in a minute resolution dated August 5,
1977. The Lims' motion for reconsideration was denied and entry of
judgment was made on September 24,1977. 13 Here the matter
should have ended; it marked only the beginning of Syjuco's travails.
3. CIVIL CASE NO.112762, CFI MANILA BRANCH 9
Syjuco then resumed its efforts to proceed with the foreclosure. It
caused the auction sale of the mortgaged property to be scheduled
on December 20, 1977, only to be frustrated again by another action
filed by the Lims on December 19, 1977, docketed as Civil Case No.
112762 of the Court of First Instance of Manila. 14 The action sought
to stop the sale on the ground that the notice of foreclosure had not
been republished; this, notwithstanding that as earlier stressed, the
Page 8 of 19
restraining order of December 26, 1968 issued in Civil Case No
75180 explicitly declared itself to be predicated on the Lims' waiver of
"their rights to the notice and republication of the notice of sale which
may be conducted at some future date." 15 An order restraining the
sale issued in the case, although the petition for preliminary injunction
was subsequently denied. A supplemental complaint was also filed by
the Lims seeking recovery of some Pl million in damages allegedly
suffered by reason of said lack of republication. 16
4. CIVIL CASE NO. 75180
That very same claim — that there had been no republication of the
notice of sale, which was the foundation of the Lims' action in Civil
Case No. 112762 as aforesaid — was made by the Lims the basis of
an urgent motion filed on December 15, 1977 in Civil Case No.
75180, in which, as earlier narrated, the judgement authorizing the
foreclosure had been affirmed by both the Court of Appeals and this
Court, and had become final and executory. And that motion sought
exactly the same remedy prayed for in Civil Case No. 112762 (filed
by the Lims four [4] days later, on December 19, 1977), i.e., the
prevention of the auction sale. The Court -- Branch 5, then presided
over by Judge Jose H. Tecson — granted the restraining order on
December 19, 1977, 17 the very same day that the Lims commenced
Civil Case No. 112762 in the same Court and in which subsequent
action they asked for and obtained a similar restraining order.
The Lims' counsel thus brought about the anomalous situation of two
(2) restraining orders directed against the same auction sale, based
on the same ground, issued by different courts having cognizance of
two (2) separate proceedings instituted for identical objectives. This
situation lasted for all of three (3) years, despite the republication of
the notice of sale caused by Syjuco in January, 1978 in an effort to
end all dispute about the matter, and despite Judge Tecson's having
been made aware of Civil Case No. 112762. It should have been
apparent to Judge Tecson that there was nothing more to be done in
Civil Case No. 75180 except to enforce the judgment, already final
and executory, authorizing the extrajudicial foreclosure of the
mortgage, a judgment sanctioned, to repeat, by both the Court of
Appeals and the Supreme Court; that there was in truth no need for
another publication of the notice since the Lims had precisely waived
such republication, this waiver having been the condition under which
they had earlier obtained an order restraining the first scheduled sale;
that, in any event, the republication effected by Syjuco had removed
the only asserted impediment to the holding of the same; and that,
finally, the Lims were acting in bad faith: they were maintaining
proceedings in two (2) different courts for essentially the same relief.
18 Incredibly, not only did Judge Tecson refuse to allow the holding
of the auction sale, as was the only just and lawful course indicated
by the circumstances, 19 he authorized the Lims to sell the
mortgaged property in a private sale,20 with the evident intention that
the proceeds of the sale, which he directed to be deposited in court,
would be divided between Syjuco and the Lims; this, in line with the
patently specious theory advocated by the Lims' counsel that the
bond flied by them for the postponement of the sale, set at P6 million
by the Court (later increased by P 3 million) had superseded and
caused novation of the mortgage. 21 The case lay fallow for a year,
certain other, incidents arising and remaining unresolved on account
of numerous postponements.
5. G.R. No. L-56014
Finally, on January 28, 1981, Syjuco betook itself to this Court,
presumably no longer disposed to await Judge Tecson's pleasure or
the Lims' convenience. It filed a petition for certiorari and prohibition,
docketed as G.R. No. L-56014, alleging that in Civil Case No. 75180,
Judge Tecson had gravely abused discretion in:
(1) unreasonably delaying the foreclosure of the mortgage;
(2) entertaining the Lims' motion to discharge said mortgage
grounded on the theory that it had been superseded and novated by
the Lims' act of filing the bond required by Judge Tecson in
connection with the postponement of the foreclosure sale, and
unreasonably delaying resolution of the issue; and
(3) authorizing the Lims to negotiate and consummate the private
sale of the mortgaged property and motu proprio extending the period
granted the Lims for the purpose, in disregard of the final and
executory judgment rendered in the case.
By judgment rendered on September 21, 1982, after due
proceedings, this Court 22 issued the writ prayed for and nullified the
orders and actuations of Judge Tecson in Civil Case No. 75180. The
judgment declared that:
(1) the republication by Syjuco of the notice of foreclosure sale
rendered the complaint in Civil Case No. 112762 moot and academic;
hence, said case could not operate to bar the sale;
(2) the Lims' bonds (of P 6 million and P 3 million), having by the
terms thereof been given to guarantee payment of damages to
Syjuco and the Sheriff of Manila resulting from the suspension of the
auction sale, could not in any sense and from any aspect have the
effect of superseding the mortgage or novating it;
(3) in fact, the bonds had become worthless when, as shown by the
record, the bondsman's authority to transact non-life insurance
business in the Philippines was not renewed, for cause, as of July 1,
1981.
The decision consequently decreed that the Sheriff of Manila should
proceed with the mortgage sale, there being no further impediment
thereto
Notice of the decision was served on the Lims, through Atty. Canlas,
on October 2, 1982. A motion for reconsideration was filed, 24 but the
same was denied with finality for lack of merit and entry of final
judgment was made on March 22,1983.
6. THE SECRET ACTION CIVIL CASE NO. Q-36845 OF THE
REGIONAL TRIAL COURT, QUEZON CITY, JUDGE JOSE P.
CASTRO, PRESIDING
Twelve (12) days after the Lims were served, as above mentioned,
with notice of this Court's judgment in G.R. No. 56014, or on October
14,1982, they caused the filing with the Regional Trial Court of
Quezon City of still another action, the third, also designed, like the
first two, to preclude enforcement of the mortgage held by Syjuco.
This time the complaint was presented, not in their individual names,
but in the name of a partnership of which they themselves were the
only partners: "Heirs of Hugo Lim." The complaint advocated the
theory that 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.
The complaint was signed by a lawyer other than Atty. Canlas, but
the records disclose that Atty. Canlas took over as counsel as of
November 4,1982. The case, docketed as Civil Case No. Q-39295,
was assigned to Branch 35 of the Quezon City Regional Trial Court,
then presided over by Judge Jose P. Castro.
Judge Castro issued a restraining order on October 15, 1982. Then,
Sheriff Perfecto G. Dalangin submitted a return of summons to the
effect that on December 6, 1982 he —
.. served personally and left a copy of summons together with a copy
of Complaint and its annexes x x upon defendant's office formerly at
313 Quirino Ave., Paranaque, Metro-Manila and now at 407 Dona
Felisa Syjuco Building, Remedios St., corner Taft Avenue, Manila,
through the Manager, a person of sufficient age and discretion duly
authorized to receive service of such nature, but who refused to
accept service and signed receipt thereof.26
A vaguer return will be hard to find. It is impossible to discern from it
where precisely the summons was served, whether at Quirino
Avenue, Paranaque, or Taft Avenue, Manila; and it is inexplicable
that the name of the person that the sheriff had been able to identify
as the manager is not stated, the latter being described merely as "a
person of sufficient age and discretion." In any event, as it was to
claim later, Syjuco asserts that it was never so served with summons,
or with any other notice, pleading, or motion relative to the case, for
that matter.
On February 10, 1983, Atty. Canlas filed an ex-parte motion to
declare Syjuco in default. The order of default issued the next day,
also directing the plaintiff partnership to present evidence ex parte
within three (3) days. On February 22, 1983, judgment by default was
rendered, declaring void the mortgage in question because executed
by the Lims without authority from the partnership which was and had
been since March 30,1959 the exclusive owner of the mortgaged
property, and making permanent an injunction against the foreclosure
sale that had issued on January 14,1983. 27 Service of notice of the
Page 9 of 19
default judgment was, according to the return of the same Sheriff
Perfecto Dalangin, effected on the following day, February 23, 1983.
His return is a virtual copy of his earlier one regarding service of
summons: it also states the place of service as the defendant's office,
either at its former location, 313 Quirino Avenue, Paranaque, or at the
later address, 407 Dona Felisa, Syjuco Building, Taft Avenue, Manila;
and it also fails to identify the person on whom service was made,
describing him only as "the clerk or person in charge" of the office. 28
Unaccountably, and contrary to what might be expected from the
rapidity with which it was decided-twelve (12) days from February 10,
1983, when the motion to declare defendant Syjuco in default was
filed-the case was afterwards allowed by Atty. Canlas to remain
dormant for seventeen (17) months. He made no effort to have the
judgment executed, or to avail of it in other actions instituted by him
against Syjuco. The judgment was not to be invoked until sometime
in or after July, 1984, again to stop the extrajudicial mortgage sale
scheduled at or about that time at the instance of Syjuco, as shall
presently be recounted.
7. Other Actions in the Interim:
a. CIVIL CASE No. 83-19018, RTC MANILA
While the Lims, through their partnership ("Heirs of Hugo Lim"), were
prosecuting their action in the sala of Judge Castro, as above
narrated, Syjuco once again tried to proceed with the foreclosure
after entry of judgment had been made in G.R. No. 56014 on March
22, 1983. It scheduled the auction sale on July 30, 1983. But once
again it was frustrated. Another obstacle was put up by the Lims and
their counsel, Atty. Canlas. This was Civil Case No. 83-19018 of the
Manila Regional Trial Court. The case was filed to stop the sale on
the theory that what was sought to be realized from the sale was
much in excess of the judgment in Civil Case No. 75180, and that
there was absence of the requisite notice. It is significant that the
judgment by default rendered by Judge Castro in Civil Case No. Q-
36485 was not asserted as additional ground to support the cause of
action. Be this as it may, a restraining order was issued on July
20,1983 in said Civil Case No. 83-9018. 29
b. CIVIL CASE NO. Q-32924, RTC QUEZON CITY
What the outcome of this case, No. 83-19018, is not clear. What is
certain is (1) that the auction sale was re-scheduled for September
20, 1983, (2) that it was aborted because the Lims managed to obtain
still another restraining order in another case commenced by their
lawyer, Atty. Canlas: Civil Case No. Q-32924 of the Court of First
Instance of Quezon City, grounded on the proposition that the
publication of the notice of sale was defective; and (3) that the action
was dismissed by the Regional Trial Court on February 3, 1984. 30
No other salient details about these two (2) cases are available in the
voluminous records before the Court, except that it was Atty. Canlas
who had filed them. He admits having done so unequivocally: "Thus,
the undersigned counsel filed injunction cases in Civil Case No. 83-
19018 and Civil Case No. 39294, Regional Trial Courts of Manila and
Quezon City. ... " 31
7. RE-ACTIVATION OF CIVIL CASE NO. Q-36485, RTC, Q
QUEZON CITY, BRANCH XXXV
Upon the dismissal of Civil Case No. 39294, Syjuco once more
resumed its efforts to effect the mortgage sale which had already
been stymied for more than fifteen (15) years. At its instance, the
sheriff once again set a date for the auction sale. But on the date of
the sale, a letter of Atty. Canlas was handed to the sheriff drawing
attention to the permanent injunction of the sale embodied in the
judgment by default rendered by Judge Castro in Civil Case No. Q-
36485. 32 Syjuco lost no time in inquiring about Civil Case No. Q-
36485, and was very quickly made aware of the judgment by default
therein promulgated and the antecedent events leading thereto. It
was also made known that on July 9, 1984, Judge Castro had
ordered execution of the judgment; that Judge Castro had on July 16,
1984 granted Atty. Canlas' motion to declare cancelled the titles to
the Lims' mortgaged properties and as nun and void the annotation of
the mortgage and its amendments on said titles, and to direct the
Register of Deeds of Manila to issue new titles, in lieu of the old, in
the name of the partnership, "Heirs of Hugo Lim." 33
On July 17,1984, Syjuco filed in said Civil Case No. Q-36485 a
motion for reconsideration of the decision and for dismissal of the
action, alleging that it had never been served with summons; that
granting arguendo that service had somehow been made, it had
never received notice of the decision and therefore the same had not
and could not have become final; and that the action should be
dismissed on the ground of bar by prior judgment premised on the
final decisions of the Supreme Court in G.R. No. L-45752 and G.R.
No. 56014.
Two other motions by Syjuco quickly followed. The first, dated July
20, 1984, prayed for abatement of Judge Castro's order decreeing
the issuance of new certificates of title over the mortgaged lands in
the name of the plaintiff partnership. 34 The second, filed on July 24,
1984, was a supplement to the motion to dismiss earlier filed,
asserting another ground for the dismissal of the action, i.e., failure to
state a cause of action, it appearing that the mortgaged property
remained registered in the names of the individual members of the
Lim family notwithstanding that the property had supposedly been
conveyed to the plaintiff partnership long before the execution of the
mortgage and its amendments,-and that even assuming ownership of
the property by the partnership, the mortgage executed by all the
partners was valid and binding under Articles 1811 and 1819 of the
Civil Code.35
The motions having been opposed in due course by the plaintiff
partnership, they remained pending until January 31, 1985 when
Syjuco moved for their immediate resolution. Syjuco now claims that
Judge Castro never acted on the motions. The latter however states
that that he did issue an order on February 22, 1985 declaring that he
had lost jurisdiction to act thereon because, petitio principii, his
decision had already become final and executory.
8. G.R.NO.L-70403; THE PROCEEDING AT BAR
For the third time Syjuco is now before this Court on the same matter.
It filed on April 3, 1985 the instant petition for certiorari, prohibition
and mandamus. It prays in its petition that the default judgment
rendered against it by Judge Castro in said Civil Case No. Q-36485
be annulled on the ground of lack of service of summons, res judicata
and laches, and failure of the complaint to state a cause of action;
that the sheriff be commanded to proceed with the foreclosure of the
mortgage on the property covered by Transfer Certificates of Title
Numbered 75413, 75415, 75416 and 75418 of the Manila Registry;
and that the respondents the Lims, Judge Castro, the Sheriff and the
Register of Deeds of Manila, the partnership known as "Heirs of Hugo
Lim," and Atty. Paterno R. Canlas, counsel for-the Lims and their
partnership-be perpetually enjoined from taking any further steps to
prevent the foreclosure.
The comment filed for the respondents by Atty. Canlas in substance
alleged that (a) Syjuco was validly served with summons in Civil Case
No. Q-36485, hence, that the decision rendered by default therein
was also valid and, having been also duly served on said petitioner,
became final by operation of law after the lapse of the reglementary
appeal period; (b) finality of said decision removed the case from the
jurisdiction of the trial court, which was powerless to entertain and act
on the motion for reconsideration and motion to dismiss; (c) the
petition was in effect an action to annul a judgment, a proceeding
within the original jurisdiction of the Court of Appeals; (d) the plea of
res judicata came too late because raised after the decision had
already become final; moreover, no Identity of parties existed
between the cases invoked, on the one hand, and Civil Case No. Q-
36485, on the other, the parties in the former being the Lims in their
personal capacities and in the latter, the Lim Partnership, a separate
and distinct juridical entity; and the pleaded causes of action being
different, usury in the earlier cases and authority of the parties to
encumber partnership property in the case under review; (e) the plea
of laches also came too late, not having been invoked in the lower
court; and (f) the property involved constituted assets of the Lim
partnership, being registered as such with the Securities and
Exchange Commission.
On his own behalf Atty. Canlas submitted that he had no knowledge
of the institution of Civil Case No. Q-36485 (though he admitted being
collaborating counsel in said case); that he did not represent the Lims
in all their cases against Syjuco, having been counsel for the former
only since 1977, not for the last seventeen years as claimed by
Syjuco; and that he had no duty to inform opposing counsel of the
pendency of Civil Case No. Q-36485. 37
Respondent Judge Castro also filed a comment disclaiming
knowledge of previous controversies regarding the mortgaged
property. He asserted that Syjuco had been properly declared in
default for having failed to answer the complaint despite service of
summons upon it, and that his decision in said case which was also
properly served on Syjuco became final when it was not timely
appealed, after which he lost jurisdiction to entertain the motion for
Page 10 of 19
reconsideration and motion to dismiss. He also denied having failed
to act on said motions, adverting to an alleged order of February 22,
1985 where he declared his lack of jurisdiction to act thereon.
The respondent Register of Deeds for his part presented a comment
wherein he stated that by virtue of an order of execution in Civil Case
No. Q-36485, he had cancelled TCTs Nos. 75413, 75415, 75416 and
75418 of his Registry and prepared new certificates of title in lieu
thereof, but that cancellation had been held in abeyance for lack of
certain registration requirements and by reason also of the motion of
Syjuco's Atty. Formoso to hold in abeyance enforcement of the trial
court's order of July 16, 1984 as well as of the temporary restraining
order subsequently issued by the Court.
It is time to write finis to this unedifying narrative which is notable
chiefly for the deception, deviousness and trickery which have
marked the private respondents' thus far successful attempts to avoid
the payment of a just obligation. The record of the present proceeding
and the other records already referred to, which the Court has
examined at length, make it clear that the dispute should have been
laid to rest more than eleven years ago, with entry of judgment of this
Court (on September 24, 1977) in G.R. No. L-45752 sealing the fate
of the Lims' appeal against the amended decision in Civil Case No.
75180 where they had originally questioned the validity of the
mortgage and its foreclosure. That result, the records also show, had
itself been nine (9) years in coming, Civil Case No. 75180 having
been instituted in December 1968 and, after trial and judgment, gone
through the Court of Appeals (in CA-G.R. No. 00242-R) and this
Court (in G.R. No. 34683), both at the instance of the Lims, on the
question of reopening before the amended decision could be issued.
Unwilling, however, to concede defeat, the Lims moved (in Civil Case
No. 75180) to stop the foreclosure sale on the ground of lack of
republication. On December 19,1977 they obtained a restraining
order in said case, but this notwithstanding, on the very same date
they filed another action (Civil Case No. 117262) in a different branch
of the same Court of First Instance of Manila to enjoin the foreclosure
sale on the same ground of alleged lack of republication. At about this
time, Syjuco republished the notice of sale in order, as it was later to
manifest, to end all further dispute.
That move met with no success. The Lims managed to persuade the
judge in Civil Case No. 75180, notwithstanding his conviction that the
amended decision in said case had already become final, not only to
halt the foreclosure sale but also to authorize said respondents to
dispose of the mortgaged property at a private sale upon posting a
bond of P6,000,000.00 (later increased by P3,000,000.00) to
guarantee payment of Syjuco's mortgage credit. This gave the Lims a
convenient excuse for further suspension of the foreclosure sale by
introducing a new wrinkle into their contentions-that the bond
superseded the mortgage which should, they claimed, therefore be
discharged instead of foreclosed.
Thus from the final months of 1977 until the end of 1980, a period of
three years, Syjuco found itself fighting a legal battle on two fronts: in
the already finally decided Civil Case No. 75180 and in Civil Case No.
117262, upon the single issue of alleged lack of republication, an
issue already mooted by the Lims' earlier waiver of republication as a
condition for the issuance of the original restraining order of
December 26,1968 in Civil Case No. 75180, not to mention the fact
that said petitioner had also tried to put an end to it by actually
republishing the notice of sale.
With the advent of 1981, its pleas for early resolution having
apparently fallen on deaf ears, Syjuco went to this Court (in G.R. No.
L-56014) from which, on September 21, 1982, it obtained the
decision already referred to holding, in fine, that there existed no
further impediment to the foreclosure sale and that the sheriff could
proceed with the same.
Said decision, instead of deterring further attempts to derail the
foreclosure, apparently gave the signal for the clandestine filing this
time — by the Partnership of the Heirs of Hugo Lim -on October
14,1982 of Civil Case No. Q-36485, the subject of the present
petition, which for the first time asserted the claim that the mortgaged
property had been contributed to the plaintiff partnership long before
the execution of the Syjuco's mortgage in order to defeat the
foreclosure.
Syjuco now maintains that it had no actual knowledge of the
existence and pendency of Civil Case No. Q-36485 until confronted,
in the manner already adverted to, with the fait accompli of a "final"
judgment with permanent injunction therein, and nothing in the record
disabuses the Court about the truth of this disclaimer. Indeed,
considering what had transpired up to that denouement, it becomes
quite evident that actuations of the Lims and their lawyer had been
geared to keeping Syjuco in the dark about said case. Their filing of
two other cases also seeking to enjoin the foreclosure sale (Civil
Case No. 83-19018, Regional Trial Court of Manila in July 1983, and
Civil Case No. Q-32924, Regional Trial Court of Quezon City in
September of the same year) after said sale had already been
permanently enjoined by default judgment in Civil Case No. Q-36485,
appears in retrospect to be nothing but a brace of feints calculated to
keep Syjuco in that state of ignorance and to lull any apprehensions it
mat may have harbored about encountering further surprises from
any other quarter.
Further credence is lent to this appraisal by the unusually rapid
movement of Civil Case No. Q-36485 itself in its earlier stages, which
saw the motion to declare Syjuco in default filed, an order of default
issued, evidence ex parte for the plaintiffs received and judgment by
default rendered, all within the brief span of twelve days, February
10-22, 1983. Notice of said judgment was "served" on February 23,
1983, the day after it was handed down, only to be followed by an
unaccountable lull of well over a year before it was ordered executed
on July 9, 1984 — unaccountable, considering that previous flurry of
activity, except in the context of a plan to rush the case to judgment
and then divert Syjuco's attention to the Lims' moves in other
directions so as to prevent discovery of the existence of the case until
it was too late.
The Court cannot but condemn in the strongest terms this trifling with
the judicial process which degrades the administration of justice,
mocks, subverts and misuses that process for purely dilatory
purposes, thus tending to bring it into disrepute, and seriously erodes
public confidence in the will and competence of the courts to
dispense swift justice.
Upon the facts, the only defense to the foreclosure that could possibly
have merited the full-blown trial and appeal proceedings it actually
went through was that of alleged usury pleaded in Civil Case No.
75180 and finally decided against the respondent Lims in G.R. No. L-
45752 in September 1977. The other issues of failure to republish
and discharge of mortgage by guarantee set up in succeeding actions
were sham issues, questions without substance raised only for
purposes of delay by the private respondents, in which they
succeeded only too well. The claim urged in this latest case: that the
mortgaged property had been contributed to the respondent
partnership and was already property of said partnership when the
individual Lims unauthorizedly mortgaged it to Syjuco, is of no better
stripe, and this, too, is clear from the undisputed facts and the legal
conclusions to be drawn therefrom.
The record shows that the respondent partnership is composed
exclusively of the individual Lims in whose name all the cases herein
referred to, with the sole exception of Civil Case No. Q-36485, were
brought and prosecuted, their contribution to the partnership
consisting chiefly, if not solely, of the property subject of the Syjuco
mortgage. It is also a fact that despite its having been contributed to
the partnership, allegedly on March 30, 1959, the property was never
registered with the Register of Deeds in the name of the partnership,
but to this date remains registered in the names of the Lims as
owners in common. The original mortgage deed of November
14,1964 was executed by the Lims as such owners, as were all
subsequent amendments of the mortgage. There can be no dispute
that in those circumstances, the respondent partnership was
chargeable with knowledge of the mortgage from the moment of its
execution. 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.
The principles of equitable estoppel, sometimes called estoppel in
pais, are made part of our law by Art. 1432 of the Civil Code. Coming
under this class is estoppel by silence, which obtains here and as to
which it has been held that:
Page 11 of 19
... an estoppel may arise from silence as well as from words.
'Estoppel by silence' arises where a person, who by force of
circumstances is under a duty to another to speak, refrains from
doing so and thereby leads the other to believe in the existence of a
state of facts in reliance on which he acts to his prejudice. Silence
may support an estoppel whether the failure to speak is intentional or
negligent.
Inaction or silence may under some circumstances amount to a
misrepresentation and concealment of the facts, so as to raise an
equitable estoppel. When the silence is of such a character and
under such circumstances that it would become a fraud on the other
party to permit the party who has kept silent to deny what his silence
has induced the other to believe and act on, it will operate as an
estoppel. This doctrine rests on the principle that if one maintains
silence, when in conscience he ought to speak, equity will debar him
from speaking when in conscience he ought to remain silent. He who
remains silent when he ought to speak cannot be heard to speak
when he should be silent.
And more to the point:
A property owner who knowingly permits another to sell or encumber
the property, without disclosing his title or objecting to the transaction,
is estopped to set up his title or interest as against a person who has
been thereby misled to his injury. x x x
An owner of real property who stands by and sees a third person
selling or mortgaging it under claim of title without asserting his own
title or giving the purchaser or mortgagee any notice thereof is
estopped, as against such purchaser or mortgagee, afterward to
assert his title; and, although title does not pass under these
circumstances, a conveyance will be decreed by a court of equity.
Especially is the rule applicable where the party against whom the
estoppel is claimed, in addition to standing by, takes part in malting
the sale or mortgage.
More specifically, the concept to which that species of estoppel which
results from the non-disclosure of an estate or interest in real property
has ordinarily been referred is fraud, actual or constructive. ...
Although fraud is not an essential element of the original conduct
working the estoppel, it may with perfect property be said that it would
be fraudulent for the party to repudiate his conduct, and to assert a
right or claim in contravention thereof.
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 contemplates a situation duplicating the
circumstances that 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 partners a
conveyance executed by all the partners passes all their rights in
such property.
The term "conveyance" used in said provision, which is taken from
Section 10 of the American Uniform Partnership Act, includes a
mortgage.
Interpreting Sec. 10 of the Uniform Partnership Act, it has been held
that the right to mortgage is included in the right to convey. This is
different from the rule in agency that a special power to sell excludes
the power to mortgage (Art. 1879).
As indisputable as the propositions and principles just stated is that
the cause of action in Civil Case No. Q-36485 is barred by prior
judgment. The right subsumed in that cause is the negation of the
mortgage, postulated on the claim that the parcels of land mortgaged
by the Lims to Syjuco did not in truth belong to them but to the
partnership. Assuming this to be so, the right could have been
asserted at the time that the Lims instituted their first action on
December 24, 1968 in the Manila Court of First Instance, Civil Case
No. 75180, or when they filed their subsequent actions: Civil Case
No. 112762, on December 19, 1977; Civil Case No. 83-19018, in
1983, and Civil Case No. Q-39294, also in 1983. The claim could
have been set up by the Lims, as members composing the
partnership, "Heirs of Hugo Lim." It could very well have been put
forth by the partnership itself, as co-plaintiff in the corresponding
complaints, considering that the actions involved property supposedly
belonging to it and were being prosecuted by the entire membership
of the partnership, and therefore, the partnership was in actuality, the
real party in interest. In fact, consistently with the Lims' theory, they
should be regarded, in all the actions presented by them, as having
sued for vindication, not of their individual rights over the property
mortgaged, but those of the partnership. There is thus no reason to
distinguish between the Lims, as individuals, and the partnership
itself, since the former constituted the entire membership of the latter.
In other words, despite the concealment of the existence of the
partnership, for all intents and purposes and consistently with the
Lims' own theory, it was that partnership which was the real party in
interest in all the actions; it was actually represented in said actions
by all the individual members thereof, and consequently, those
members' acts, declarations and omissions cannot be deemed to be
simply the individual acts of said members, but in fact and in law,
those of the partnership.
What was done by the Lims — or by the partnership of which they
were the only members-was to split their cause of action in violation
of the well known rule that only one suit may be instituted for a single
cause of action. 44 The right sought to be enforced by them in all
their actions was, at bottom, to strike down the mortgage constituted
in favor of Syjuco, a right which, in their view, resulted from several
circumstances, namely that the mortgage was constituted over
property belonging to the partnership without the latter's authority;
that the principal obligation thereby secured was usurious; that the
publication of the notice of foreclosure sale was fatally defective,
circumstances which had already taken place at the time of the
institution of the actions. They instituted four (4) actions for the same
purpose on one ground or the other, making each ground the subject
of a separate action. Upon these premises, application of the
sanction indicated by law is caned for, i.e., the judgment on the merits
in any one is available as a bar in the others.
The first judgment-rendered in Civil Case No. 75180 and affirmed by
both the Court of Appeals (CA-G.R. No. 51752) and this Court (G.R.
No. L-45752) should therefore have barred all the others, all the
requisites of res judicata being present. The judgment was a final and
executory judgment; it had been rendered by a competent court; and
there was, between the first and subsequent cases, not only identity
of subject-matter and of cause of action, but also of parties. As
already pointed out, the plaintiffs in the first four (4) actions, the Lims,
were representing exactly the same claims as those of the
partnership, the plaintiff in the fifth and last action, of which
partnership they were the only members, and there was hence no
substantial difference as regards the parties plaintiff in all the actions.
Under the doctrine of res judicata, the judgment in the first was and
should have been regarded as conclusive in all other, actions not only
"with respect to the matter directly adjudged," but also "as to any
other matter that could have been raised in relation thereto. " 46 It
being indisputable that the matter of the partnership's being the
owner of the mortgaged properties "could have been raised in
relation" to those expressly made issuable in the first action, it follows
that that matter could not be re-litigated in the last action, the fifth.
Though confronted with the facts thus precluding the respondent
partnership's claim to the property under both the principle of
estoppel and the provisions of Article 1819, last paragraph, of the
Civil Code, as well as the familiar doctrine of res judicata, the
respondent Judge refused to act on Syjuco's motions on the ground
that he no longer had jurisdiction to do so because they were filed
after judgment by default against Syjuco, which failed to answer the
complaint despite valid service of summons, had been rendered and
become final. The sheriffs return, however, creates grave doubts
about the correctness of the Judge's basic premise that summons
had been validly served on Syjuco. For one thing, the return 47 is
unspecific about where service was effected. No safe conclusion
about the place of service can be made from its reference to a former
and a present office of Syjuco in widely separate locations, with
nothing to indicate whether service was effected at one address or
the other, or even at both. A more serious defect is the failure to
name the person served who is, with equal ambiguity, identified only
as "the Manager" of the defendant corporation (petitioner herein).
Since the sheriffs return constitutes primary evidence of the manner
and incidents of personal service of a summons, the Rules are quite
specific about what such a document should contain:
SEC. 20. Proof of service. — The proof of service of a summons shall
be made in writing by the server and shall set forth the manner, place
and date of service; shall specify any papers which have been served
with the process and the name of the person who received the same;
and shall be sworn to when made by a person other than a sheriff or
his deputy.
In the case of Delta Motor Sales Corporation vs. Mangosing it was
held that:"
(a) strict compliance with the mode of service is necessary to confer
jurisdiction of the court over a corporation. The officer upon whom
service is made must be one who is named in the statute; otherwise
Page 12 of 19
the service is insufficient. So, where the statute requires that in the
case of a domestic corporation summons should be served on 'the
president or head of the corporation, secretary, treasurer, cashier or
managing agent thereof, service of summons on the secretary's wife
did not confer jurisdiction over the corporation in the foreclosure
proceeding against it. Hence, the decree of foreclosure and the
deficiency judgment were void and should be vacated (Reader vs.
District Court, 94 Pacific 2nd 858).
The purpose is to render it reasonably certain that the corporation will
receive prompt and proper notice in an action against it or to insure
that the summons be served on a representative so integrated with
the corporation that such person will know what to do with the legal
papers served on him. In other words, 'to bring home to the
corporation notice of the filing of the action'. (35 A C.J.S. 288 citing
Jenkins vs. Lykes Bros. S.S. Co., 48 F. Supp. 848; MacCarthy vs.
Langston, D.C. Fla., 23 F.R.D. 249).
The liberal construction rule cannot be invoked and utilized as a
substitute for the plain legal requirements as to the manner in which
summons should be served on a domestic corporation (U.S. vs.
Mollenhauer Laboratories, Inc., 267 Fed. Rep. 2nd 260).'
The rule cannot be any less exacting as regards adherence to the
requirements of proof of service, it being usually by such proof that
sufficiency of compliance with the prescribed mode of service is
measured. Here the only proof of service of summons is the
questioned sheriff's return which, as already pointed out, is not only
vague and unspecific as to the place of service, but also neglects to
Identify by name the recipient of the summons as required by Rule
20, Section 14, of the Rules of Court. Where the sheriffs return is
defective the presumption of regularity in the performance of official
functions will not lie. 50 The defective sheriffs return thus being
insufficient and incompetent to prove that summons was served in
the manner prescribed for service upon corporations, there is no
alternative to affirming the petitioner's claim that it had not been
validly summoned in Civil Case No. Q-36485. It goes without saying
that lacking such valid service, the Trial Court did not acquire
jurisdiction over the petitioner Syjuco, rendering null and void all
subsequent proceedings and issuances in the action from the order
of default up to and including the judgment by default and the order
for its execution.
The respondents' contention that the petition is in effect an action to
annul a judgment which is within the exclusive original jurisdiction of
the Court of Appeals has already been answered in Matanguihan vs.
Tengco where, by declaring that an action for annulment of judgment
is not a plain, speedy and adequate remedy, this Court in effect
affirmed that certiorari is an appropriate remedy against judgments or
proceedings alleged to have been rendered or had without valid
service of summons.
Respondent Judge Castro begged the question when, instead of
resolving on the merits the issue of the invalidity of his default
judgment and of the proceedings leading thereto because of absence
of valid service of summons on the defendant, which had been
expressly raised in the defendant's motion for reconsideration, he
simply refused to do so on the excuse that he had lost jurisdiction
over the case. This refusal was, in the premises, a grave abuse of
judicial discretion which must be rectified.
What has been said makes unnecessary any further proceedings in
the Court below, which might otherwise be indicated by the
consideration that two of the postulates of petitioner's unresolved
motions which the Court considers equally as decisive as res
judicata, to wit: estoppel by silence and Article 1819, last paragraph,
of the Civil Code, do not constitute grounds for a motion to dismiss
under rule 16, of the Rules of Court. Such a step would only cause
further delay. And delay has been the bane of petitioner's cause,
defying through all these years all its efforts to collect on a just debt.
The undenied and undisputable facts make it perfectly clear that the
claim to the mortgaged property belatedly and in apparent bad faith
pressed by the respondent partnership is foreclosed by both law and
equity. Further proceedings will not make this any clearer than it
already is. The Court is clothed with ample authority, in such a case,
to call a halt to all further proceedings and pronounce judgment on
the basis of what is already manifestly of record.
So much for the merits; the consequences that should attend the
inexcusable and indefensible conduct of the respondents Lims, the
respondent partnership and their counsel, Atty. Paterno R. Canlas,
should now be addressed. That the Lims and their partnership acted
in bad faith and with intent to defraud is manifest in the record of their
actuations, presenting as they did, piecemeal and in one case after
another, defenses to the foreclosure or claims in derogation thereof
that were available to them from the very beginning — actuations that
were to stave off the liquidation of an undenied debt for more than
twenty years and culminated in the clandestine filing and prosecution
of the action subject of the present petition.
What has happened here, it bears repeating, is nothing less than an
abuse of process, a trifling with the courts and with the rights of
access thereto, for which Atty. Canlas must share responsibility
equally with his clients. The latter could not have succeeded so well
in obstructing the course of justice without his aid and advice and his
tireless espousal of their claims and pretensions made in the various
cases chronicled here. That the cause to which he lent his advocacy
was less than just or worthy could not have escaped him, if not at the
start of his engagement, in the years that followed when with his
willing assistance, if not instigation, it was shuttled from one forum to
another after each setback. This Court merely stated what is obvious
and cannot be gainsaid when, in Surigao Mineral Reservation Board
vs. Cloribel, 55 it held that a party's lawyer of record has control of
the proceedings and that '(w)hatever steps his client takes should be
within his knowledge and responsibility."
In Prudential Bank vs. Castro, strikingly similar actuations in a case,
which are described in the following paragraph taken from this
Court's decision therein:
Respondents' foregoing actuations reveal an 'unholy alliance'
between them and a clear indication of partiality for the party
represented by the other to the detriment of the objective
dispensation of justice. Writs of Attachment and Execution were
issued and implemented with lightning speed; the case itself was
railroaded to a swift conclusion through a similar judgment;
astronomical sums were awarded as damages and attorney's fees;
and topping it all, the right to appeal was foreclosed by clever
maneuvers," and which, the Court found, followed a pattern of
conduct in other cases of which judicial notice was taken, were
deemed sufficient cause for disbarment.
Atty. Canlas even tried to mislead this Court by claiming that he
became the Lims' lawyer only in 1977, when the record indubitably
shows that he has represented them since September 9, 1972 when
he first appeared for them to prosecute their appeal in Civil Case No.
75180. 58 He has also quite impenitently disclaimed a duty to inform
opposing counsel in Civil Case No. Q-39294 of the existence of Civil
Case No. Q-36485, as plaintiffs' counsel in both actions, even while
the former, which involved the same mortgage, was already being
litigated when the latter was filed, although in the circumstances such
disclosure was required by the ethics of his profession, if not indeed
by his lawyer's oath.
A clear case also exists for awarding at least nominal damages to
petitioner, though damages are not expressly prayed for, under the
general prayer of the petition for "such other reliefs as may be just
and equitable under the premises," and the action being not only of
certiorari and prohibition, but also of mandamus-in which the payment
of "damages sustained by the petitioner by reason of the wrongful
acts of the defendant' is expressly authorized.
There is no question in the Court's mind that such interests as may
have accumulated on the mortgage loan will not offset the prejudice
visited upon the petitioner by the excruciatingly long delay in the
satisfaction of said debt that the private respondents have engineered
and fomented.
These very same considerations dictate the imposition of exemplary
damages in accordance with Art. 2229 of the Civil Code.
WHEREFORE, so that complete justice may be dispensed here and,
as far as consistent with that end, all the matters and incidents with
which these proceedings are concerned may be brought to a swift
conclusion:
(1) the assailed judgment by default in Civil Case No.Q-36485, the
writ of execution and all other orders issued in implementation
thereof, and all proceedings in the case leading to said judgment after
the filing of the complaint are DECLARED null and void and are
hereby SET ASIDE; and the complaint in said case is DISMISSED for
being barred by prior judgment and estoppel, and for lack of merit;
(2) the City Sheriff of Manila is ORDERED, upon receipt of this
Decision, to schedule forthwith and thereafter conduct with all due
dispatch the sale at public auction of the mortgaged property in
question for the satisfaction of the mortgage debt of the respondents
Page 13 of 19
Lims to petitioner, in the principal amount of P2,460,000.00 as found
in the amended decision in Civil Case No. 75180 of the Court of First
Instance of Manila, interests thereon at the rate of twelve (12%)
percent per annum from November 8, 1967 until the date of sale, plus
such other and additional sums for commissions, expenses, fees, etc.
as may be lawfully chargeable in extrajudicial foreclosure and sale
proceedings;
(3) the private respondents, their successors and assigns, are
PERPETUALLY ENJOINED from taking any action whatsoever to
obstruct, delay or prevent said auction sale;
(4) the private respondents (the Lims, the Partnership of the Heirs of
Hugo Lim and Atty. Paterno R. Canlas) are sentenced, jointly and
severally, to pay the petitioner P25,000.00 as nominal damages and
P100,000.00 as exemplary damages, as well as treble costs; and
(5) let this matter be referred to the Integrated Bar of the Philippines
for investigation, report, and recommendation insofar as the conduct
of Atty. Canlas as counsel in this case and in the other cases
hereinabove referred to is concerned. SO ORDERED.
6LIWANAG and REYES vs. WORKMEN'S COMPENSATION
COMMISSION
G.R. No. L-12164 May 22, 1959
Appellants Benito Liwanag and Maria Liwanag Reyes are co-owners
of Liwanag Auto Supply, a commercial guard who while in line of
duty, was skilled by criminal hands. His widow Ciriaca Vda. de
Balderama and minor children Genara, Carlos and Leogardo, all
surnamed Balderama, in due time filed a claim for compensation with
the Workmen's Compensation Commission, which was granted in an
award worded as follows:
WHEREFORE, the order of the referee under consideration should
be, as it is hereby, affirmed and respondents Benito Liwanag and
Maria Liwanag Reyes, ordered.
1. To pay jointly and severally the amount of three thousand Four
Hundred Ninety-Four and 40/100 (P3,494.40) Pesos to the claimants
in lump sum; and
To pay to the Workmen's Compensation Funds the sum of P4.00
(including P5.00 for this review) as fees, pursuant to Section 55 of the
Act.
In appealing the case to this Tribunal, 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. They
argue 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.
At first blush appellants' contention would seem to be well, for
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 from which it
could be gathered that their liability must be solidary. Arts. 1711 and
1712 of the new Civil Code provide:
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.
The provisions of the new Civil Code above quoted taken together
with those of Section 2 of the Workmen's Compensation Act,
reasonably indicate that in compensation cases, the liability of
business partners, like appellants, should be solidary; otherwise, the
right of the employee may be defeated, or at least crippled. If the
responsibility of appellants were to be merely joint and solidary, and
one of them happens to be insolvent, the amount awarded to the
appellees would only be partially satisfied, which is evidently contrary
to the intent and purposes of the Act. In the previous cases we have
already held that the Workmen's Compensation Act should be
construed fairly, reasonably and liberally in favor of and for the benefit
of the employee and his dependents; that all doubts as to the right of
compensation resolved in his favor; and that it should be interpreted
to promote its purpose. Accordingly, the present controversy should
be decided in favor of the appellees.
Moreover, Art. 1207 of the new Civil Code provides:
. . . . There is solidary liability only when the obligation expressly so
states, or when the law or the nature of the obligation requires
solidarity.
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.
Wherefore, finding no error in the award appealed from, the same is
hereby affirmed, with costs against appellants.
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.
7PIONEER INSURANCE & SURETY CORPORATION vs. CA G.R.
No. 84197 July 28, 1989
The subject matter of these consolidated petitions is the decision of
the Court of Appeals in CA-G.R. CV No. 66195 which modified the
decision of the then Court of First Instance of Manila in Civil Case No.
66135. The plaintiffs complaint (petitioner in G.R. No. 84197) against
all defendants (respondents in G.R. No. 84197) was dismissed but in
all other respects the trial court's decision was affirmed.
The dispositive portion of the trial court's decision reads as follows:
WHEREFORE, judgment is rendered against defendant Jacob S. Lim
requiring Lim to pay plaintiff the amount of P311,056.02, with interest
at the rate of 12% per annum compounded monthly; plus 15% of the
amount awarded to plaintiff as attorney's fees from July 2,1966, until
full payment is made; plus P70,000.00 moral and exemplary
damages.
It is found in the records that the cross party plaintiffs incurred
additional miscellaneous expenses aside from Pl51,000.00,,making a
total of P184,878.74. Defendant Jacob S. Lim is further required to
pay cross party plaintiff, Bormaheco, the Cervanteses one-half and
Maglana the other half, the amount of Pl84,878.74 with interest from
the filing of the cross-complaints until the amount is fully paid; plus
moral and exemplary damages in the amount of P184,878.84 with
interest from the filing of the cross-complaints until the amount is fully
Page 14 of 19
paid; plus moral and exemplary damages in the amount of
P50,000.00 for each of the two Cervanteses.
Furthermore, he is required to pay P20,000.00 to Bormaheco and the
Cervanteses, and another P20,000.00 to Constancio B. Maglana as
attorney's fees. xxx xxx xxx
WHEREFORE, in view of all above, the complaint of plaintiff Pioneer
against defendants Bormaheco, the Cervanteses and Constancio B.
Maglana, is dismissed. Instead, plaintiff is required to indemnify the
defendants Bormaheco and the Cervanteses the amount of
P20,000.00 as attorney's fees and the amount of P4,379.21, per year
from 1966 with legal rate of interest up to the time it is paid.
Furthermore, the plaintiff is required to pay Constancio B. Maglana
the amount of P20,000.00 as attorney's fees and costs.
No moral or exemplary damages is awarded against plaintiff for this
action was filed in good faith. The fact that the properties of the
Bormaheco and the Cervanteses were attached and that they were
required to file a counterbond in order to dissolve the attachment, is
not an act of bad faith. When a man tries to protect his rights, he
should not be saddled with moral or exemplary damages.
Furthermore, the rights exercised were provided for in the Rules of
Court, and it was the court that ordered it, in the exercise of its
discretion.
No damage is decided against Malayan Insurance Company, Inc., the
third-party defendant, for it only secured the attachment prayed for by
the plaintiff Pioneer. If an insurance company would be liable for
damages in performing an act which is clearly within its power and
which is the reason for its being, then nobody would engage in the
insurance business. No further claim or counter-claim for or against
anybody is declared by this Court. (Rollo - G.R. No. 24197, pp. 15-
16)
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in
the airline business as owner-operator of Southern Air Lines (SAL) a
single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA)
and Lim entered into and executed a sales contract (Exhibit A) for the
sale and purchase of two (2) DC-3A Type aircrafts and one (1) set of
necessary spare parts for the total agreed price of US $109,000.00 to
be paid in installments. One DC-3 Aircraft with Registry No. PIC-718,
arrived in Manila on June 7,1965 while the other aircraft, arrived in
Manila on July 18,1965.
On May 22, 1965, Pioneer Insurance and Surety Corporation
(Pioneer, petitioner in G.R. No. 84197) as surety executed and issued
its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its
principal, Lim, for the balance price of the aircrafts and spare parts.
It appears that Border Machinery and Heavy Equipment Company,
Inc. (Bormaheco), Francisco and Modesto Cervantes (Cervanteses)
and Constancio Maglana (respondents in both petitions) contributed
some funds used in the purchase of the above aircrafts and spare
parts. The funds were supposed to be their contributions to a new
corporation proposed by Lim to expand his airline business. They
executed two (2) separate indemnity agreements (Exhibits D-1 and
D-2) in favor of Pioneer, one signed by Maglana and the other jointly
signed by Lim for SAL, Bormaheco and the Cervanteses. The
indemnity agreements stipulated that the indemnitors principally
agree and bind themselves jointly and severally to indemnify and hold
and save harmless Pioneer from and against any/all damages,
losses, costs, damages, taxes, penalties, charges and expenses of
whatever kind and nature which Pioneer may incur in consequence of
having become surety upon the bond/note and to pay, reimburse and
make good to Pioneer, its successors and assigns, all sums and
amounts of money which it or its representatives should or may pay
or cause to be paid or become liable to pay on them of whatever kind
and nature.
On June 10, 1965, Lim doing business under the name and style of
SAL executed in favor of Pioneer as deed of chattel mortgage as
security for the latter's suretyship in favor of the former. It was
stipulated therein that Lim transfer and convey to the surety the two
aircrafts. The deed (Exhibit D) was duly registered with the Office of
the Register of Deeds of the City of Manila and with the Civil
Aeronautics Administration pursuant to the Chattel Mortgage Law and
the Civil Aeronautics Law (Republic Act No. 776), respectively.
Lim defaulted on his subsequent installment payments prompting
JDA to request payments from the surety. Pioneer paid a total sum of
P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the
said chattel mortgage before the Sheriff of Davao City. The
Cervanteses and Maglana, however, filed a third party claim alleging
that they are co-owners of the aircrafts,
On July 19, 1966, Pioneer filed an action for judicial foreclosure with
an application for a writ of preliminary attachment against Lim and
respondents, the Cervanteses, Bormaheco and Maglana.
In their Answers, Maglana, Bormaheco and the Cervanteses filed
cross-claims against Lim alleging that they were not privies to the
contracts signed by Lim and, by way of counterclaim, sought for
damages for being exposed to litigation and for recovery of the sums
of money they advanced to Lim for the purchase of the aircrafts in
question.
After trial on the merits, a decision was rendered holding Lim liable to
pay Pioneer but dismissed Pioneer's complaint against all other
defendants.
As stated earlier, the appellate court modified the trial court's decision
in that the plaintiffs complaint against all the defendants was
dismissed. In all other respects the trial court's decision was affirmed.
We first resolve G.R. No. 84197.
Petitioner Pioneer Insurance and Surety Corporation avers that:
RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED
WHEN IT DISMISSED THE APPEAL OF PETITIONER ON THE
SOLE GROUND THAT PETITIONER HAD ALREADY COLLECTED
THE PROCEEDS OF THE REINSURANCE ON ITS BOND IN
FAVOR OF THE JDA AND THAT IT CANNOT REPRESENT A
REINSURER TO RECOVER THE AMOUNT FROM HEREIN
PRIVATE RESPONDENTS AS DEFENDANTS IN THE TRIAL
COURT. (Rollo - G. R. No. 84197, p. 10)
The petitioner questions the following findings of the appellate court:
We find no merit in plaintiffs appeal. It is undisputed that plaintiff
Pioneer had reinsured its risk of liability under the surety bond in
favor of JDA and subsequently collected the proceeds of such
reinsurance in the sum of P295,000.00. Defendants' alleged
obligation to Pioneer amounts to P295,000.00, hence, plaintiffs
instant action for the recovery of the amount of P298,666.28 from
defendants will no longer prosper. Plaintiff Pioneer is not the real
party in interest to institute the instant action as it does not stand to
be benefited or injured by the judgment.
Plaintiff Pioneer's contention that it is representing the reinsurer to
recover the amount from defendants, hence, it instituted the action is
utterly devoid of merit. Plaintiff did not even present any evidence that
it is the attorney-in-fact of the reinsurance company, authorized to
institute an action for and in behalf of the latter. To qualify a person to
be a real party in interest in whose name an action must be
prosecuted, he must appear to be the present real owner of the right
sought to be enforced (Moran, Vol. I, Comments on the Rules of
Court, 1979 ed., p. 155). It has been held that the real party in
interest is the party who would be benefited or injured by the
judgment or the party entitled to the avails of the suit (Salonga v.
Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in
interest is meant a present substantial interest as distinguished from
a mere expectancy or a future, contingent, subordinate or
consequential interest (Garcia v. David, 67 Phil. 27; Oglleaby v.
Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v.
Germans, 1 NW 2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669,
quoting 47 C.V. 35).
Based on the foregoing premises, plaintiff Pioneer cannot be
considered as the real party in interest as it has already been paid by
the reinsurer the sum of P295,000.00 — the bulk of defendants'
alleged obligation to Pioneer.
In addition to the said proceeds of the reinsurance received by
plaintiff Pioneer from its reinsurer, the former was able to foreclose
extra-judicially one of the subject airplanes and its spare engine,
realizing the total amount of P37,050.00 from the sale of the
mortgaged chattels. Adding the sum of P37,050.00, to the proceeds
of the reinsurance amounting to P295,000.00, it is patent that plaintiff
has been overpaid in the amount of P33,383.72 considering that the
total amount it had paid to JDA totals to only P298,666.28. To allow
plaintiff Pioneer to recover from defendants the amount in excess of
P298,666.28 would be tantamount to unjust enrichment as it has
Page 15 of 19
already been paid by the reinsurance company of the amount plaintiff
has paid to JDA as surety of defendant Lim vis-a-vis defendant Lim's
liability to JDA. Well settled is the rule that no person should unjustly
enrich himself at the expense of another (Article 22, New Civil Code).
(Rollo-84197, pp. 24-25).
The petitioner contends that-(1) it is at a loss where respondent court
based its finding that petitioner was paid by its reinsurer in the
aforesaid amount, as this matter has never been raised by any of the
parties herein both in their answers in the court below and in their
respective briefs with respondent court; (Rollo, p. 11) (2) even
assuming hypothetically that it was paid by its reinsurer, still none of
the respondents had any interest in the matter since the reinsurance
is strictly between the petitioner and the re-insurer pursuant to section
91 of the Insurance Code; (3) pursuant to the indemnity agreements,
the petitioner is entitled to recover from respondents Bormaheco and
Maglana; and (4) the principle of unjust enrichment is not applicable
considering that whatever amount he would recover from the co-
indemnitor will be paid to the reinsurer.
The records belie the petitioner's contention that the issue on the
reinsurance money was never raised by the parties.
A cursory reading of the trial court's lengthy decision shows that two
of the issues threshed out were:,xxx xxx xxx
1. Has Pioneer a cause of action against defendants with respect to
so much of its obligations to JDA as has been paid with reinsurance
money?
2. If the answer to the preceding question is in the negative, has
Pioneer still any claim against defendants, considering the amount it
has realized from the sale of the mortgaged properties? (Record on
Appeal, p. 359, Annex B of G.R. No. 84157).
In resolving these issues, the trial court made the following findings:
It appearing that Pioneer reinsured its risk of liability under the surety
bond it had executed in favor of JDA, collected the proceeds of such
reinsurance in the sum of P295,000, and paid with the said amount
the bulk of its alleged liability to JDA under the said surety bond, it is
plain that on this score it no longer has any right to collect to the
extent of the said amount.
On the question of why it is Pioneer, instead of the reinsurance (sic),
that is suing defendants for the amount paid to it by the reinsurers,
notwithstanding that the cause of action pertains to the latter, Pioneer
says: The reinsurers opted instead that the Pioneer Insurance &
Surety Corporation shall pursue alone the case.. . . . Pioneer
Insurance & Surety Corporation is representing the reinsurers to
recover the amount.' In other words, insofar as the amount paid to it
by the reinsurers Pioneer is suing defendants as their attorney-in-fact.
But in the first place, there is not the slightest indication in the
complaint that Pioneer is suing as attorney-in- fact of the reinsurers
for any amount. Lastly, and most important of all, Pioneer has no right
to institute and maintain in its own name an action for the benefit of
the reinsurers. It is well-settled that an action brought by an attorney-
in-fact in his own name instead of that of the principal will not prosper,
and this is so even where the name of the principal is disclosed in the
complaint.
Section 2 of Rule 3 of the Old Rules of Court provides that 'Every
action must be prosecuted in the name of the real party in interest.'
This provision is mandatory. The real party in interest is the party who
would be benefitted or injured by the judgment or is the party entitled
to the avails of the suit.
This Court has held in various cases that an attorney-in-fact is not a
real party in interest, that there is no law permitting an action to be
brought by an attorney-in-fact. Arroyo v. Granada and Gentero, 18
Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12;
Filipinos Industrial Corporation v. San Diego G.R. No. L- 22347,1968,
23 SCRA 706, 710-714.
The total amount paid by Pioneer to JDA is P299,666.29. Since
Pioneer has collected P295,000.00 from the reinsurers, the uninsured
portion of what it paid to JDA is the difference between the two
amounts, or P3,666.28. This is the amount for which Pioneer may
sue defendants, assuming that the indemnity agreement is still valid
and effective. But since the amount realized from the sale of the
mortgaged chattels are P35,000.00 for one of the airplanes and
P2,050.00 for a spare engine, or a total of P37,050.00, Pioneer is still
overpaid by P33,383.72. Therefore, Pioneer has no more claim
against defendants. (Record on Appeal, pp. 360-363).
The payment to the petitioner made by the reinsurers was not
disputed in the appellate court. Considering this admitted payment,
the only issue that cropped up was the effect of payment made by the
reinsurers to the petitioner. Therefore, the petitioner's argument that
the respondents had no interest in the reinsurance contract as this is
strictly between the petitioner as insured and the reinsuring company
pursuant to Section 91 (should be Section 98) of the Insurance Code
has no basis.
In general a reinsurer, on payment of a loss acquires the same rights
by subrogation as are acquired in similar cases where the original
insurer pays a loss (Universal Ins. Co. v. Old Time Molasses Co.
C.C.A. La., 46 F 2nd 925).
The rules of practice in actions on original insurance policies are in
general applicable to actions or contracts of reinsurance. (Delaware,
Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7
Ann. Con. 1134).
Hence the applicable law is Article 2207 of the new Civil Code, to wit:
Art. 2207. If the plaintiffs property has been insured, and he has
received indemnity from the insurance company for the injury or loss
arising out of the wrong or breach of contract complained of, the
insurance company shall be subrogated to the rights of the insured
against the wrongdoer or the person who has violated the contract. If
the amount paid by the insurance company does not fully cover the
injury or loss, the aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or injury.
Interpreting the aforesaid provision, we ruled in the case of Phil. Air
Lines, Inc. v. Heald Lumber Co. (101 Phil. 1031 [1957]) which we
subsequently applied in Manila Mahogany Manufacturing Corporation
v. Court of Appeals (154 SCRA 650 [1987]):
Note that if a property is insured and the owner receives the
indemnity from the insurer, it is provided in said article that the insurer
is deemed subrogated to the rights of the insured against the
wrongdoer and if the amount paid by the insurer does not fully cover
the loss, then the aggrieved party is the one entitled to recover the
deficiency. Evidently, under this legal provision, the real party in
interest with regard to the portion of the indemnity paid is the insurer
and not the insured. (Emphasis supplied).
It is clear from the records that Pioneer sued in its own name and not
as an attorney-in-fact of the reinsurer.
Accordingly, the appellate court did not commit a reversible error in
dismissing the petitioner's complaint as against the respondents for
the reason that the petitioner was not the real party in interest in the
complaint and, therefore, has no cause of action against the
respondents.
Nevertheless, the petitioner argues that the appeal as regards the
counter indemnitors should not have been dismissed on the premise
that the evidence on record shows that it is entitled to recover from
the counter indemnitors. It does not, however, cite any grounds
except its allegation that respondent "Maglanas defense and
evidence are certainly incredible" (p. 12, Rollo) to back up its
contention.
On the other hand, we find the trial court's findings on the matter
replete with evidence to substantiate its finding that the counter-
indemnitors are not liable to the petitioner. The trial court stated:
Apart from the foregoing proposition, the indemnity agreement
ceased to be valid and effective after the execution of the chattel
mortgage.
Testimonies of defendants Francisco Cervantes and Modesto
Cervantes.
Pioneer Insurance, knowing the value of the aircrafts and the spare
parts involved, agreed to issue the bond provided that the same
would be mortgaged to it, but this was not possible because the
planes were still in Japan and could not be mortgaged here in the
Philippines. As soon as the aircrafts were brought to the Philippines,
they would be mortgaged to Pioneer Insurance to cover the bond,
and this indemnity agreement would be cancelled.
The following is averred under oath by Pioneer in the original
complaint:
Page 16 of 19
The various conflicting claims over the mortgaged properties have
impaired and rendered insufficient the security under the chattel
mortgage and there is thus no other sufficient security for the claim
sought to be enforced by this action.
This is judicial admission and aside from the chattel mortgage there is
no other security for the claim sought to be enforced by this action,
which necessarily means that the indemnity agreement had ceased
to have any force and effect at the time this action was instituted. Sec
2, Rule 129, Revised Rules of Court.
Prescinding from the foregoing, Pioneer, having foreclosed the
chattel mortgage on the planes and spare parts, no longer has any
further action against the defendants as indemnitors to recover any
unpaid balance of the price. The indemnity agreement was ipso jure
extinguished upon the foreclosure of the chattel mortgage. These
defendants, as indemnitors, would be entitled to be subrogated to the
right of Pioneer should they make payments to the latter. Articles
2067 and 2080 of the New Civil Code of the Philippines.
Independently of the preceding proposition Pioneer's election of the
remedy of foreclosure precludes any further action to recover any
unpaid balance of the price.
SAL or Lim, having failed to pay the second to the eight and last
installments to JDA and Pioneer as surety having made of the
payments to JDA, the alternative remedies open to Pioneer were as
provided in Article 1484 of the New Civil Code, known as the Recto
Law.
Pioneer exercised the remedy of foreclosure of the chattel mortgage
both by extrajudicial foreclosure and the instant suit. Such being the
case, as provided by the aforementioned provisions, Pioneer shall
have no further action against the purchaser to recover any unpaid
balance and any agreement to the contrary is void.' Cruz, et al. v.
Filipinas Investment & Finance Corp. No. L- 24772, May 27,1968, 23
SCRA 791, 795-6.
The operation of the foregoing provision cannot be escaped from
through the contention that Pioneer is not the vendor but JDA. The
reason is that Pioneer is actually exercising the rights of JDA as
vendor, having subrogated it in such rights. Nor may the application
of the provision be validly opposed on the ground that these
defendants and defendant Maglana are not the vendee but
indemnitors. Pascual, et al. v. Universal Motors Corporation, G.R. No.
L- 27862, Nov. 20,1974, 61 SCRA 124.
The restructuring of the obligations of SAL or Lim, thru the change of
their maturity dates discharged these defendants from any liability as
alleged indemnitors. The change of the maturity dates of the
obligations of Lim, or SAL extinguish the original obligations thru
novations thus discharging the indemnitors.
The principal hereof shall be paid in eight equal successive three
months interval installments, the first of which shall be due and
payable 25 August 1965, the remainder of which ... shall be due and
payable on the 26th day x x x of each succeeding three months and
the last of which shall be due and payable 26th May 1967.
However, at the trial of this case, Pioneer produced a memorandum
executed by SAL or Lim and JDA, modifying the maturity dates of the
obligations, as follows:
The principal hereof shall be paid in eight equal successive three
month interval installments the first of which shall be due and payable
4 September 1965, the remainder of which ... shall be due and
payable on the 4th day ... of each succeeding months and the last of
which shall be due and payable 4th June 1967.
Not only that, Pioneer also produced eight purported promissory
notes bearing maturity dates different from that fixed in the aforesaid
memorandum; the due date of the first installment appears as
October 15, 1965, and those of the rest of the installments, the 15th
of each succeeding three months, that of the last installment being
July 15, 1967.
These restructuring of the obligations with regard to their maturity
dates, effected twice, were done without the knowledge, much less,
would have it believed that these defendants Maglana (sic). Pioneer's
official Numeriano Carbonel would have it believed that these
defendants and defendant Maglana knew of and consented to the
modification of the obligations. But if that were so, there would have
been the corresponding documents in the form of a written notice to
as well as written conformity of these defendants, and there are no
such document. The consequence of this was the extinguishment of
the obligations and of the surety bond secured by the indemnity
agreement which was thereby also extinguished. Applicable by
analogy are the rulings of the Supreme Court in the case of
Kabankalan Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of
Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538.
Art. 2079. An extension granted to the debtor by the creditor without
the consent of the guarantor extinguishes the guaranty The mere
failure on the part of the creditor to demand payment after the debt
has become due does not of itself constitute any extension time
referred to herein, (New Civil Code).'
Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F.
Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.
Pioneer's liability as surety to JDA had already prescribed when
Pioneer paid the same. Consequently, Pioneer has no more cause of
action to recover from these defendants, as supposed indemnitors,
what it has paid to JDA. By virtue of an express stipulation in the
surety bond, the failure of JDA to present its claim to Pioneer within
ten days from default of Lim or SAL on every installment, released
Pioneer from liability from the claim.
Therefore, Pioneer is not entitled to exact reimbursement from these
defendants thru the indemnity.
Art. 1318. Payment by a solidary debtor shall not entitle him to
reimbursement from his co-debtors if such payment is made after the
obligation has prescribed or became illegal.
These defendants are entitled to recover damages and attorney's
fees from Pioneer and its surety by reason of the filing of the instant
case against them and the attachment and garnishment of their
properties. The instant action is clearly unfounded insofar as plaintiff
drags these defendants and defendant Maglana.' (Record on Appeal,
pp. 363-369, Rollo of G.R. No. 84157).
We find no cogent reason to reverse or modify these findings.
Hence, it is our conclusion that the petition in G.R. No. 84197 is not
meritorious.
We now discuss the merits of G.R. No. 84157.
Petitioner Jacob S. Lim poses the following issues:
l. What legal rules govern the relationship among co-investors whose
agreement was to do business through the corporate vehicle but who
failed to incorporate the entity in which they had chosen to invest?
How are the losses to be treated in situations where their
contributions to the intended 'corporation' were invested not through
the corporate form? This Petition presents these fundamental
questions which we believe were resolved erroneously by the Court
of Appeals ('CA'). (Rollo, p. 6).
These questions are premised on the petitioner's theory that as a
result of the failure of respondents Bormaheco, Spouses Cervantes,
Constancio Maglana and petitioner Lim to incorporate, a de facto
partnership 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. The petitioner, therefore,
questions the appellate court's findings ordering him to reimburse
certain amounts given by the respondents to the petitioner as their
contributions to the intended corporation, to wit:
However, defendant Lim should be held liable to pay his co-
defendants' cross-claims in the total amount of P184,878.74 as
correctly found by the trial court, with interest from the filing of the
cross-complaints until the amount is fully paid. Defendant Lim should
pay one-half of the said amount to Bormaheco and the Cervanteses
and the other one-half to defendant Maglana. It is established in the
records that defendant Lim had duly received the amount of
Pl51,000.00 from defendants Bormaheco and Maglana representing
the latter's participation in the ownership of the subject airplanes and
spare parts (Exhibit 58). In addition, the cross-party plaintiffs incurred
additional expenses, hence, the total sum of P 184,878.74.
We first state the principles.
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
Page 17 of 19
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 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 be liable as such in an action for
settlement of the alleged partnership and contribution (Ward v.
Brigham, 127 Mass. 24). A partnership relation between certain
stockholders 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).
In the instant case, it is to be noted that the petitioner was declared
non-suited for his failure to appear during the pretrial despite
notification. In his answer, the petitioner denied having received any
amount from respondents Bormaheco, the Cervanteses and
Maglana. The trial court and the appellate court, however, found
through Exhibit 58, that the petitioner received the amount of
P151,000.00 representing the participation of Bormaheco and Atty.
Constancio B. Maglana in the ownership of the subject airplanes and
spare parts. The record shows that defendant Maglana gave
P75,000.00 to petitioner Jacob Lim thru the Cervanteses.
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. Maglana alleged
in his cross-claim:
... that sometime in early 1965, Jacob Lim proposed to Francisco
Cervantes and Maglana to expand his airline business. Lim was to
procure two DC-3's from Japan and secure the necessary certificates
of public convenience and necessity as well as the required permits
for the operation thereof. Maglana sometime in May 1965, gave
Cervantes his share of P75,000.00 for delivery to Lim which
Cervantes did and Lim acknowledged receipt thereof. Cervantes,
likewise, delivered his share of the undertaking. Lim in an undertaking
sometime on or about August 9,1965, promised to incorporate his
airline in accordance with their agreement and proceeded to acquire
the planes on his own account. Since then up to the filing of this
answer, Lim has refused, failed and still refuses to set up the
corporation or return the money of Maglana. (Record on Appeal, pp.
337-338).
while respondents Bormaheco and the Cervanteses alleged in their
answer, counterclaim, cross-claim and third party complaint:
Sometime in April 1965, defendant Lim lured and induced the
answering defendants to purchase two airplanes and spare parts
from Japan which the latter considered as their lawful contribution
and participation in the proposed corporation to be known as SAL.
Arrangements and negotiations were undertaken by defendant Lim.
Down payments were advanced by defendants Bormaheco and the
Cervanteses and Constancio Maglana (Exh. E- 1). Contrary to the
agreement among the defendants, defendant Lim in connivance with
the plaintiff, signed and executed the alleged chattel mortgage and
surety bond agreement in his personal capacity as the alleged
proprietor of the SAL. The answering defendants learned for the first
time of this trickery and misrepresentation of the other, Jacob Lim,
when the herein plaintiff chattel mortgage (sic) allegedly executed by
defendant Lim, thereby forcing them to file an adverse claim in the
form of third party claim. Notwithstanding repeated oral demands
made by defendants Bormaheco and Cervanteses, to defendant Lim,
to surrender the possession of the two planes and their accessories
and or return the amount advanced by the former amounting to an
aggregate sum of P 178,997.14 as evidenced by a statement of
accounts, the latter ignored, omitted and refused to comply with them.
(Record on Appeal, pp. 341-342).
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.
WHEREFORE, the instant petitions are DISMISSED. The questioned
decision of the Court of Appeals is AFFIRMED. SO ORDERED.
8VIUDA DE CHAN DIACO vs. PENG
G.R. No. L-29182 October 24, 1928
This is an appeal from a decision of the Court of First Instance of
Manila dismissing an insolvency proceeding.
It appears from the record that on June 13, 1925, the San Miguel
Brewery, Porta Pueco & Co., and Ruiz & Rementaria S. en C.
instituted insolvency proceedings against Leoncia Vda. de Chan
Diaco (alias Lao Liong Naw), alleged to be the owner of a grocery
store on Calle Nueva, Binondo, known as the store of "La Viuda de
G. G. Chan Diaco."
In their petition for the declaration of the insolvency, the above-
mentioned firms alleged, among other things, that Leoncia was
indebted to them in the sum of P26,234.47, which debt was incurred
within thirty days prior to the filing of said petition. It further appears
that other creditors have filed claims against the estate to the amount
of P50,000.
The petition for the declaration of insolvency was set down for
hearing on June 25, 1925. Leoncia did not appear at the hearing,
notwithstanding the fact that she was duly notified, and the court
declared her insolvent and ordered the sheriff to take possession of
her property, the visible part of which at that time consisting of some
merchandise, afterwards sold at public auction for P3,300. Judge
Simplicio del Rosario, in an order dated September 12, 11925,
appointed Ricardo Summers, the clerk of the Court of First Instance
of Manila, referee, authorizing him to take further evidence in regard
to the questions of fact raised by the motions of August 5th and 19th.
After various hearings and the taking of considerable testimony, the
referee, on February 18, 1926, rendered a report to the court in which
he made the following recommendations:
That the insolvent deliver to the assignee:
(a) The sum of P56,000 more or less that the "encargado" of the
insolvent's business, Chan Chiao Wa, had delivered to her on the
18th of April, 1925, which amount was in fact, on the 19th day of
April, 1925, about P56,102.65.
(b) The accounts receivable as of June 19, 1925, or that is to say, two
months after the insolvent took charge of her store, amounting to
P40,000.
(c) The amount taken for her own use and out of the business on
June 8, 1925, to wit, P2,000.
(d) Another P2,000 that on June 5, 1925, and being already insolvent,
the widow of Chan Diaco had taken from the China Banking
corporation for her personal use.
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(e) The following account books:
Libros de Acreedores Extranjeros.
Libros de Acreedores Chinos.
Libros de Deudores de Manila.
Libros de Deudores de Provincias.
Libros de Entrada y salida de efectos y mercancias para Manila y
Provincias. Libro Diario de Caja.
Libro de Sueldos de Empleados.
Libros de Balances e Inventarios.
Libro mayor de 1924 y 1925.
The report was approved by Judge del Rosario on April 14, 1926, and
the merchants Cua Ico, Chan Keep, and Simon A. Chan Bona were
ordered to show cause why they should not return that alleged
merchandise to the value of P20,000, alleged to have been delivered
to them by Leoncia, together with P5,000 in cash alleged to have
been received from her by the merchant Chua Ico between the 8th
and 11th days of June, 1925.
On April 22, 1926, the attorney for the insolvent filed her exception to
the report of the referee, which had already been approved on April
14, and on July 23, 1926, the court rendered a decision, reaffirming
its order of April 14, and ordered the insolvent to deliver to the
assignee the sum of P56,000, more or less. alleged to have been in
her possession on April 19, 1925. The court further ordered her to
surrender the books of accounts mentioned in the referee's report
together with the accounts receivable amounting to P40,000 and the
sums withdrawn by her from her current account with the China
Banking Corporation a few days prior to the declaration of insolvency;
and directed the assignee to file actions against the merchants Cua
Ico, Chan Keep, and Simon A. Chan Bona for the return by them of
the sum of P5,000 in cash, plus the merchandise valued at P20,000
delivered to them by the insolvent in fraud of her creditors.
On August 4, 1926, attorney for the insolvent filed a motion asking
the court to dismiss the proceedings against her on the ground that
they should have been brought against the partnership "Lao Liong
Naw & Co.," of which she was only a member. The alleged
partnership was evidenced by an agreement dated July 22, 1922,
and from which it appeared that on that date Lao Liong Naw
(Leoncia), Chan Chiaco Wa, Cua Yuk, Chan Bun Suy, Cahn Bun Le,
and Juan Maquitan Chan had formed a partnership with a capital of
P21,000, of which only P4,000 was contributed by Leoncia.
In view of the aforesaid motion Judge Del Rosario on August 7, 1926,
suspended for the time being the effects of the decision of July 23,
1926, and set the motion down for hearing on the 14th of August,
1926. His Honor again appointed Summers as referee.
After several hearings in which various witnesses were examined and
documents presented on behalf of both sides, the referee, on
February 28, 1927, rendered a second report, in which he found as
facts that the alleged partnership between the insolvent and some of
her relatives and employees was only a fictitious organization created
for the purpose of deceiving the Bureau of Customs and enable some
of the aforesaid relatives, who were mere coolies, to come to the we think it can be safely held that a partnership may be adjudged
Philippines under the status of merchants. He, therefore, bankrupt in the name of an ostensible partner, when such name is
recommended that the motion of the insolvent to dismiss the the name under which the partnership did business.
proceedings against her be denied.
The decision appealed from is hereby reversed, the reports and
The report was assigned for hearing on May 21, 1927. Judge Del recommendations of the referee are approved, the order for the
Rosario was then absent on leave and the matter was, therefore, dismissal of the case is set aside, and the decision of Judge Simplicio
submitted to Judge Francisco Zandueta, who had been temporarily Del Rosario dated July 23, 1926, will remain in full force and effect.
assigned to take the place of Judge Del Rosario, and on June 6, No costs will be allowed. So ordered.
1927, a decision was rendered disapproving the report of the referee.
The court, therefore, affirmed the suspension of the decision of Judge
Del Rosario, and on June 23, 1926, dismissed the insolvency
proceedings, and ordered the assignee to return to the sheriff all the
property of the insolvent which he, the sheriff, might have in his
possession. The decision further provided for leave to the petitioners
to file a new petition in insolvency against the partnership Lao Liong
Naw & Co. if they so desired. A motion for reconsideration was
presented by the assignee but was denied by the court in an order of
July 1, 1927. the assignee, thereupon, appealed to this court and
presents the following assignments of error:
1. The lower court erred in disapproving the report of the referee
dated February 28, 1927.
2. The lower court erred in dismissing the petition for the involuntary
insolvency of the merchant Leoncia Vda. de Chan Diaco (alias Lao
Liong Naw or Niew).
3. The lower court erred in ordering the filing of a new petition of
insolvency against the fictitious partnership Lao Liong Niew & Co.
and the delivery to the sheriff of all the property of the insolvency.
In our opinion, all of the assignments of error are well taken. The
evidence appearing in the record fully supports the findings of the
referee and his report should have been approved by the court below.
As to the second and third assignments of error it is to be observed
that conceding for the sake of the argument that the debts in question
were incurred by the alleged partnership, it clearly appears from the
record that said partnership, as such, has no visible assets that,
therefore, the partners individually must, jointly and severally,
respond for its debts (Code of Commerce, art. 127). As the appellee
is one of the partners and admits that she is insolvent, we can see no
reason for the dismissal of the proceedings against her. It is further to
be noted that 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) and, under this rule, it seems clear that the
alleged partnership here in question may, if necessary, be included in
the case by amendments to the insolvency petition.
We also call attention to the fact that the evidence clearly shows that
the business, alleged to have been that of the partnership, was
carried on under the name "Leoncia Vda. de Chan Diaco" or "La Vda.
de G. G. Chan Diaco," both of which are names of the appellee, and
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