G.R. No.
109248 July 3, 1995
GREGORIO F. ORTEGA, TOMAS O. DEL CASTILLO, JR., and BENJAMIN T.
BACORRO, petitioners,
vs.
HON. COURT OF APPEALS, SECURITIES AND EXCHANGE COMMISSION and
JOAQUIN L. MISA, respondents.
VITUG, J.:
The instant petition seeks a review of the decision rendered by the Court of
Appeals, dated 26 February 1993, in CA-G.R. SP No. 24638 and No. 24648
affirming in toto that of the Securities and Exchange Commission ("SEC") in
SEC AC 254.
The antecedents of the controversy, summarized by respondent Commission
and quoted at length by the appellate court in its decision, are hereunder
restated.
The law firm of ROSS, LAWRENCE, SELPH and CARRASCOSO was duly
registered in the Mercantile Registry on 4 January 1937 and reconstituted
with the Securities and Exchange Commission on 4 August 1948. The SEC
records show that there were several subsequent amendments to the
articles of partnership on 18 September 1958, to change the firm [name] to
ROSS, SELPH and CARRASCOSO; on 6 July 1965 . . . to ROSS, SELPH, SALCEDO,
DEL ROSARIO, BITO & MISA; on 18 April 1972 to SALCEDO, DEL ROSARIO,
BITO, MISA & LOZADA; on 4 December 1972 to SALCEDO, DEL ROSARIO,
BITO, MISA & LOZADA; on 11 March 1977 to DEL ROSARIO, BITO, MISA &
LOZADA; on 7 June 1977 to BITO, MISA & LOZADA; on 19 December 1980,
[Joaquin L. Misa] appellees Jesus B. Bito and Mariano M. Lozada associated
themselves together, as senior partners with respondents-appellees Gregorio
F. Ortega, Tomas O. del Castillo, Jr., and Benjamin Bacorro, as junior partners.
On February 17, 1988, petitioner-appellant wrote the respondents-appellees
a letter stating:
I am withdrawing and retiring from the firm of Bito, Misa and Lozada,
effective at the end of this month.
"I trust that the accountants will be instructed to make the proper liquidation
of my participation in the firm."
On the same day, petitioner-appellant wrote respondents-appellees another
letter stating:
"Further to my letter to you today, I would like to have a meeting with all of
you with regard to the mechanics of liquidation, and more particularly, my
interest in the two floors of this building. I would like to have this resolved
soon because it has to do with my own plans."
On 19 February 1988, petitioner-appellant wrote respondents-appellees
another letter stating:
"The partnership has ceased to be mutually satisfactory because of the
working conditions of our employees including the assistant attorneys. All my
efforts to ameliorate the below subsistence level of the pay scale of our
employees have been thwarted by the other partners. Not only have they
refused to give meaningful increases to the employees, even attorneys, are
dressed down publicly in a loud voice in a manner that deprived them of
their self-respect. The result of such policies is the formation of the union,
including the assistant attorneys."
On 30 June 1988, petitioner filed with this Commission's Securities
Investigation and Clearing Department (SICD) a petition for dissolution and
liquidation of partnership, docketed as SEC Case No. 3384 praying that the
Commission:
"1. Decree the formal dissolution and order the immediate liquidation of (the
partnership of) Bito, Misa & Lozada;
"2. Order the respondents to deliver or pay for petitioner's share in the
partnership assets plus the profits, rent or interest attributable to the use of
his right in the assets of the dissolved partnership;
"3. Enjoin respondents from using the firm name of Bito, Misa & Lozada in
any of their correspondence, checks and pleadings and to pay petitioners
damages for the use thereof despite the dissolution of the partnership in the
amount of at least P50,000.00;
"4. Order respondents jointly and severally to pay petitioner attorney's fees
and expense of litigation in such amounts as maybe proven during the trial
and which the Commission may deem just and equitable under the premises
but in no case less than ten (10%) per cent of the value of the shares of
petitioner or P100,000.00;
"5. Order the respondents to pay petitioner moral damages with the amount
of P500,000.00 and exemplary damages in the amount of P200,000.00.
"Petitioner likewise prayed for such other and further reliefs that the
Commission may deem just and equitable under the premises."
On 13 July 1988, respondents-appellees filed their opposition to the petition.
On 13 July 1988, petitioner filed his Reply to the Opposition.
On 31 March 1989, the hearing officer rendered a decision ruling that:
"[P]etitioner's withdrawal from the law firm Bito, Misa & Lozada did not
dissolve the said law partnership. Accordingly, the petitioner and
respondents are hereby enjoined to abide by the provisions of the
Agreement relative to the matter governing the liquidation of the shares of
any retiring or withdrawing partner in the partnership interest."1
On appeal, the SEC en banc reversed the decision of the Hearing Officer and
held that the withdrawal of Attorney Joaquin L. Misa had dissolved the
partnership of "Bito, Misa & Lozada." The Commission ruled that, being a
partnership at will, the law firm could be dissolved by any partner at anytime,
such as by his withdrawal therefrom, regardless of good faith or bad faith,
since no partner can be forced to continue in the partnership against his will.
In its decision, dated 17 January 1990, the SEC held:
WHEREFORE, premises considered the appealed order of 31 March 1989 is
hereby REVERSED insofar as it concludes that the partnership of Bito, Misa &
Lozada has not been dissolved. The case is hereby REMANDED to the Hearing
Officer for determination of the respective rights and obligations of the
parties.2
The parties sought a reconsideration of the above decision. Attorney Misa, in
addition, asked for an appointment of a receiver to take over the assets of
the dissolved partnership and to take charge of the winding up of its affairs.
On 4 April 1991, respondent SEC issued an order denying reconsideration, as
well as rejecting the petition for receivership, and reiterating the remand of
the case to the Hearing Officer.
The parties filed with the appellate court separate appeals (docketed CA-G.R.
SP No. 24638 and CA-G.R. SP No. 24648).
During the pendency of the case with the Court of Appeals, Attorney Jesus
Bito and Attorney Mariano Lozada both died on, respectively, 05 September
1991 and 21 December 1991. The death of the two partners, as well as the
admission of new partners, in the law firm prompted Attorney Misa to renew
his application for receivership (in CA G.R. SP No. 24648). He expressed
concern over the need to preserve and care for the partnership assets. The
other partners opposed the prayer.
The Court of Appeals, finding no reversible error on the part of respondent
Commission, AFFIRMED in toto the SEC decision and order appealed from. In
fine, the appellate court held, per its decision of 26 February 1993, (a) that
Atty. Misa's withdrawal from the partnership had changed the relation of the
parties and inevitably caused the dissolution of the partnership; (b) that such
withdrawal was not in bad faith; (c) that the liquidation should be to the
extent of Attorney Misa's interest or participation in the partnership which
could be computed and paid in the manner stipulated in the partnership
agreement; (d) that the case should be remanded to the SEC Hearing Officer
for the corresponding determination of the value of Attorney Misa's share in
the partnership assets; and (e) that the appointment of a receiver was
unnecessary as no sufficient proof had been shown to indicate that the
partnership assets were in any such danger of being lost, removed or
materially impaired.
In this petition for review under Rule 45 of the Rules of Court, petitioners
confine themselves to the following issues:
1. Whether or not the Court of Appeals has erred in holding that the
partnership of Bito, Misa & Lozada (now Bito, Lozada, Ortega & Castillo) is a
partnership at will;
2. Whether or not the Court of Appeals has erred in holding that the
withdrawal of private respondent dissolved the partnership regardless of his
good or bad faith; and
3. Whether or not the Court of Appeals has erred in holding that private
respondent's demand for the dissolution of the partnership so that he can
get a physical partition of partnership was not made in bad faith;
to which matters we shall, accordingly, likewise limit ourselves.
A partnership that does not fix its term is a partnership at will. That the law
firm "Bito, Misa & Lozada," and now "Bito, Lozada, Ortega and Castillo," is
indeed such a partnership need not be unduly belabored. We quote, with
approval, like did the appellate court, the findings and disquisition of
respondent SEC on this matter; viz:
The partnership agreement (amended articles of 19 August 1948) does not
provide for a specified period or undertaking. The "DURATION" clause simply
states:
"5. DURATION. The partnership shall continue so long as mutually
satisfactory and upon the death or legal incapacity of one of the partners,
shall be continued by the surviving partners."
The hearing officer however opined that the partnership is one for a specific
undertaking and hence not a partnership at will, citing paragraph 2 of the
Amended Articles of Partnership (19 August 1948):
"2. Purpose. The purpose for which the partnership is formed, is to act as
legal adviser and representative of any individual, firm and corporation
engaged in commercial, industrial or other lawful businesses and
occupations; to counsel and advise such persons and entities with respect to
their legal and other affairs; and to appear for and represent their principals
and client in all courts of justice and government departments and offices in
the Philippines, and elsewhere when legally authorized to do so."
The "purpose" of the partnership is not the specific undertaking referred to
in the law. Otherwise, all partnerships, which necessarily must have a
purpose, would all be considered as partnerships for a definite undertaking.
There would therefore be no need to provide for articles on partnership at
will as none would so exist. Apparently what the law contemplates, is a
specific undertaking or "project" which has a definite or definable period of
completion.3
The birth and life of a partnership at will is predicated on the mutual desire
and consent of the partners. The right to choose with whom a person wishes
to associate himself is the very foundation and essence of that partnership.
Its continued existence is, in turn, dependent on the constancy of that
mutual resolve, along with each partner's capability to give it, and the
absence of a cause for dissolution provided by the law itself. Verily, any one
of the partners may, at his sole pleasure, dictate a dissolution of the
partnership at will. He must, however, act in good faith, not that the
attendance of bad faith can prevent the dissolution of the partnership4 but
that it can result in a liability for damages.5
In passing, neither would the presence of a period for its specific duration or
the statement of a particular purpose for its creation prevent the dissolution
of any partnership by an act or will of a partner.6 Among partners,7 mutual
agency arises and the doctrine of delectus personae allows them to have the
power, although not necessarily the right, to dissolve the partnership. An
unjustified dissolution by the partner can subject him to a possible action for
damages.
The dissolution of a partnership is the change in the relation of the parties
caused by any partner ceasing to be associated in the carrying on, as might
be distinguished from the winding up of, the business.8 Upon its dissolution,
the partnership continues and its legal personality is retained until the
complete winding up of its business culminating in its termination.9
The liquidation of the assets of the partnership following its dissolution is
governed by various provisions of the Civil Code; 10 however, an agreement
of the partners, like any other contract, is binding among them and normally
takes precedence to the extent applicable over the Code's general provisions.
We here take note of paragraph 8 of the "Amendment to Articles of
Partnership" reading thusly:
. . . In the event of the death or retirement of any partner, his interest in the
partnership shall be liquidated and paid in accordance with the existing
agreements and his partnership participation shall revert to the Senior
Partners for allocation as the Senior Partners may determine; provided,
however, that with respect to the two (2) floors of office condominium which
the partnership is now acquiring, consisting of the 5th and the 6th floors of
the Alpap Building, 140 Alfaro Street, Salcedo Village, Makati, Metro Manila,
their true value at the time of such death or retirement shall be determined
by two (2) independent appraisers, one to be appointed (by the partnership
and the other by the) retiring partner or the heirs of a deceased partner, as
the case may be. In the event of any disagreement between the said
appraisers a third appraiser will be appointed by them whose decision shall
be final. The share of the retiring or deceased partner in the aforementioned
two (2) floor office condominium shall be determined upon the basis of the
valuation above mentioned which shall be paid monthly within the first ten
(10) days of every month in installments of not less than P20,000.00 for the
Senior Partners, P10,000.00 in the case of two (2) existing Junior Partners
and P5,000.00 in the case of the new Junior Partner. 11
The term "retirement" must have been used in the articles, as we so hold, in
a generic sense to mean the dissociation by a partner, inclusive of resignation
or withdrawal, from the partnership that thereby dissolves it.
On the third and final issue, we accord due respect to the appellate court and
respondent Commission on their common factual finding, i.e., that Attorney
Misa did not act in bad faith. Public respondents viewed his withdrawal to
have been spurred by "interpersonal conflict" among the partners. It would
not be right, we agree, to let any of the partners remain in the partnership
under such an atmosphere of animosity; certainly, not against their will. 12
Indeed, for as long as the reason for withdrawal of a partner is not contrary
to the dictates of justice and fairness, nor for the purpose of unduly visiting
harm and damage upon the partnership, bad faith cannot be said to
characterize the act. Bad faith, in the context here used, is no different from
its normal concept of a conscious and intentional design to do a wrongful act
for a dishonest purpose or moral obliquity.
WHEREFORE, the decision appealed from is AFFIRMED. No pronouncement
on costs.
SO ORDERED.
G.R. No. 136448 November 3, 1999
LIM TONG LIM, petitioner,
vs.
PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.
PANGANIBAN, J.:
A partnership may be deemed to exist among parties who agree to borrow
money to pursue a business and to divide the profits or losses that may arise
therefrom, even if it is shown that they have not contributed any capital of
their own to a "common fund." Their contribution may be in the form of
credit or industry, not necessarily cash or fixed assets. Being partner, they
are all liable for debts incurred by or on behalf of the partnership. The
liability for a contract entered into on behalf of an unincorporated
association or ostensible corporation may lie in a person who may not have
directly transacted on its behalf, but reaped benefits from that contract.
The Case
In the Petition for Review on Certiorari before us, Lim Tong Lim assails the
November 26, 1998 Decision of the Court of Appeals in CA-GR CV
41477, 1 which disposed as follows:
WHEREFORE, [there being] no reversible error in the appealed decision, the
same is hereby affirmed. 2
The decretal portion of the Quezon City Regional Trial Court (RTC) ruling,
which was affirmed by the CA, reads as follows:
WHEREFORE, the Court rules:
1. That plaintiff is entitled to the writ of preliminary attachment issued by
this Court on September 20, 1990;
2. That defendants are jointly liable to plaintiff for the following amounts,
subject to the modifications as hereinafter made by reason of the special and
unique facts and circumstances and the proceedings that transpired during
the trial of this case;
a. P532,045.00 representing [the] unpaid purchase price of the fishing nets
covered by the Agreement plus P68,000.00 representing the unpaid price of
the floats not covered by said Agreement;
b. 12% interest per annum counted from date of plaintiff's invoices and
computed on their respective amounts as follows:
i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80 dated
February 9, 1990;
ii. Accrued interest for P27,904.02 on Invoice No. 14413 for P146,868.00
dated February 13, 1990;
iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00 dated
February 19, 1990;
c. P50,000.00 as and for attorney's fees, plus P8,500.00 representing P500.00
per appearance in court;
d. P65,000.00 representing P5,000.00 monthly rental for storage charges on
the nets counted from September 20, 1990 (date of attachment) to
September 12, 1991 (date of auction sale);
e. Cost of suit.
With respect to the joint liability of defendants for the principal obligation or
for the unpaid price of nets and floats in the amount of P532,045.00 and
P68,000.00, respectively, or for the total amount P600,045.00, this Court
noted that these items were attached to guarantee any judgment that may
be rendered in favor of the plaintiff but, upon agreement of the parties, and,
to avoid further deterioration of the nets during the pendency of this case, it
was ordered sold at public auction for not less than P900,000.00 for which
the plaintiff was the sole and winning bidder. The proceeds of the sale paid
for by plaintiff was deposited in court. In effect, the amount of P900,000.00
replaced the attached property as a guaranty for any judgment that plaintiff
may be able to secure in this case with the ownership and possession of the
nets and floats awarded and delivered by the sheriff to plaintiff as the highest
bidder in the public auction sale. It has also been noted that ownership of the
nets [was] retained by the plaintiff until full payment [was] made as
stipulated in the invoices; hence, in effect, the plaintiff attached its own
properties. It [was] for this reason also that this Court earlier ordered the
attachment bond filed by plaintiff to guaranty damages to defendants to be
cancelled and for the P900,000.00 cash bidded and paid for by plaintiff to
serve as its bond in favor of defendants.
From the foregoing, it would appear therefore that whatever judgment the
plaintiff may be entitled to in this case will have to be satisfied from the
amount of P900,000.00 as this amount replaced the attached nets and floats.
Considering, however, that the total judgment obligation as computed above
would amount to only P840,216.92, it would be inequitable, unfair and
unjust to award the excess to the defendants who are not entitled to
damages and who did not put up a single centavo to raise the amount of
P900,000.00 aside from the fact that they are not the owners of the nets and
floats. For this reason, the defendants are hereby relieved from any and all
liabilities arising from the monetary judgment obligation enumerated above
and for plaintiff to retain possession and ownership of the nets and floats
and for the reimbursement of the P900,000.00 deposited by it with the Clerk
of Court.
SO ORDERED. 3
The Facts
On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao
entered into a Contract dated February 7, 1990, for the purchase of fishing
nets of various sizes from the Philippine Fishing Gear Industries, Inc. (herein
respondent). They claimed that they were engaged in a business venture
with Petitioner Lim Tong Lim, who however was not a signatory to the
agreement. The total price of the nets amounted to P532,045. Four hundred
pieces of floats worth P68,000 were also sold to the Corporation. 4
The buyers, however, failed to pay for the fishing nets and the floats; hence,
private respondents filed a collection suit against Chua, Yao and Petitioner
Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit was
brought against the three in their capacities as general partners, on the
allegation that "Ocean Quest Fishing Corporation" was a nonexistent
corporation as shown by a Certification from the Securities and Exchange
Commission. 5 On September 20, 1990, the lower court issued a Writ of
Preliminary Attachment, which the sheriff enforced by attaching the fishing
nets on board F/B Lourdes which was then docked at the Fisheries Port,
Navotas, Metro Manila.
Instead of answering the Complaint, Chua filed a Manifestation admitting his
liability and requesting a reasonable time within which to pay. He also turned
over to respondent some of the nets which were in his possession. Peter Yao
filed an Answer, after which he was deemed to have waived his right to
cross-examine witnesses and to present evidence on his behalf, because of
his failure to appear in subsequent hearings. Lim Tong Lim, on the other
hand, filed an Answer with Counterclaim and Crossclaim and moved for the
lifting of the Writ of Attachment. 6 The trial court maintained the Writ, and
upon motion of private respondent, ordered the sale of the fishing nets at a
public auction. Philippine Fishing Gear Industries won the bidding and
deposited with the said court the sales proceeds of P900,000. 7
On November 18, 1992, the trial court rendered its Decision, ruling that
Philippine Fishing Gear Industries was entitled to the Writ of Attachment and
that Chua, Yao and Lim, as general partners, were jointly liable to pay
respondent. 8
The trial court ruled that a partnership among Lim, Chua and Yao existed
based (1) on the testimonies of the witnesses presented and (2) on a
Compromise Agreement executed by the three 9 in Civil Case No. 1492-MN
which Chua and Yao had brought against Lim in the RTC of Malabon, Branch
72, for (a) a declaration of nullity of commercial documents; (b) a
reformation of contracts; (c) a declaration of ownership of fishing boats; (d)
an injunction and (e) damages. 10 The Compromise Agreement provided:
a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels
sold in the amount of P5,750,000.00 including the fishing net. This
P5,750,000.00 shall be applied as full payment for P3,250,000.00 in favor of
JL Holdings Corporation and/or Lim Tong Lim;
b) If the four (4) vessel[s] and the fishing net will be sold at a higher price
than P5,750,000.00 whatever will be the excess will be divided into 3: 1/3
Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao;
c) If the proceeds of the sale the vessels will be less than P5,750,000.00
whatever the deficiency shall be shouldered and paid to JL Holding
Corporation by 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3 Peter Yao. 11
The trial court noted that the Compromise Agreement was silent as to the
nature of their obligations, but that joint liability could be presumed from the
equal distribution of the profit and loss. 21
Lim appealed to the Court of Appeals (CA) which, as already stated, affirmed
the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that petitioner was a partner of Chua
and Yao in a fishing business and may thus be held liable as a such for the
fishing nets and floats purchased by and for the use of the partnership. The
appellate court ruled:
The evidence establishes that all the defendants including herein appellant
Lim Tong Lim undertook a partnership for a specific undertaking, that is for
commercial fishing . . . . Oviously, the ultimate undertaking of the defendants
was to divide the profits among themselves which is what a partnership
essentially is . . . . By a contract of partnership, two or more persons bind
themselves to contribute money, property or industry to a common fund
with the intention of dividing the profits among themselves (Article 1767,
New Civil Code). 13
Hence, petitioner brought this recourse before this Court. 14
The Issues
In his Petition and Memorandum, Lim asks this Court to reverse the assailed
Decision on the following grounds:
I THE COURT OF APPEALS ERRED IN HOLDING, BASED ON A COMPROMISE
AGREEMENT THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A
SEPARATE CASE, THAT A PARTNERSHIP AGREEMENT EXISTED AMONG THEM.
II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR
OCEAN QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS FROM
PHILIPPINE FISHING, THE COURT OF APPEALS WAS UNJUSTIFIED IN
IMPUTING LIABILITY TO PETITIONER LIM AS WELL.
III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT
OF PETITIONER LIM'S GOODS.
In determining whether petitioner may be held liable for the fishing nets and
floats from respondent, the Court must resolve this key issue: whether by
their acts, Lim, Chua and Yao could be deemed to have entered into a
partnership.
This Court's Ruling
The Petition is devoid of merit.
First and Second Issues:
Existence of a Partnership and Petitioner's Liability
In arguing that he should not be held liable for the equipment purchased
from respondent, petitioner controverts the CA finding that a partnership
existed between him, Peter Yao and Antonio Chua. He asserts that the CA
based its finding on the Compromise Agreement alone. Furthermore, he
disclaims any direct participation in the purchase of the nets, alleging that
the negotiations were conducted by Chua and Yao only, and that he has not
even met the representatives of the respondent company. Petitioner further
argues that he was a lessor, not a partner, of Chua and Yao, for the "Contract
of Lease " dated February 1, 1990, showed that he had merely leased to the
two the main asset of the purported partnership — the fishing boat F/B
Lourdes. The lease was for six months, with a monthly rental of P37,500 plus
25 percent of the gross catch of the boat.
We are not persuaded by the arguments of petitioner. The facts as found by
the two lower courts clearly showed that there existed a partnership among
Chua, Yao and him, pursuant to Article 1767 of the Civil Code which provides:
Art. 1767 — By the contract of partnership, two or more persons bind
themselves to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves.
Specifically, both lower courts ruled that a partnership among the three
existed based on the following factual findings: 15
(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in
commercial fishing to join him, while Antonio Chua was already Yao's
partner;
(2) That after convening for a few times, Lim, Chua, and Yao verbally agreed
to acquire two fishing boats, the FB Lourdes and the FB Nelson for the sum of
P3.35 million;
(3) That they borrowed P3.25 million from Jesus Lim, brother of Petitioner
Lim Tong Lim, to finance the venture.
(4) That they bought the boats from CMF Fishing Corporation, which
executed a Deed of Sale over these two (2) boats in favor of Petitioner Lim
Tong Lim only to serve as security for the loan extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the refurbishing, re-equipping,
repairing, dry docking and other expenses for the boats would be shouldered
by Chua and Yao;
(6) That because of the "unavailability of funds," Jesus Lim again extended a
loan to the partnership in the amount of P1 million secured by a check,
because of which, Yao and Chua entrusted the ownership papers of two
other boats, Chua's FB Lady Anne Mel and Yao's FB Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement, Peter Yao and Antonio
Chua bought nets from Respondent Philippine Fishing Gear, in behalf of
"Ocean Quest Fishing Corporation," their purported business name.
(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC,
Branch 72 by Antonio Chua and Peter Yao against Lim Tong Lim for (a)
declaration of nullity of commercial documents; (b) reformation of contracts;
(c) declaration of ownership of fishing boats; (4) injunction; and (e) damages.
(9) That the case was amicably settled through a Compromise Agreement
executed between the parties-litigants the terms of which are already
enumerated above.
From the factual findings of both lower courts, it is clear that Chua, Yao and
Lim had decided to engage in a fishing business, which they started by buying
boats worth P3.35 million, financed by a loan secured from Jesus Lim who
was petitioner's brother. In their Compromise Agreement, they subsequently
revealed their intention to pay the loan with the proceeds of the sale of the
boats, and to divide equally among them the excess or loss. These boats, the
purchase and the repair of which were financed with borrowed money, fell
under the term "common fund" under Article 1767. The contribution to such
fund need not be cash or fixed assets; it could be an intangible like credit or
industry. That the parties agreed that any loss or profit from the sale and
operation of the boats would be divided equally among them also shows that
they had indeed formed a partnership.
Moreover, it is clear that the partnership extended not only to the purchase
of the boat, but also to that of the nets and the floats. The fishing nets and
the floats, both essential to fishing, were obviously acquired in furtherance of
their business. It would have been inconceivable for Lim to involve himself so
much in buying the boat but not in the acquisition of the aforesaid
equipment, without which the business could not have proceeded.
Given the preceding facts, it is clear that there was, among petitioner, Chua
and Yao, a partnership engaged in the fishing business. They purchased the
boats, which constituted the main assets of the partnership, and they agreed
that the proceeds from the sales and operations thereof would be divided
among them.
We stress that under Rule 45, a petition for review like the present case
should involve only questions of law. Thus, the foregoing factual findings of
the RTC and the CA are binding on this Court, absent any cogent proof that
the present action is embraced by one of the exceptions to the rule. 16 In
assailing the factual findings of the two lower courts, petitioner effectively
goes beyond the bounds of a petition for review under Rule 45.
Compromise Agreement
Not the Sole Basis of Partnership
Petitioner argues that the appellate court's sole basis for assuming the
existence of a partnership was the Compromise Agreement. He also claims
that the settlement was entered into only to end the dispute among them,
but not to adjudicate their preexisting rights and obligations. His arguments
are baseless. The Agreement was but an embodiment of the relationship
extant among the parties prior to its execution.
A proper adjudication of claimants' rights mandates that courts must review
and thoroughly appraise all relevant facts. Both lower courts have done so
and have found, correctly, a preexisting partnership among the parties. In
implying that the lower courts have decided on the basis of one piece of
document alone, petitioner fails to appreciate that the CA and the RTC
delved into the history of the document and explored all the possible
consequential combinations in harmony with law, logic and fairness. Verily,
the two lower courts' factual findings mentioned above nullified petitioner's
argument that the existence of a partnership was based only on the
Compromise Agreement.
Petitioner Was a Partner,
Not a Lessor
We are not convinced by petitioner's argument that he was merely the lessor
of the boats to Chua and Yao, not a partner in the fishing venture. His
argument allegedly finds support in the Contract of Lease and the
registration papers showing that he was the owner of the boats, including
F/B Lourdes where the nets were found.
His allegation defies logic. In effect, he would like this Court to believe that
he consented to the sale of his own boats to pay a debt of Chua and Yao,
with the excess of the proceeds to be divided among the three of them. No
lessor would do what petitioner did. Indeed, his consent to the sale proved
that there was a preexisting partnership among all three.
Verily, as found by the lower courts, petitioner entered into a business
agreement with Chua and Yao, in which debts were undertaken in order to
finance the acquisition and the upgrading of the vessels which would be used
in their fishing business. The sale of the boats, as well as the division among
the three of the balance remaining after the payment of their loans, proves
beyond cavil that F/B Lourdes, though registered in his name, was not his
own property but an asset of the partnership. It is not uncommon to register
the properties acquired from a loan in the name of the person the lender
trusts, who in this case is the petitioner himself. After all, he is the brother of
the creditor, Jesus Lim.
We stress that it is unreasonable — indeed, it is absurd — for petitioner to
sell his property to pay a debt he did not incur, if the relationship among the
three of them was merely that of lessor-lessee, instead of partners.
Corporation by Estoppel
Petitioner argues that under the doctrine of corporation by estoppel, liability
can be imputed only to Chua and Yao, and not to him. Again, we disagree.
Sec. 21 of the Corporation Code of the Philippines provides:
Sec. 21. Corporation by estoppel. — All persons who assume to act as a
corporation knowing it to be without authority to do so shall be liable as
general partners for all debts, liabilities and damages incurred or arising as a
result thereof: Provided however, That when any such ostensible corporation
is sued on any transaction entered by it as a corporation or on any tort
committed by it as such, it shall not be allowed to use as a defense its lack of
corporate personality.
One who assumes an obligation to an ostensible corporation as such, cannot
resist performance thereof on the ground that there was in fact no
corporation.
Thus, even if the ostensible corporate entity is proven to be legally
nonexistent, a party may be estopped from denying its corporate existence.
"The reason behind this doctrine is obvious — an unincorporated association
has no personality and would be incompetent to act and appropriate for
itself the power and attributes of a corporation as provided by law; it cannot
create agents or confer authority on another to act in its behalf; thus, those
who act or purport to act as its representatives or agents do so without
authority and at their own risk. And as it is an elementary principle of law
that a person who acts as an agent without authority or without a principal is
himself regarded as the principal, possessed of all the right and subject to all
the liabilities of a principal, a person acting or purporting to act on behalf of a
corporation which has no valid existence assumes such privileges and
obligations and becomes personally liable for contracts entered into or for
other acts performed as such agent. 17
The doctrine of corporation by estoppel may apply to the alleged corporation
and to a third party. In the first instance, an unincorporated association,
which represented itself to be a corporation, will be estopped from denying
its corporate capacity in a suit against it by a third person who relied in good
faith on such representation. It cannot allege lack of personality to be sued to
evade its responsibility for a contract it entered into and by virtue of which it
received advantages and benefits.
On the other hand, a third party who, knowing an association to be
unincorporated, nonetheless treated it as a corporation and received
benefits from it, may be barred from denying its corporate existence in a suit
brought against the alleged corporation. In such case, all those who
benefited from the transaction made by the ostensible corporation, despite
knowledge of its legal defects, may be held liable for contracts they impliedly
assented to or took advantage of.
There is no dispute that the respondent, Philippine Fishing Gear Industries, is
entitled to be paid for the nets it sold. The only question here is whether
petitioner should be held jointly 18 liable with Chua and Yao. Petitioner
contests such liability, insisting that only those who dealt in the name of the
ostensible corporation should be held liable. Since his name does not appear
on any of the contracts and since he never directly transacted with the
respondent corporation, ergo, he cannot be held liable.
Unquestionably, petitioner benefited from the use of the nets found inside
F/B Lourdes, the boat which has earlier been proven to be an asset of the
partnership. He in fact questions the attachment of the nets, because the
Writ has effectively stopped his use of the fishing vessel.
It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao
decided to form a corporation. Although it was never legally formed for
unknown reasons, this fact alone does not preclude the liabilities of the three
as contracting parties in representation of it. Clearly, under the law on
estoppel, those acting on behalf of a corporation and those benefited by it,
knowing it to be without valid existence, are held liable as general partners.
Technically, it is true that petitioner did not directly act on behalf of the
corporation. However, having reaped the benefits of the contract entered
into by persons with whom he previously had an existing relationship, he is
deemed to be part of said association and is covered by the scope of the
doctrine of corporation by estoppel. We reiterate the ruling of the Court in
Alonso v. Villamor: 19
Finally, petitioner claims that the Writ of Attachment was improperly issued
against the nets. We agree with the Court of Appeals that this issue is now
moot and academic. As previously discussed, F/B Lourdes was an asset of the
partnership and that it was placed in the name of petitioner, only to assure
payment of the debt he and his partners owed. The nets and the floats were
specifically manufactured and tailor-made according to their own design, and
were bought and used in the fishing venture they agreed upon. Hence, the
issuance of the Writ to assure the payment of the price stipulated in the
invoices is proper. Besides, by specific agreement, ownership of the nets
remained with Respondent Philippine Fishing Gear, until full payment
thereof.
WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED.
Costs against petitioner.
SO ORDERED.

A litigation is not a game of technicalities in which one, more deeply

schooled and skilled in the subtle art of movement and position, entraps and
destroys the other. It is, rather, a contest in which each contending party
fully and fairly lays before the court the facts in issue and then, brushing
aside as wholly trivial and indecisive all imperfections of form and
technicalities of procedure, asks that justice be done upon the merits.
Lawsuits, unlike duels, are not to be won by a rapier's thrust. Technicality,
when it deserts its proper office as an aid to justice and becomes its great
hindrance and chief enemy, deserves scant consideration from courts. There
should be no vested rights in technicalities.

Third Issue:

Validity of Attachment
G.R. No. 127405 September 20, 2001
MARJORIE TOCAO and WILLIAM T. BELO, petitioners,
vs.
COURT OF APPEALS and NENITA A. ANAY, respondent.
RESOLUTION
YNARES-SANTIAGO, J.:
The inherent powers of a Court to amend and control its processes and
orders so as to make them conformable to law and justice includes the right
to reverse itself, especially when in its honest opinion it has committed an
error or mistake in judgment, and that to adhere to its decision will cause
injustice to a party litigant.1
On November 14, 2001, petitioners Marjorie Tocao and William T. Belo filed
a Motion for Reconsideration of our Decision dated October 4, 2000. They
maintain that there was no partnership between petitioner Belo, on the one
hand, and respondent Nenita A. Anay, on the other hand; and that the latter
being merely an employee of petitioner Tocao.
After a careful review of the evidence presented, we are convinced that,
indeed, petitioner Belo acted merely as guarantor of Geminesse Enterprise.
This was categorically affirmed by respondent's own witness, Elizabeth
Bantilan, during her cross-examination. Furthermore, Bantilan testified that it
was Peter Lo who was the company's financier. Thus:
Q - You mentioned a while ago the name William Belo. Now, what is the
role of William Belo with Geminesse Enterprise?
A - William Belo is the friend of Marjorie Tocao and he was the guarantor
of the company.
Q - What do you mean by guarantor?
A - He guarantees the stocks that she owes somebody who is Peter Lo
and he acts as guarantor for us. We can borrow money from him.
Q - You mentioned a certain Peter Lo. Who is this Peter Lo?
A - Peter Lo is based in Singapore.
Q - What is the role of Peter Lo in the Geminesse Enterprise?
A - He is the one fixing our orders that open the L/C.
Q - You mean Peter Lo is the financier?
A - Yes, he is the financier.
Q - And the defendant William Belo is merely the guarantor of Geminesse
Enterprise, am I correct?
A - Yes, sir2
The foregoing was neither refuted nor contradicted by respondent's
evidence. It should be recalled that the business relationship created
between petitioner Tocao and respondent Anay was an informal partnership,
which was not even recorded with the Securities and Exchange Commission.
As such, it was understandable that Belo, who was after all petitioner Tocao's
good friend and confidante, would occasionally participate in the affairs of
the business, although never in a formal or official capacity.3 Again,
respondent's witness, Elizabeth Bantilan, confirmed that petitioner Belo's
presence in Geminesse Enterprise's meetings was merely as guarantor of the
company and to help petitioner Tocao.4
Furthermore, no evidence was presented to show that petitioner Belo
participated in the profits of the business enterprise. Respondent herself
professed lack of knowledge that petitioner Belo received any share in the
net income of the partnership.5 On the other hand, petitioner Tocao
declared that petitioner Belo was not entitled to any share in the profits of
Geminesse Enterprise.6 With no participation in the profits, petitioner Belo
cannot be deemed a partner since the essence of a partnership is that the
partners share in the profits and losses.7

Consequently, inasmuch as petitioner Belo was not a partner in Geminesse

Enterprise, respondent had no cause of action against him and her complaint
against him should accordingly be dismissed.

As regards the award of damages, petitioners argue that respondent should

be deemed in bad faith for failing to account for stocks of Geminesse
Enterprise amounting to P208,250.00 and that, accordingly, her claim for
damages should be barred to that extent. We do not agree. Given the
circumstances surrounding private respondent's sudden ouster from the
partnership by petitioner Tocao, her act of withholding whatever stocks were
in her possession and control was justified, if only to serve as security for her
claims against the partnership. However, while we do not agree that the
same renders private respondent in bad faith and should bar her claim for
damages, we find that the said sum of P208,250.00 should be deducted from
whatever amount is finally adjudged in her favor on the basis of the formal
account of the partnership affairs to be submitted to the Regional Trial Court.

WHEREFORE, based on the foregoing, the Motion for Reconsideration of

petitioners is PARTIALLY GRANTED. The Regional Trial Court of Makati is
hereby ordered to DISMISS the complaint, docketed as Civil Case No. 88-509,
as against petitioner William T. Belo only. The sum of P208,250.00 shall be
deducted from whatever amount petitioner Marjorie Tocao shall be held
liable to pay respondent after the normal accounting of the partnership
affairs.

SO ORDERED.
G.R. No. L-18703 August 28, 1922
INVOLUNTARY INSOLVENCY OF CAMPOS RUEDA & CO., S. en C., appellee,
vs.
PACIFIC COMMERCIAL CO., ASIATIC PETROLEUM CO., and INTERNATIONAL
BANKING CORPORATION, petitioners-appellants.
Jose Yulo, Ross and Lawrence and J. A. Wolfson for appellants.
Antonio Sanz for appellee.
ROMUALDEZ, J.:
The record of this proceeding having been transmitted to this court by virtue
of an appeal taken herein, a motion was presented by the appellants praying
this court that this case be considered purely a moot question now, for the
reason that subsequent to the decision appealed from, the partnership
Campos Rueda & Co., voluntarily filed an application for a judicial decree
adjudging itself insolvent, which is just what the herein petitioners and
appellants tried to obtain from the lower court in this proceeding.
The motion now before us must be, and is hereby, denied even under the
facts stated by the appellants in their motion aforesaid. The question raised
in this case is not purely moot one; the fact that a man was insolvent on a
certain day does not justify an inference that he was some time prior
thereto.
Proof that a man was insolvent on a certain day does not justify an inference
that he was on a day some time prior thereto. Many contingencies, such as
unwise investments, losing contracts, misfortune, or accident, might happen
to reduce a person from a state of solvency within a short space of time.
(Kimball vs. Dresser, 98 Me., 519; 57 Atl. Rep., 767.)
A decree of insolvency begins to operate on the date it is issued. It is one
thing to adjudge Campos Rueda & Co. insolvent in December, 1921, as
prayed for in this case, and another to declare it insolvent in July, 1922, as
stated in the motion.
Turning to the merits of this appeal, we find that this limited partnership
was, and is, indebted to the appellants in various sums amounting to not less
than P1,000, payable in the Philippines, which were not paid more than thirty
days prior to the date of the filing by the petitioners of the application for
involuntary insolvency now before us. These facts were sufficient established
by the evidence.
The trial court denied the petition on the ground that it was not proven, nor
alleged, that the members of the aforesaid firm were insolvent at the time
the application was filed; and that was said partners are personally and
solidarily liable for the consequence of the transactions of the partnership, it
cannot be adjudged insolvent so long as the partners are not alleged and
proven to be insolvent. From this judgment the petitioners appeal to this
court, on the ground that this finding of the lower court is erroneous.
The fundamental question that presents itself for decision is whether or not
a limited partnership, such as the appellee, which has failed to pay its
obligation with three creditors for more than thirty days, may be held to
have committed an act of insolvency, and thereby be adjudged insolvent
against its will.
Unlike the common law, the Philippine statutes consider a limited
partnership as a juridical entity for all intents and purposes, which
personality is recognized in all its acts and contracts (art. 116, Code of
Commerce). This being so and the juridical personality of a limited
partnership being different from that of its members, it must, on general
principle, answer for, and suffer, the consequence of its acts as such an entity
capable of being the subject of rights and obligations. If, as in the instant
case, the limited partnership of Campos Rueda & Co. Failed to pay its
obligations with three creditors for a period of more than thirty days, which
failure constitutes, under our Insolvency Law, one of the acts of bankruptcy
upon which an adjudication of involuntary insolvency can be predicated, this
partnership must suffer the consequences of such a failure, and must be
adjudged insolvent. We are not unmindful of the fact that some courts of the
United States have held that a partnership may not be adjudged insolvent in
an involuntary insolvency proceeding unless all of its members are insolvent,
while others have maintained a contrary view. But it must be borne in mind
that under the American common law, partnerships have no juridical
personality independent from that of its members; and if now they have such
personality for the purpose of the insolvency law, it is only by virtue of
general law enacted by the Congress of the United States on July 1, 1898,
section 5, paragraph (h), of which reads thus:
In the event of one or more but not all of the members of a partnership
being adjudged bankrupt, the partnership property shall not be administered
in bankruptcy, unless by consent of the partner or partners not adjudged
bankrupt; but such partner or partners not adjudged bankrupt shall settle the
partnership business as expeditiously as its nature will permit, and account
for the interest of the partner or partners adjudged bankrupt.
The general consideration that these partnership had no juridical personality
and the limitations prescribed in subsection (h) above set forth gave rise to
the conflict noted in American decisions, as stated in the case of In re
Samuels (215 Fed., 845), which mentions the two apparently conflicting
doctrines, citing one from In re Bertenshaw (157 Fed., 363), and the other
from Francis vs. McNeal (186 Fed., 481).
But there being in our insolvency law no such provision as that contained in
section 5 of said Act of Congress of July 1, 1898, nor any rule similar thereto,
and the juridical personality of limited partnership being recognized by our
statutes from their formation in all their acts and contracts the decision of
American courts on this point can have no application in this jurisdiction, nor
we see any reason why these partnerships cannot be adjudged bankrupt
irrespective of the solvency or insolvency of their members, provided the
partnership has, as such, committed some of the acts of insolvency provided
in our law. Under this view it is unnecessary to discuss the other points raised
by the parties, although in the particular case under consideration it can be
added that the liability of the limited partners for the obligations and losses
of the partnership is limited to the amounts paid or promised to be paid into
the common fund except when a limited partner should have included his
name or consented to its inclusion in the firm name (arts. 147 and 148, Code
of Commerce).
Therefore, it having been proven that the partnership Campos Rueda & Co.
failed for more than thirty days to pay its obligations to the petitioners the
Pacific Commercial Co. the Asiatic Petroleum Co. and the International
Banking Corporation, the case comes under paragraph 11 of section 20 of Act
No. 1956, and consequently the petitioners have the right to a judicial decree
declaring the involuntary insolvency of said partnership.
Wherefore, the judgment appealed from is reversed, and it is adjudged that
the limited partnership Campos Rueda & Co. is and was on December 28,
1921, insolvent and liable for having failed for more than thirty days to meet
its obligations with the three petitioners herein, and it is ordered that this
proceeding be remanded to the Court of First Instance of Manila with
instruction to said court to issue the proper decrees under section 24 of Act
No. 1956, and proceed therewith until its final disposition.
It is so ordered without special finding as to costs.
G.R. No. 78133 October 18, 1988
MARIANO P. PASCUAL and RENATO P. DRAGON, petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE and COURT OF TAX APPEALS,
respondents.
De la Cuesta, De las Alas and Callanta Law Offices for petitioners.
The Solicitor General for respondents
GANCAYCO, J.:
The distinction between co-ownership and an unregistered partnership or
joint venture for income tax purposes is the issue in this petition.
On June 22, 1965, petitioners bought two (2) parcels of land from Santiago
Bernardino, et al. and on May 28, 1966, they bought another three (3)
parcels of land from Juan Roque. The first two parcels of land were sold by
petitioners in 1968 toMarenir Development Corporation, while the three
parcels of land were sold by petitioners to Erlinda Reyes and Maria Samson
on March 19,1970. Petitioners realized a net profit in the sale made in 1968
in the amount of P165,224.70, while they realized a net profit of P60,000.00
in the sale made in 1970. The corresponding capital gains taxes were paid by
petitioners in 1973 and 1974 by availing of the tax amnesties granted in the
said years.
However, in a letter dated March 31, 1979 of then Acting BIR Commissioner
Efren I. Plana, petitioners were assessed and required to pay a total amount
of P107,101.70 as alleged deficiency corporate income taxes for the years
1968 and 1970.
Petitioners protested the said assessment in a letter of June 26, 1979
asserting that they had availed of tax amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner informed petitioners
that in the years 1968 and 1970, petitioners as co-owners in the real estate
transactions formed an unregistered partnership or joint venture taxable as a
corporation under Section 20(b) and its income was subject to the taxes
prescribed under Section 24, both of the National Internal Revenue Code 1
that the unregistered partnership was subject to corporate income tax as
distinguished from profits derived from the partnership by them which is
subject to individual income tax; and that the availment of tax amnesty
under P.D. No. 23, as amended, by petitioners relieved petitioners of their
individual income tax liabilities but did not relieve them from the tax liability
of the unregistered partnership. Hence, the petitioners were required to pay
the deficiency income tax assessed.
Petitioners filed a petition for review with the respondent Court of Tax
Appeals docketed as CTA Case No. 3045. In due course, the respondent court
by a majority decision of March 30, 1987, 2 affirmed the decision and action
taken by respondent commissioner with costs against petitioners.
It ruled that on the basis of the principle enunciated in Evangelista 3 an
unregistered partnership was in fact formed by petitioners which like a
corporation was subject to corporate income tax distinct from that imposed
on the partners.
In a separate dissenting opinion, Associate Judge Constante Roaquin stated
that considering the circumstances of this case, although there might in fact
be a co-ownership between the petitioners, there was no adequate basis for
the conclusion that they thereby formed an unregistered partnership which
made "hem liable for corporate income tax under the Tax Code.
Hence, this petition wherein petitioners invoke as basis thereof the following
alleged errors of the respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT THE DETERMINATION OF THE
RESPONDENT COMMISSIONER, TO THE EFFECT THAT PETITIONERS FORMED
AN UNREGISTERED PARTNERSHIP SUBJECT TO CORPORATE INCOME TAX,
AND THAT THE BURDEN OF OFFERING EVIDENCE IN OPPOSITION THERETO
RESTS UPON THE PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE BASIS OF ISOLATED SALE
TRANSACTIONS, THAT AN UNREGISTERED PARTNERSHIP EXISTED THUS
IGNORING THE REQUIREMENTS LAID DOWN BY LAW THAT WOULD
WARRANT THE PRESUMPTION/CONCLUSION THAT A PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS SIMILAR TO THE EVANGELISTA
CASE AND THEREFORE SHOULD BE DECIDED ALONGSIDE THE EVANGELISTA
CASE.
D. IN RULING THAT THE TAX AMNESTY DID NOT RELIEVE THE PETITIONERS
FROM PAYMENT OF OTHER TAXES FOR THE PERIOD COVERED BY SUCH
AMNESTY. (pp. 12-13, Rollo.)
The petition is meritorious.
The basis of the subject decision of the respondent court is the ruling of this
Court in Evangelista. 4
In the said case, petitioners borrowed a sum of money from their father
which together with their own personal funds they used in buying several
real properties. They appointed their brother to manage their properties
with full power to lease, collect, rent, issue receipts, etc. They had the real
properties rented or leased to various tenants for several years and they
gained net profits from the rental income. Thus, the Collector of Internal
Revenue demanded the payment of income tax on a corporation, among
others, from them.
In resolving the issue, this Court held as follows:
The issue in this case is whether petitioners are subject to the tax on
corporations provided for in section 24 of Commonwealth Act No. 466,
otherwise known as the National Internal Revenue Code, as well as to the
residence tax for corporations and the real estate dealers' fixed tax. With
respect to the tax on corporations, the issue hinges on the meaning of the
terms corporation and partnership as used in sections 24 and 84 of said
Code, the pertinent parts of which read:
Sec. 24. Rate of the tax on corporations.—There shall be levied, assessed,
collected, and paid annually upon the total net income received in the
preceding taxable year from all sources by every corporation organized in, or
existing under the laws of the Philippines, no matter how created or
organized but not including duly registered general co-partnerships
(companies collectives), a tax upon such income equal to the sum of the
following: ...
Sec. 84(b). The term "corporation" includes partnerships, no matter how
created or organized, joint-stock companies, joint accounts (cuentas en
participation), associations or insurance companies, but does not include
duly registered general co-partnerships (companies colectivas).
Article 1767 of the Civil Code of the Philippines provides:
By the contract of partnership two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the
intention of dividing the profits among themselves.
Pursuant to this article, the essential elements of a partnership are two,
namely: (a) an agreement to contribute money, property or industry to a
common fund; and (b) intent to divide the profits among the contracting
parties. The first element is undoubtedly present in the case at bar, for,
admittedly, petitioners have agreed to, and did, contribute money and
property to a common fund. Hence, the issue narrows down to their intent in
acting as they did. Upon consideration of all the facts and circumstances
surrounding the case, we are fully satisfied that their purpose was to engage
in real estate transactions for monetary gain and then divide the same
among themselves, because:
1. Said common fund was not something they found already in existence. It
was not a property inherited by them pro indiviso. They created it purposely.
What is more they jointly borrowed a substantial portion thereof in order to
establish said common fund.
2. They invested the same, not merely in one transaction, but in a series of
transactions. On February 2, 1943, they bought a lot for P100,000.00. On
April 3, 1944, they purchased 21 lots for P18,000.00. This was soon followed,
on April 23, 1944, by the acquisition of another real estate for P108,825.00.
Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The
number of lots (24) acquired and transcations undertaken, as well as the
brief interregnum between each, particularly the last three purchases, is
strongly indicative of a pattern or common design that was not limited to the
conservation and preservation of the aforementioned common fund or even
of the property acquired by petitioners in February, 1943. In other words,
one cannot but perceive a character of habituality peculiar to business
transactions engaged in for purposes of gain.
3. The aforesaid lots were not devoted to residential purposes or to other
personal uses, of petitioners herein. The properties were leased separately to
several persons, who, from 1945 to 1948 inclusive, paid the total sum of
P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for
petitioners do not even suggest that there has been any change in the
utilization thereof.
4. Since August, 1945, the properties have been under the management of
one person, namely, Simeon Evangelists, with full power to lease, to collect
rents, to issue receipts, to bring suits, to sign letters and contracts, and to
indorse and deposit notes and checks. Thus, the affairs relative to said
properties have been handled as if the same belonged to a corporation or
business enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to
be exact, over fifteen (15) years, since the first property was acquired, and
over twelve (12) years, since Simeon Evangelists became the manager.
6. Petitioners have not testified or introduced any evidence, either on their
purpose in creating the set up already adverted to, or on the causes for its
continued existence. They did not even try to offer an explanation therefor.
Although, taken singly, they might not suffice to establish the intent
necessary to constitute a partnership, the collective effect of these
circumstances is such as to leave no room for doubt on the existence of said
intent in petitioners herein. Only one or two of the aforementioned
circumstances were present in the cases cited by petitioners herein, and,
hence, those cases are not in point. 5
In the present case, there is no evidence that petitioners entered into an
agreement to contribute money, property or industry to a common fund, and
that they intended to divide the profits among themselves. Respondent
commissioner and/ or his representative just assumed these conditions to be
present on the basis of the fact that petitioners purchased certain parcels of
land and became co-owners thereof.
In Evangelists, there was a series of transactions where petitioners purchased
twenty-four (24) lots showing that the purpose was not limited to the
conservation or preservation of the common fund or even the properties
acquired by them. The character of habituality peculiar to business
transactions engaged in for the purpose of gain was present.
In the instant case, petitioners bought two (2) parcels of land in 1965. They
did not sell the same nor make any improvements thereon. In 1966, they
bought another three (3) parcels of land from one seller. It was only 1968
when they sold the two (2) parcels of land after which they did not make any
additional or new purchase. The remaining three (3) parcels were sold by
them in 1970. The transactions were isolated. The character of habituality
peculiar to business transactions for the purpose of gain was not present.
In Evangelista, the properties were leased out to tenants for several years.
The business was under the management of one of the partners. Such
condition existed for over fifteen (15) years. None of the circumstances are
present in the case at bar. The co-ownership started only in 1965 and ended
in 1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista in Evangelista
he said:
I wish however to make the following observation Article 1769 of the new
Civil Code lays down the rule for determining when a transaction should be
deemed a partnership or a co-ownership. Said article paragraphs 2 and 3,
provides;
(2) Co-ownership or co-possession does not itself establish a partnership,
whether such co-owners or co-possessors do or do not share any profits
made by the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived;
From the above it appears that the fact that those who agree to form a co-
ownership share or do not share any profits made by the use of the property
held in common does not convert their venture into a partnership. Or the
sharing of the gross returns does not of itself establish a partnership whether
or not the persons sharing therein have a joint or common right or interest in
the property. This only means that, aside from the circumstance of profit, the
presence of other elements constituting partnership is necessary, such as the
clear intent to form a partnership, the existence of a juridical personality
different from that of the individual partners, and the freedom to transfer or
assign any interest in the property by one with the consent of the others
(Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635-636)
It is evident that an isolated transaction whereby two or more persons
contribute funds to buy certain real estate for profit in the absence of other
circumstances showing a contrary intention cannot be considered a
partnership.
Persons who contribute property or funds for a common enterprise and
agree to share the gross returns of that enterprise in proportion to their
contribution, but who severally retain the title to their respective
contribution, are not thereby rendered partners. They have no common
stock or capital, and no community of interest as principal proprietors in the
business itself which the proceeds derived. (Elements of the Law of
Partnership by Flord D. Mechem 2nd Ed., section 83, p. 74.)
A joint purchase of land, by two, does not constitute a co-partnership in
respect thereto; nor does an agreement to share the profits and losses on
the sale of land create a partnership; the parties are only tenants in common.
(Clark vs. Sideway, 142 U.S. 682,12 Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another agreed to become owners of a
single tract of realty, holding as tenants in common, and to divide the profits
of disposing of it, the brother and the other not being entitled to share in
plaintiffs commission, no partnership existed as between the three parties,
whatever their relation may have been as to third parties. (Magee vs. Magee
123 N.E. 673, 233 Mass. 341.)
In order to constitute a partnership inter sese there must be: (a) An intent to
form the same; (b) generally participating in both profits and losses; (c) and
such a community of interest, as far as third persons are concerned as
enables each party to make contract, manage the business, and dispose of
the whole property.-Municipal Paving Co. vs. Herring 150 P. 1067, 50 III 470.)
The common ownership of property does not itself create a partnership the corporate income tax liability in this case, without pronouncement as to
between the owners, though they may use it for the purpose of making costs.
gains; and they may, without becoming partners, agree among themselves as
SO ORDERED.
to the management, and use of such property and the application of the
proceeds therefrom. (Spurlock vs. Wilson, 142 S.W. 363,160 No. App. 14.) 6

The sharing of returns does not in itself establish a partnership whether or

not the persons sharing therein have a joint or common right or interest in
the property. There must be a clear intent to form a partnership, the
existence of a juridical personality different from the individual partners, and
the freedom of each party to transfer or assign the whole property.

In the present case, there is clear evidence of co-ownership between the

petitioners. There is no adequate basis to support the proposition that they
thereby formed an unregistered partnership. The two isolated transactions
whereby they purchased properties and sold the same a few years thereafter
did not thereby make them partners. They shared in the gross profits as co-
owners and paid their capital gains taxes on their net profits and availed of
the tax amnesty thereby. Under the circumstances, they cannot be
considered to have formed an unregistered partnership which is thereby
liable for corporate income tax, as the respondent commissioner proposes.

And even assuming for the sake of argument that such unregistered
partnership appears to have been formed, since there is no such existing
unregistered partnership with a distinct personality nor with assets that can
be held liable for said deficiency corporate income tax, then petitioners can
be held individually liable as partners for this unpaid obligation of the
partnership p. 7 However, as petitioners have availed of the benefits of tax
amnesty as individual taxpayers in these transactions, they are thereby
relieved of any further tax liability arising therefrom.

WHEREFROM, the petition is hereby GRANTED and the decision of the

respondent Court of Tax Appeals of March 30, 1987 is hereby REVERSED and
SET ASIDE and another decision is hereby rendered relieving petitioners of

G.R. No. 112675 January 25, 1999
AFISCO Insurance Corp
vs.
COURT OF APPEALS, COURT OF TAX APPEALS and COMISSIONER OF
INTERNAL REVENUE, respondent.
Pursuant to "reinsurance treaties," a number of local insurance firms formed
themselves into a "pool" in order to facilitate the handling of business
contracted with a nonresident foreign insurance company. May the "clearing
house" or "insurance pool" so formed be deemed a partnership or an
association that is taxable as a corporation under the National Internal
Revenue Code (NIRC)? Should the pool's remittances to the member
companies and to the said foreign firm be taxable as dividends? Under the
facts of this case, has the goverment's right to assess and collect said tax
prescribed?
The Case
These are the main questions raised in the Petition for Review on Certiorari
before us, assailing the October 11, 1993 Decision 1 of the Court of Appeals 2
in CA-GR SP 25902, which dismissed petitioners' appeal of the October 19,
1992 Decision 3 of the Court of Tax Appeals 4 (CTA) which had previously
sustained petitioners' liability for deficiency income tax, interest and
withholding tax. The Court of Appeals ruled:
WHEREFORE, the petition is DISMISSED, with costs against petitioner 5
The petition also challenges the November 15, 1993 Court of Appeals (CA)
Resolution 6 denying reconsideration.
The Facts
The antecedent facts, 7 as found by the Court of Appeals, are as follows:
The petitioners are 41 non-life insurance corporations, organized and existing
under the laws of the Philippines. Upon issuance by them of Erection,
Machinery Breakdown, Boiler Explosion and Contractors' All Risk insurance
policies, the petitioners on August 1, 1965 entered into a Quota Share
Reinsurance Treaty and a Surplus Reinsurance Treaty with the Munchener
Ruckversicherungs-Gesselschaft (hereafter called Munich), a non-resident
foreign insurance corporation. The reinsurance treaties required petitioners
to form a [p]ool. Accordingly, a pool composed of the petitioners was formed
on the same day.
On April 14, 1976, the pool of machinery insurers submitted a financial
statement and filed an "Information Return of Organization Exempt from
Income Tax" for the year ending in 1975, on the basis of which it was
assessed by the Commissioner of Internal Revenue deficiency corporate
taxes in the amount of P1,843,273.60, and withholding taxes in the amount
of P1,768,799.39 and P89,438.68 on dividends paid to Munich and to the
petitioners, respectively. These assessments were protested by the
petitioners through its auditors Sycip, Gorres, Velayo and Co.
On January 27, 1986, the Commissioner of Internal Revenue denied the
protest and ordered the petitioners, assessed as "Pool of Machinery
Insurers," to pay deficiency income tax, interest, and with [h]olding tax,
itemized as follows:
Net income per information return P3,737,370.00
===========
Income tax due thereon P1,298,080.00
Add: 14% Int. fr. 4/15/76
to 4/15/79 545,193.60
——————
TOTAL AMOUNT DUE & P1,843,273.60
COLLECTIBLE
Dividend paid to Munich
Reinsurance Company P3,728,412.00
——————
35% withholding tax at
source due thereon P1,304,944.20
Add: 25% surcharge 326,236.05
14% interest from
1/25/76 to 1/25/79 137,019.14
Compromise penalty-
non-filing of return 300.00
late payment 300.00
——————
TOTAL AMOUNT DUE & P1,768,799.39
COLLECTIBLE ===========
Dividend paid to Pool Members P655,636.00
===========
10% withholding tax at
source due thereon P65,563.60
Add: 25% surcharge 16,390.90
14% interest from
1/25/76 to 1/25/79 6,884.18
Compromise penalty-
non-filing of return 300.00
late payment 300.00
——————
TOTAL AMOUNT DUE & P89,438.68
COLLECTIBLE =========== 8
The CA ruled in the main that the pool of machinery insurers was a
partnership taxable as a corporation, and that the latter's collection of
premiums on behalf of its members, the ceding companies, was taxable
income. It added that prescription did not bar the Bureau of Internal
Revenue (BIR) from collecting the taxes due, because "the taxpayer cannot
be located at the address given in the information return filed." Hence, this
Petition for Review before us. 9
The Issues
Before this Court, petitioners raise the following issues:
1. Whether or not the Clearing House, acting as a mere agent and performing
strictly administrative functions, and which did not insure or assume any risk
in its own name, was a partnership or association subject to tax as a
corporation;
2. Whether or not the remittances to petitioners and MUNICHRE of their
respective shares of reinsurance premiums, pertaining to their individual and
separate contracts of reinsurance, were "dividends" subject to tax; and
3. Whether or not the respondent Commissioner's right to assess the
Clearing House had already prescribed. 10
The Court's Ruling
The petition is devoid of merit. We sustain the ruling of the Court of Appeals
that the pool is taxable as a corporation, and that the government's right to
assess and collect the taxes had not prescribed.
First Issue:
Pool Taxable as a Corporation
Petitioners contend that the Court of Appeals erred in finding that the pool
of clearing house was an informal partnership, which was taxable as a
corporation under the NIRC. They point out that the reinsurance policies
were written by them "individually and separately," and that their liability
was limited to the extent of their allocated share in the original risk thus
reinsured. 11 Hence, the pool did not act or earn income as a reinsurer. 12 Its
role was limited to its principal function of "allocating and distributing the
risk(s) arising from the original insurance among the signatories to the treaty
or the members of the pool based on their ability to absorb the risk(s)
ceded[;] as well as the performance of incidental functions, such as records,
maintenance, collection and custody of funds, etc." 13
Petitioners belie the existence of a partnership in this case, because (1) they,
the reinsurers, did not share the same risk or solidary liability, 14 (2) there
was no common fund; 15 (3) the executive board of the pool did not exercise
control and management of its funds, unlike the board of directors of a
corporation; 16 and (4) the pool or clearing house "was not and could not
possibly have engaged in the business of reinsurance from which it could
have derived income for itself." 17
The Court is not persuaded. The opinion or ruling of the Commission of
Internal Revenue, the agency tasked with the enforcement of tax law, is
accorded much weight and even finality, when there is no showing. that it is
patently wrong, 18 particularly in this case where the findings and
conclusions of the internal revenue commissioner were subsequently
affirmed by the CTA, a specialized body created for the exclusive purpose of
reviewing tax cases, and the Court of Appeals. 19 Indeed,
[I]t has been the long standing policy and practice of this Court to respect the
conclusions of quasi-judicial agencies, such as the Court of Tax Appeals
which, by the nature of its functions, is dedicated exclusively to the study and
consideration of tax problems and has necessarily developed an expertise on
the subject, unless there has been an abuse or improvident exercise of its
authority. 20
This Court rules that the Court of Appeals, in affirming the CTA which had
previously sustained the internal revenue commissioner, committed no
reversible error. Section 24 of the NIRC, as worded in the year ending 1975,
provides:
Sec. 24. Rate of tax on corporations. — (a) Tax on domestic corporations. —
A tax is hereby imposed upon the taxable net income received during each
taxable year from all sources by every corporation organized in, or existing
under the laws of the Philippines, no matter how created or organized, but
not including duly registered general co-partnership (compañias colectivas),
general professional partnerships, private educational institutions, and
building and loan associations . . . .
Ineludibly, the Philippine legislature included in the concept of corporations
those entities that resembled them such as unregistered partnerships and
associations. Parenthetically, the NIRC's inclusion of such entities in the tax
on corporations was made even clearer by the tax Reform Act of 1997, 21
which amended the Tax Code. Pertinent provisions of the new law read as
follows:
Sec. 27. Rates of Income Tax on Domestic Corporations. —
(A) In General. — Except as otherwise provided in this Code, an income tax of
thirty-five percent (35%) is hereby imposed upon the taxable income derived
during each taxable year from all sources within and without the Philippines
by every corporation, as defined in Section 22 (B) of this Code, and taxable
under this Title as a corporation . . . .
Sec. 22. — Definition. — When used in this Title:
xxx xxx xxx
(B) The term "corporation" shall include partnerships, no matter how created
or organized, joint-stock companies, joint accounts (cuentas en
participacion), associations, or insurance companies, but does not include
general professional partnerships [or] a joint venture or consortium formed
for the purpose of undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy operations pursuant to an
operating or consortium agreement under a service contract without the
Government. "General professional partnerships" are partnerships formed
by persons for the sole purpose of exercising their common profession, no
part of the income of which is derived from engaging in any trade or
business.
xxx xxx xxx
Thus, the Court in Evangelista v. Collector of Internal Revenue 22 held that
Section 24 covered these unregistered partnerships and even associations or
joint accounts, which had no legal personalities apart from their individual
members. 23 The Court of Appeals astutely applied Evangelista. 24
. . . Accordingly, a pool of individual real property owners dealing in real
estate business was considered a corporation for purposes of the tax in sec.
24 of the Tax Code in Evangelista v. Collector of Internal Revenue, supra. The
Supreme Court said:
The term "partnership" includes a syndicate, group, pool, joint venture or
other unincorporated organization, through or by means of which any
business, financial operation, or venture is carried on. *** (8 Merten's Law of
Federal Income Taxation, p. 562 Note 63)
Art. 1767 of the Civil Code recognizes the creation of a contract of
partnership when "two or more persons bind themselves to contribute
money, property, or Industry to a common fund, with the intention of
dividing the profits among themselves." 25 Its requisites are: "(1) mutual
contribution to a common stock, and (2) a joint interest in the profits." 26 In
other words, a partnership is formed when persons contract "to devote to a
common purpose either money, property, or labor with the intention of
dividing the profits between
themselves." 27 Meanwhile, an association implies associates who enter into
a "joint enterprise . . . for the transaction of business." 28
In the case before us, the ceding companies entered into a Pool Agreement
29 or an association 30 that would handle all the insurance businesses
covered under their quota-share reinsurance treaty 31 and surplus
reinsurance treaty32 with Munich. The following unmistakably indicates a
partnership or an association covered by Section 24 of the NIRC:
(1) The pool has a common fund, consisting of money and other valuables
that are deposited in the name and credit of the pool. 33 This common fund
pays for the administration and operation expenses of the pool. 24
(2) The pool functions through an executive board, which resembles the
board of directors of a corporation, composed of one representative for each
of the ceding companies. 35
(3) True, the pool itself is not a reinsurer and does not issue any insurance
policy; however, its work is indispensable, beneficial and economically useful
to the business of the ceding companies and Munich, because without it they
would not have received their premiums. The ceding companies share "in the
business ceded to the pool" and in the "expenses" according to a "Rules of
Distribution" annexed to the Pool Agreement. 36 Profit motive or business is,
therefore, the primordial reason for the pool's formation. As aptly found by
the CTA:
. . . The fact that the pool does not retain any profit or income does not
obliterate an antecedent fact, that of the pool being used in the transaction
of business for profit. It is apparent, and petitioners admit, that their
association or coaction was indispensable [to] the transaction of the
business, . . . If together they have conducted business, profit must have
been the object as, indeed, profit was earned. Though the profit was
apportioned among the members, this is only a matter of consequence, as it
implies that profit actually resulted. 37
The petitioners' reliance on Pascuals v. Commissioner 38 is misplaced,
because the facts obtaining therein are not on all fours with the present
case. In Pascual, there was no unregistered partnership, but merely a co-
ownership which took up only two isolated transactions. 39 The Court of
Appeals did not err in applying Evangelista, which involved a partnership that
engaged in a series of transactions spanning more than ten years, as in the
case before us.
Second Issue:
Pool's Remittances are Taxable
Petitioners further contend that the remittances of the pool to the ceding
companies and Munich are not dividends subject to tax. They insist that such
remittances contravene Sections 24 (b) (I) and 263 of the 1977 NIRC and
"would be tantamount to an illegal double taxation as it would result in
taxing the same taxpayer" 40 Moreover, petitioners argue that since Munich
was not a signatory to the Pool Agreement, the remittances it received from
the pool cannot be deemed dividends. 41 They add that even if such
remittances were treated as dividends, they would have been exempt under
the previously mentioned sections of the 1977 NIRC, 42 as well as Article 7 of
paragraph 1 43 and Article 5 of paragraph 5 44 of the RP-West German Tax
Treaty. 45
Petitioners are clutching at straws. Double taxation means taxing the same
property twice when it should be taxed only once. That is, ". . . taxing the
same person twice by the same jurisdiction for the same thing" 46 In the
instant case, the pool is a taxable entity distinct from the individual corporate
entities of the ceding companies. The tax on its income is obviously different
from the tax on the dividends received by the said companies. Clearly, there
is no double taxation here.
The tax exemptions claimed by petitioners cannot be granted, since their
entitlement thereto remains unproven and unsubstantiated. It is axiomatic in
the law of taxation that taxes are the lifeblood of the nation. Hence,
"exemptions therefrom are highly disfavored in law and he who claims tax
exemption must be able to justify his claim or right." 47 Petitioners have
failed to discharge this burden of proof. The sections of the 1977 NIRC which
they cite are inapplicable, because these were not yet in effect when the
income was earned and when the subject information return for the year
ending 1975 was filed.
Referring, to the 1975 version of the counterpart sections of the NIRC, the
Court still cannot justify the exemptions claimed. Section 255 provides that
no tax shall ". . . be paid upon reinsurance by any company that has already
paid the tax . . ." This cannot be applied to the present case because, as
previously discussed, the pool is a taxable entity distinct from the ceding
companies; therefore, the latter cannot individually claim the income tax
paid by the former as their own.
On the other hand, Section 24 (b) (1) 48 pertains to tax on foreign
corporations; hence, it cannot be claimed by the ceding companies which are
domestic corporations. Nor can Munich, a foreign corporation, be granted
exemption based solely on this provision of the Tax Code, because the same
subsection specifically taxes dividends, the type of remittances forwarded to
it by the pool. Although not a signatory to the Pool Agreement, Munich is
patently an associate of the ceding companies in the entity formed, pursuant
to their reinsurance treaties which required the creation of said pool.
Under its pool arrangement with the ceding companies; Munich shared in
their income and loss. This is manifest from a reading of Article 3 49 and 10
50 of the Quota-Share Reinsurance treaty and Articles 3 51 and 10 52 of the
Surplus Reinsurance Treaty. The foregoing interpretation of Section 24 (b) (1)
is in line with the doctrine that a tax exemption must be construed
strictissimi juris, and the statutory exemption claimed must be expressed in a
language too plain to be mistaken. 53
Finally the petitioners' claim that Munich is tax-exempt based on the RP-
West German Tax Treaty is likewise unpersuasive, because the internal
revenue commissioner assessed the pool for corporate taxes on the basis of
the information return it had submitted for the year ending 1975, a taxable
year when said treaty was not yet in effect. 54 Although petitioners omitted
in their pleadings the date of effectivity of the treaty, the Court takes judicial
notice that it took effect only later, on December 14, 1984. 55
Third Issue:
Prescription
Petitioners also argue that the government's right to assess and collect the
subject tax had prescribed. They claim that the subject information return
was filed by the pool on April 14, 1976. On the basis of this return, the BIR
telephoned petitioners on November 11, 1981, to give them notice of its
letter of assessment dated March 27, 1981. Thus, the petitioners contend
that the five-year statute of limitations then provided in the NIRC had already
lapsed, and that the internal revenue commissioner was already barred by
prescription from making an assessment. 56
We cannot sustain the petitioners. The CA and the CTA categorically found
that the prescriptive period was tolled under then Section 333 of the NIRC,
57 because "the taxpayer cannot be located at the address given in the
information return filed and for which reason there was delay in sending the
assessment." 58 Indeed, whether the government's right to collect and
assess the tax has prescribed involves facts which have been ruled upon by
the lower courts. It is axiomatic that in the absence of a clear showing of
palpable error or grave abuse of discretion, as in this case, this Court must
not overturn the factual findings of the CA and the CTA.
Furthermore, petitioners admitted in their Motion for Reconsideration
before the Court of Appeals that the pool changed its address, for they
stated that the pool's information return filed in 1980 indicated therein its
"present address." The Court finds that this falls short of the requirement of
Section 333 of the NIRC for the suspension of the prescriptive period. The
law clearly states that the said period will be suspended only "if the taxpayer
informs the Commissioner of Internal Revenue of any change in the address."
WHEREFORE, the petition is DENIED. The Resolution of the Court of Appeals
dated October 11, 1993 and November 15, 1993 are hereby AFFIRMED. Cost
against petitioners.1âwphi1.nêt
SO ORDERED.