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Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No.

L-45662 April 26, 1939

ENRIQUE CLEMENTE, plaintiff-appellee, vs. DIONISIO GALVAN, defendant-appellee. JOSE ECHEVARRIA, intervenor-appellant. Engracio F. Clemea and Celedonio Bernardo for appellant. Vicente Bengson for defendant-appellee. No appearance for other party. DIAZ, J.: The intervenor Jose Echevarria having lost in the Court of First Instance of manila which rendered judgment against him, the pertinent portion of which reads: "and with respect to the complaint of the intervenor, the mortgage executed in his favor by plaintiff is declared null and void, and said complaint in intervention, as well as the counterclaim filed by the defendant against the intervenor, is dismissed, without pronouncement as to costs," he appealed to this court on the ground that, according to him, the lower court committed the errors assigned in his brief as follows: I. The court a quo erred in finding in the appealed decision that plaintiff was unable to take possession of the machines subject of the deed of mortgage Exhibit B either before or after the execution thereof. II. The court a quo likewise erred in deciding the present case against the intervenor-appellant, on the ground, among others, that "plaintiff has not adduced any evidence nor has he testified to show that the machines mortgaged by him to the intervenor have ever belonged to him, notwithstanding that said intervenor is his close relative.". III. The lower court also erred in declaring null and void the mortgage executed by plaintiff in favor of the intervenor and, thereby, dismissing the complaint in intervention. IV. The lower court lastly erred in ordering the receiver J. D. Mencarini to deliver to the defendant the aforesaid machines upon petition of the plaintiff. In order to have a clear idea of the question, it is proper to state the facts bearing on the case as they appear in the decision and judgment of the lower court and in the documents which constitute all the evidence adduced by the parties during the trial. On June 6, 1931, plaintiff and defendant organized a civil partnership which they named "Galvan y Compaia" to engage in the manufacture and sale of paper and other stationery. they agreed to invest

therein a capital of P100,000, but as a matter of fact they did not cover more than one-fifth thereof, each contributing P10,000. Hardly a year after such organization, the plaintiff commenced the present case in the above-mentioned court to ask for the dissolution of the partnership and to compel defendant to whom the management thereof was entrusted to submit an accounting of his administration and to deliver to him his share as such partner. In his answer defendant expressed his conformity to the dissolution of the partnership and the liquidation of its affairs; but by way of counterclaim he asked that, having covered a deficit incurred by the partnership amounting to P4,000 with his own money, plaintiff reimburse him of one-half of said sum. On petition of the plaintiff a receiver and liquidator to take charge of the properties and business for the partnership while the same was not yet definitely dissolved, was appointed, the person chosen being Juan D. Mencarini. The latter was already discharging the duties of his office when the court, by virtue of a petition ex parte of the plaintiff, issued the order of May 24, 1933, requiring said receiver to deliver to him (plaintiff) certain machines which were then at Nos. 705-707 Ylaya Street, Manila but authorizing him to charge their value of P4,500 against the portion which may eventually be due to said plaintiff. To comply with said order, the receiver delivered to plaintiff the keys to the place where the machines were found, which was the same place where defendant had his home; but before he could take actual possession of said machines, upon the strong opposition of defendant, the court, on motion of the latter, suspended the effects of its order of May 24, 1933. In the meantime the judgments rendered in cases Nos. 42794 and 43070 entitled "Philippine Education Co., Inc. vs.Enrique Clemente" for the recovery of a sum of money, and "Jose Echevarria vs. Enrique Clemente", also for the recovery of a sum of money, respectively, were made executory; and in order to avoid the attachment and subsequent sale of the machines by the sheriff for the satisfaction from the proceeds thereof of the judgments rendered in the two cases aforecited, plaintiff agreed with the intervenor, who is his nephew, to execute, as he in fact executed in favor of the latter, a deed of mortgage Exhibit B encumbering the machines described in said deed in which it is stated that "they are situated on Singalong Street No. 1163", which is a place entirely different from the house Nos. 705 and 707 on Ylaya Street hereinbefore mentioned. The one year agreed upon in the deed of mortgage for the fulfillment by the plaintiff of the obligation he had contracted with the intervenor, having expired, the latter commenced case No. 49629 to collect his mortgage credit. The intervenor, as plaintiff in the said case, obtained judgment in his favor because the defendant did not interpose any defense or objection, and, moreover, admitted being really indebted to the intervenor in the amount set forth in the deed of mortgage Exhibit B. The machines which the intervenor said were mortgaged to him were then in fact in custodia legis, as they were under the control of the receiver and liquidator Juan D. Mencarini. It was, therefore, useless for the intervenor to attach the same in view of the receiver's opposition; and the question having been brought to court, it decided that nothing could be done because the receiver was not a party to the case which the intervenor instituted to collect his aforesaid credit. (Civil case No. 49629.) The question ended thus because the intervenor did not take any other step until he thought of joining in this case as intervenor. 1. From the foregoing facts, it is clear that plaintiff could not obtain possession of the machines in question. The constructive possession deducible from the fact that he had the keys to the place where the machines were found (Ylaya Street Nos. 705-707), as they had been delivered to him by the receiver, does not help him any because the lower court suspended the effects of the other whereby the keys were delivered to him a few days after its issuance; and thereafter revoked it entirely in the appealed decision. Furthermore, when he attempted to take actual possession of the machines, the defendant did not allow him to do so. Consequently, if he did not have actual possession of the machines, he could not in any manner mortgage them, for while it is true that the oft-mentioned deed of mortgage Exhibit B was annotated in the registry of property, it is no less true the machines to which it refers are not the same as those in

question because the latter are on Ylaya Street Nos. 705-707 and the former are on Singalong Street No. 1163. It cannot be said that Exhibit B-1, allegedly a supplementary contract between the plaintiff and the intervenor, shows that the machines referred to in the deed of mortgage are the same as those in dispute and which are found on Ylaya Street because said exhibit being merely a private document, the same cannot vary or alter the terms of a public document which is Exhibit B or the deed of mortgage. 2. The second error attributed to the lower court is baseless. The evidence of record shows that the machines in contention originally belonged to the defendant and from him were transferred to the partnership Galvan y Compania. This being the case, said machines belong to the partnership and not to him, and shall belong to it until partition is effected according to the result thereof after the liquidation. 3. The last two errors attributed by the appellant to the lower court have already been disposed of by the considerations above set forth. they are as baseless as the previous ones. In view of all the foregoing, the judgment appealed from is affirmed, with costs against the appellant. So ordered. Avancea, C. J., Villa-Real, Imperial, Laurel, Concepcion, and Moran, JJ., concur.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-5963 May 20, 1953

THE LEYTE-SAMAR SALES CO., and RAYMUNDO TOMASSI, petitioners, vs. SULPICIO V. CEA, in his capacity as Judge of the Court of First Instance of Leyte and OLEGARIO LASTRILLA, respondents. Filomeno Montejo for petitioners. Sulpicio V. Cea in his own behalf. Olegario Lastrilla in his own behalf. BENGZON, J.: Labaled "Certiorari and Prohibition with preliminary Injunction" this petition prays for the additional writ ofmandamus to compel the respondent judge to give due course to petitioners' appeal from his order taxing costs. However, inasmuch as according to the answer, petitioners through their attorney withdrew their cash appeal bond of P60 after the record on appeal bond of P60 after the record on appeal had been rejected, the matter of mandamus may be summarily be dropped without further comment. From the pleadings it appears that, In civil case No. 193 of the Court of First Instance of Leyte, which is a suit for damages by the LeyteSamar Sales Co. (hereinafter called LESSCO) and Raymond Tomassi against the Far Eastern Lumber & Commercial Co. (unregistered commercial partnership hereinafter called FELCO), Arnold Hall, Fred Brown and Jean Roxas, judgment against defendants jointly and severally for the amount of P31,589.14 plus costs was rendered on October 29, 1948. The Court of Appeals confirmed the award in November 1950, minus P2,000 representing attorney's fees mistakenly included. The decision having become final, the sheriff sold at auction on June 9, 1951 to Robert Dorfe and Pepito Asturias "all the rights, interests, titles and participation" of the defendants in certain buildings and properties described in the certificate, for a total price of eight thousand and one hundred pesos. But on June 4, 1951 Olegario Lastrilla filed in the case a motion, wherein he claimed to be the owner by purchase on September 29, 1949, of all the "shares and interests" of defendant Fred Brown in the FELCO, and requested "under the law of preference of credits" that the sheriff be required to retain in his possession so much of the deeds of the auction sale as may be necessary "to pay his right". Over the plaintiffs' objection the judge in his order of June 13, 1951, granted Lastrilla's motion by requiring the sheriff to retain 17 per cent of the money "for delivery to the assignee, administrator or receiver" of the FELCO. And on motion of Lastrilla, the court on August 14, 1951, modified its order of delivery and merely declared that Lastrilla was entitled to 17 per cent of the properties sold, saying in part:

. . . el Juzgado ha encontrado que no se han respetado los derechos del Sr. Lastrilla en lo que se refiere a su adquiscicion de las acciones de C. Arnold Hall (Fred Brown) en la Far Eastern Lumber & Lumber Commercial C. porque la mismas han sido incluidas en la subasta. Es vedad que las acciones adquiridas por el Sr. Lastilla representan el 17 por ciento del capital de la sociedad "Far Eastern Lumber & Commercial Co., Inc., et al." pero esto no quiere decir que su vlor no esta sujeto a las fluctuaciones del negocio donde las invirtio. Se vendieron propiedades de la corporacion "Far Eastern Lumber & Co. Inc.," y de la venta solamente se obtuvo la cantidad de P8,100. "En su virtud, se declara que el 17 por ciento de las propiedades vendidas en publica subasta pretenece al Sr. O Lastrilla y este tiene derecho a dicha porcion pero con la obligacion de pagar el 17 por ciento de los gastos for la conservacion de dichas propriedades por parte del Sheriff; . . . . (Annex K) It is from this declaration and the subsequent orders to enforce it1 that the petitioners seek relief by certiorari, their position being the such orders were null and void for lack of jurisdiction. At their request a writ of preliminary injunction was issued here. The record is not very clear, but there are indications, and we shall assume for the moment, that Fred Brown (like Arnold Hall and Jean Roxas) was a partner of the FELCO, was defendant in Civil Case No. 193 as such partner, and that the properties sold at auction actually belonged to the FELCO partnership and the partners. We shall also assume that the sale made to Lastrilla on September 29, 1949, of all the shares of Fred Brown in the FELCO was valid. (Remember that judgment in this case was entered in the court of first instance a year before.) The result then, is that on June 9, 1951 when the sale was effected of the properties of FELCO to Roberto Dorfe and Pepito Asturias, Lastilla was already a partner of FELCO. Now, does Lastrilla have any proper claim to the proceeds of the sale? If he was a creditor of the FELCO, perhaps or maybe. But he was no. The partner of a partnership is not a creditor of such partnership for the amount of his shares. That is too elementary to need elaboration. Lastrilla's theory, and the lower court's seems to be: inasmuch as Lastrilla had acquired the shares of Brown is September, 1949, i.e., before the auction sale and he was not a party to the litigation, such shares could not have been transferred to Dorfe and Austrilla. Granting arguendo that the auction sale and not included the interest or portion of the FELCO properties corresponding to the shares of Lastrilla in the same partnership (17%), the resulting situation would be at most that the purchasers Dorfe and Austrias will have to recognized dominion of Lastrillas over 17 per cent of the properties awarded to them.2 So Lastrilla acquired no right to demand any part of the money paid by Dorfe and Austrias to he sheriff any part of the money paid by Dorfe and Austrias to the sheriff for the benefit of FELCO and Tomassi, the plaintiffs in that case, for the reason that, as he says, his shares (acquired from Brown) could not have been and were not auctioned off to Dorfe and Austrias.

Supposing however that Lastrillas shares have been actually (but unlawfully) sold by the sheriff (at the instance of plaintiffs) to Dorfe and Austrias, what is his remedy? Section 15, Rule 39 furnishes the answer. Precisely, respondents argue, Lastrilla vindicated his claim by proper action, i.e., motion in the case. We ruled once that "action" in this section means action as defined in section 1, Rule 2.3 Anyway his remedy is to claim "the property", not the proceeds of the sale, which the sheriff is directed by section 14, Rule 39 to deliver unto the judgment creditors. In other words, the owner of property wrongfully sold may not voluntarily come to court, and insist, "I approve the sale, therefore give me the proceeds because I am the owner". The reason is that the sale was made for the judgment creditor (who paid for the fees and notices), and not for anybody else. On this score the respondent judge's action on Lastrilla's motion should be declared as in excess of jurisdiction, which even amounted to want of jurisdiction, which even amounted to want of jurisdiction, considering specially that Dorfe and Austrias, and the defendants themselves, had undoubtedly the right to be heardbut they were not notified.4 Why was it necessary to hear them on the merits of Lastrilla's motion? Because Dorfe and Austrillas might be unwilling to recognized the validity of Lastrilla's purchase, or, if valid, they may want him not to forsake the partnership that might have some obligations in connection with the partnership properties. And what is more important, if the motion is granted, when the time for redemptioner seventeen per cent (178%) less than amount they had paid for the same properties. The defendants Arnold Hall and Jean Roxas, eyeing Lastrilla's financial assets, might also oppose the substitution by Lastrilla of Fred Brown, the judgment against them being joint and several. They might entertain misgivings about Brown's slipping out of their common predicament through the disposal of his shares. Lastly, all the defendants would have reasonable motives to object to the delivery of 17 per cent of the proceeds to Lustrial, because it is so much money deducted, and for which the plaintiffs might as another levyon their other holdings or resources. Supposing of course, there was no fraudulent collusion among them. Now, these varied interest of necessity make Dorfe, Asturias and the defendants indispensable parties to the motion of Lastrilla granting it was step allowable under our regulations on execution. Yet these parties were not notified, and obviously took no part in the proceedings on the motion. A valid judgment cannot be rendered where there is a want of necessary parties, and a court cannot properly adjudicate matters involved in a suit when necessary and indispensable parties to the proceedings are not before it. (49 C.J.S., 67.) Indispensable parties are those without whom the action cannot be finally determined. In a case for recovery of real property, the defendant alleged in his answer that he was occupying the property as a tenant of a third person. This third person is an indispensable party, for, without him, any judgment which the plaintiff might obtain against the tenant would have no

effectiveness, for it would not be binding upon, and cannot be executed against, the defendant's landlord, against whom the plaintiff has to file another action if he desires to recover the property effectively. In an action for partition of property, each co-owner is an indispensable party. (Moran, Comments, 1952 ed. Vol. I, p. 56.) (Emphasissupplied.) Wherefore, the orders of the court recognizing Lastrilla's right and ordering payment to him of a part of the proceeds were patently erroneous, because promulgated in excess or outside of its jurisdiction. For this reason the respondents' argument resting on plaintiffs' failure to appeal from the orders on time, although ordinarily decisive, carries no persuasive force in this instance. For as the former Chief Justice Dr. Moran has summarized in his Comments, 1952 ed. Vol. II, p. 168 . . . And in those instances wherein the lower court has acted without jurisdiction over the subject-matter, or where the order or judgment complained of is a patent nullity, courts have gone even as far as to disregard completely the questions of petitioner's fault, the reason being, undoubtedly, that acts performed with absolute want of jurisdiction over the subject-matter are void ab initio and cannot be validated by consent, express or implied, of the parties. Thus, the Supreme Court granted a petition forcertiorari and set aside an order reopening a cadastral case five years after the judgment rendered therein had become final. In another case, the Court set aside an order amending a judgment acquired a definitive character. And still in another case, an order granting a review of a decree of registration issued more than a year ago had been declared null void. In all these case the existence of the right to appeal has been recitals was rendered without any trial or hearing, and the Supreme Court, in grantingcertiorari, said that the judgment was by its own recitals a patent nullity, which should be set aside though an appeal was available but was not availed of. . . . Invoking our ruling in Melocotones vs. Court of First Instance, (57 Phil., 144), wherein we applied the theory of laches to petitioners' 3-years delay in requesting certiorari, respondents point out that whereas the orders complained of herein were issued in June 13, 1951 and August 14, 1951 this special civil action was not filed until August 1952. It should be observed that the order of June 13 was superseded by that of August 14, 1951. The last order merely declared "que el 17 por ciento de la propiedades vendidas en publica subasta pertenece at Sr. Lastrilla y este tiene derecho a dicha porcion." This does not necessarily mean that 17 per cent of the money had to be delivered to him. It could mean, as hereinbefore indicated, that the purchasers of the property (Dorfe and Asturias) had to recognize Lastrilla's ownership. It was only on April 16, 1952 (Annex N) that the court issued an order directing the sheriff "to tun over" to Lastrilla "17 per cent of the total proceeds of the auction sale". There is the order that actually prejudiced the petitioners herein, and they fought it until the last order of July 10,. 1952 (Annex Q). Surely a month's delay may not be regarded as laches. In view of the foregoing, it is our opinion, and we so hold, that all orders of the respondents judge requiring delivery of 17 per cent of the proceeds of the auction sale to respondent Olegario Lastrilla are null and void; and the costs of this suit shall be taxed against the latter. The preliminary injunction heretofore issued is made permanent. So ordered. Paras, C.J., Feria, Pablo, Tuason, Montemayor, Reyes, Jugo, Bautista Angelo and Labrador, JJ., concur.

Footnotes
1

Requiring sheriff to turn over 17 per cent of the proceeds to Lastillas.

This is a feature to be discussed between the three them at the proper time and this statement does not attempt to settle their respective rights.
3

Cf. Manila Herald Publishing Co. vs. Judge Ramos, 88 Phil., 94, Moran, Comments, 1952 ed. Vol. 2, p. 46.
4

True, Lastrilla was attorney for defendants, but he was careful in all his motions on the matter to sign "in his own representation" or "for himself and in his behalf."

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-26937 October 5, 1927

PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs. SEVERO EUGENIO LO, ET AL., defendants. SEVERIO EUGENIO LO, NG KHEY LING and YEP SENG, appellants. Jose Lopez Vito for appellants. Roman Lacson for appellee.

VILLAMOR, J.: 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 copartnership, 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 copartnership. 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-infact 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: TAI SING & CO. To your outstanding account (C. O. D.) with us on June 30, 1922 Interest on same from June 30, 1922 to December 31,1924, at 9 per cent per annum P16,518.74 3,720.86

Total 20, 239.00 ========= 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 had not been authorized by the board of directors of the company, nor was the person who subscribed said contract authorized to make the same, under the article of copartnership. 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.1awph!l.net 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 P22,727.74 up to August 31, 1926, and interest on P16,518.74 from 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 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 loner 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. Avancea, C.J., Johnson, Street, Malcolm, Johns and Romualdez, JJ., concur.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-3146 September 14, 1907

NICOLAS CO-PITCO, plaintiff-appellee, vs. PEDRO YULO, defendant-appellant. Salvador Laguda, for appellant. Rothrock and Ney, for appellee. WILLIARD, J.: The appellee makes the point in his brief in this court that although the defendant excepted to the order of the court below denying his motion for a new trial on the ground of the insufficiency of the evidence, yet we can not review such evidence because it is not properly certified. We think that this point is well taken. The testimony of one witness is certified to by the stenographer, who says that it is all the evidence which took during the trial. The testimony of this witness is unimportant. There follow in the record several pages of what purports to be evidence of different witnesses taken in narrative form, but neither the judge, nor the clerk, nor the stenographer certify in any way what these pages are or that they contain evidence taken during the trial of this case. For the purpose of this review, therefore, we can only consider the facts admitted by the pleadings and those stated in the decision of the court below. In that decision the court makes the following finding of fact, among others: Before February, 1903, Florencio Yulo and Jaime Palacios were partners in the operation of a sugar estate in Victorias, Island of Negros, and had commercial dealings with a Chinaman named Dy-Sianco, who furnished them with money and goods, and used to buy their crop of sugar. In February, 1903, the defendant, Pedro Yulo, father of the said Florencio, took charge of the latter's interest in the above-mentioned partnership, and he became a general partner with the said Jaime Palacios in the same business, and he continued as such partner until about the end of 1904, dealing with Dy-Sianco in the same manner as the old partnership had dealt with the latter. He then finds that the balance due from the firm Pedro Yulo and Jaime Palacios was 1,638.40 pesos, Philippine currency, and orders judgment against the defendant, Pedro Yulo, for the entire amount, with interest. 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 1698 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 can not increase the liability of Pedro Yulo.

The judgment of the court below is reversed and judgment is ordered in favor of the plaintiff and against the defendant, Pedro Yulo, for the sum of P819.20 pesos, Philippine Currency, with interest thereon at the rate of 6 per cent per annum from the 12th day of January, 1905, and the costs of the Court of First Instance. No costs will be allowed to either party in this court. So ordered. Arellano, C. J., Torres, Johnson, and Tracey, JJ., concur.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION

G.R. No. L-22493 July 31, 1975 ISLAND SALES, INC., plaintiff-appellee, vs. UNITED PIONEERS GENERAL CONSTRUCTION COMPANY, ET. AL defendants. BENJAMIN C. DACO,defendant-appellant. Grey, Buenaventura and Santiago for plaintiff-appellee. Anacleto D. Badoy, Jr. for defendant-appellant.

CONCEPCION JR., J.: 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. 1 Subsequently, on motion of the plaintiff, the complaint was dismissed insofar as the defendant Romulo B. Lumauig is concerned. 2 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 3 , 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 onehalf 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. Makalintal, C.J., Fernando (Chairman), Barredo and Aquino, JJ., concur.

Footnotes 1 p. 3a, RA 2 p. 4a, RA 3 49, RA 4 pp. 56-57, RA

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-3704 December 12, 1907 LA COMPAIA MARITIMA, plaintiff-appellant, vs. FRANCISCO MUOZ, ET AL., defendants-appellees. Rosado, Sanz and Opisso, for appellant. Haussermann, Cohn and Williams, for appellees.

WILLARD, J.: The plaintiff brought this action in the Court of First Instance of Manila against the partnership of Franciso Muoz & Sons, and against Francisco Muoz de Bustillo, Emilio Muoz 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 Muoz de Bustillo and Rafael Naval of the complaint, and in favor of the plaintiff and against the defendant partnership, Francisco Muoz & Sons, and Francisco Muoz 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 Muoz, Emilio Muoz, and Rafael Naval formed on ordinary general mercantile partnership under the name of Francisco Muoz & Sons for the purpose of carrying on the mercantile business in the Province of Albay which had formerly been carried on by Francisco Muoz. Francisco Muoz was a capitalist partner and Emilio Muoz and Rafael Naval were industrial partners. 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 Muoz 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 Muoz 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 Muoz, 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 can not 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 Muoz 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 Muoz 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 Muoz de Bustillo and one-eighth thereof for the industrial partner Emilio Muoz 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 Muoz 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 copartnership 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 copartnership, 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 copartnership, be they or be they not managing partners of the same, are liable personally and in solidum with all their property for the results of the transactions made in the name and for the account of the partnership, under the signature of the latter, and by a person authorized to make use thereof. 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 intrusted to a particular person, he can not 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 can not 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 intrusted. 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 can not 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 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 dividedamong 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" stand's 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 Muoz, 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, therefor, 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, 1 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 partnership are those which include one or more industrial partners. It may be said in passing that his views can not 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 copartnership. (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 copartnership, should not include their names in that of the firm. (p. 129.) 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 can not 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 copartnership 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 can not 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.lawphil.net 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 Muoz, Emilio Muoz, or Rafael Naval until the property of the defendant Francisco Muoz & 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 copartnership?" I decide in a negative sense; he is not; by express provision of the law he can not 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 copartnership, 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 ake 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 copartnership (comanditaria), and corporation (anonima), gives the rule for such personal and joint liability, which is the purpose of the provision in the abovequoted 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

(compaias 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 can not 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 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 can not 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 can not 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, can not 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:lawphil.net 1. That the defendant company is really a collective one such as is described in the Code of Commerce; the firm of "F. Muoz & 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 elementproperty, 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.

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 can not 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 can not 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 can not 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 can not otherwise than identical. In a copartnership, and as the result of the obligations thereunder, an industrial partner can not 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 can not 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. Footnotes 1 Page 134, supra.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-6252 January 28, 1911

GEORGE O. DIETRICH, plaintiff-appellee, vs. O.K. FREEMAN, JAMES L. PIERCE, and BURTON WHITCOMB, defendants. BURTON WHITCOMB, appellant. O'Brien and De Witt for appellant. W. L. Wright for appellee. TRENT, J.: 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 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 can not 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-ManYoc 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 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. Arellano, C. J., Mapa, Carson and Moreland, JJ., concur.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. 70403 July 7, 1989 SANTIAGO SYJUCO, INC., petitioner, vs. HON. JOSE P. CASTRO, AS PRESIDING JUDGE OF THE REGIONAL TRIAL COURT OF THE NATIONAL CAPITAL JUDICIAL REGION, BRANCH LXXXV, QUEZON CITY, THE CITY SHERIFF OF THE CITY OF MANILA, THE CITY REGISTER OF DEEDS OF THE CITY OF MANILA, EUGENIO LIM, ARAMIS LIM, MARIO LIM, PAULINO LIM, LORENZO LIM, NILA LIM and/ or THE PARTNERSHIP OF THE HEIRS OF HUGO LIM and ATTORNEY PATERNO P. CANLAS, respondents. Doroteo B. Daguna and Felix D. Carao for petitioner. Paterno Canlas for private respondents.

NARVASA, J.: 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 6rendered 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. L45752 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. 11 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. 12 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 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. 23 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. 25 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, MetroManila 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 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 decidedtwelve (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. Q32924 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. 36 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 38 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 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. 39 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 CAG.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. Q36485 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, evidenceex 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: ... 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. 40 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. xxx 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. 41 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. 42

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). 43 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. 45

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. 48 In the case of Delta Motor Sales Corporation vs. Mangosing 49 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 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. Q36485. 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. 51 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 52 has already been answered in Matanguihan vs. Tengco 53 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. 54 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, 56 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, 57when 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. 59

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 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. Cruz, Gancayco, Grio-Aquino and Medialdea, JJ., concur.

Footnotes

1 Record on Appeal, Civil Case No. 75180, pp. 3-4, 10, 35, Rollo, G.R. No. 45752, p. 197. 2 Civil Cases Numbered 75180 (CFI, Manila), 112762 (CFI, Manila), 83-19018 (RTC, Manila), Q-32924 (RTC, QC), and Q- 36485 (RTC, QC). 3 CA-G.R. No. 00242-R; CA-G.R. No. 51752. 4 G.R. No. L-34683; G.R. No. L-45752; G.R. No. L-56014. 5 Record on Appeal, Civil Case No. 75180, pp. 1-13, 32, 33; Rollo G.R. No.L-45752, p. 197. 6 Later Associate Justice of the Supreme Court and now Ombudsman. 7 Rollo, G.R. No. L-45752, pp. 316-338. 8 Rollo, G.R. No. L-45752. pp. 211-214. 9 Record on Appeal, Civil Case No. 75180, pp. 683-737; Rollo, G.R. No. L-45752, p. 197. 10 Record on Appeal, Civil Case No. 75180, pp. 737-740; Rollo, G.R. No. L-45752, p. 197. 11 Rollo, G.R. No. L-45752, p. 198. 12 Id., pp. 105-134. 13 Id., at pp. 244 et seq. 14 Branch 9, presided over by Hon. Manuel Reyes, later Associate Justice, C.A. 15 SEE footnote 5 at p. 3, supra. 16 Rollo, G.R. No. L-56014, p. 5. 17 Referred to in the later Order of February 19,1979 in Civil Case No. 75180; Rollo, G.R. No. 56014, p. 27. 18 His Honor was made aware of Civil Case No. 112762 when the Lims filed a motion for the consolidation of that case with Civil Case No. 75180. 19 Rollo, G.R. No. 56014, p. 27 (Order, Feb. 19,1979, supra; p. 28 (order March 6,1979). 20 Id., pp. 103-106 (Order, Aug. 10, 1979); pp. 151-152 (Orders, Nov. 26, 1979 and Jan. 28, 1980) 21 Id., pp. 89-93, 94-97.

22 Second Division, per Barredo, J. 23 Rollo, G.R. No. 56014, pp. 415-423. 24 Id., pp- 424-442. 25 Id., pp- 498-500. 26 Rollo, G.R. No. 70403, p. 65. 27 Rollo, G.R. No. 70403, pp. 66-68 (Annex E, Petition). 28 Id., p. 69. 29 Rollo, G.R. No. 70403, p. 222. 30 Id., p. 223. 31 His comment dated June 7,1986; Rollo, G.R. No. 70403, p. 226. 32 Rollo, G.R. No. 70403, p. 9. 33 Rollo, G.R. No. 70403, pp. 191-194. 34 Id., pp. 83-85. 35 Id., pp. 86-93. 36 Rollo, G.R. No. L-70403, pp. 221-250. 37 Id., at pp. 223, 225, 227. 38 Id., pp. 265-271. 39 Rollo, G.R. No. L-70403, pp. 171-172. 40 31 C.J.S. pp. 490-494. 41 Id., pp. 498-499. 42 28 Am. Jur. 2d pp. 727. 43 Padilla, Civil Code, 1987 ed., Vol. VI, p. 153; see also Tolentino, Civil Code, 1959 ed., Vol. V, p. 303, citing Bosler vs. Sealfon, 82 Pa. Sup. Ct., 254. 44 Sec. 3, Rule 2, Rules of Court.

45 Sec. 4, Rule 2, Rules of Court. 46 Sec. 49, Rule 39, Rules of Court, which provides that the effect of a judgment rendered by a court having jurisdiction is, in proceedings other than those in rem, "with respect to the matter directly adjudged or as to any other matter that could have been raised in relation thereto, conclusive between the parties and their successors in interest by title subsequent to the commencement of the action or special proceeding, litigating for the same thing and under the same title and in the same capacity." 47 SEE footnote 26 at p. 12, supra. 48 Rule 14, Rules of Court (Italics supplied). 49 70 SCRA 598, 602-603. 50 Venturanza vs. CA, 156 SCRA 305, 313. 51 I Moran, Comments on the Rules of Court, 1979 ed., p. 435, citing Salmon, et al. vs. Tan Cuenco, 36 Phil. 556, Echevarria vs. Parsons Hardware Co., 51 Phil. 980, and Reyes vs. Paz, 60 Phil. 440; see also Keister vs. Navarro, 77 SCRA 209, citing Pantaleon vs. Asuncion, 105 Phil. 761, Gov't. vs. Bator, 69 Phil. 130, Caneda vs. CA, 116 Phil. 283, and Trimica, Inc. vs. Polaris Marketing Corp., 60 SCRA 321-325; I Francisco's Revised Rules of Court, 2nd ed., p. 761. 52 Sec. 9 (2) B.P. 129, The Judiciary Reorganization Act of 1980. 53 95 SCRA 478, 485. 54 See also the following cases where the Court took cognizance of, and resolved, similar petitions without regard to the question of whether or not an action for annulment was the appropriate recourse; Ang vs. Navarro, 81 SCRA 458; Olar vs. Cuna, 90 SCRA 114; Cavili vs. Vamenta, Jr., 114 SCRA 343; and Filmerco Commercial Co., Inc. vs. IAC, 149 SCRA 193. 55 31 SCRA 1, 23. 56 155 SCRA 604, 621. 57 Rollo, G.R. No. L-70403, p. 225. 58 SEE footnote 10 on p. 5, supra. 59 Rule 65, Sec. 3, Rules of Court.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-12164 May 22, 1959

BENITO LIWANAG and MARIA LIWANAG REYES, petitioners-appellants, vs. WORKMEN'S COMPENSATION COMMISSION, ET AL., respondents-appellees. J. de Guia for appellants. Estanislao R. Bayot for appellees. ENDENCIA, J.: 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. Paras, C. J., Bengzon, Padilla, Montemayor, Bautista Angelo, Labrador, and Concepcion, JJ., concur.

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.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-43596 October 31, 1936

PHILIPPINE NATIONAL BANK, plaintiff-appellee, vs. THE NATIONAL CITY BANK OF NEW YORK, and MOTOR SERVICE COMPANY, INC., defendants. MOTOR SERVICE COMPANY, INC., appellant. L. D. Lockwood for appellant. Camus and Delgado for appellee.

RECTO, J.: This case was submitted for decision to the court below on the following stipulation of facts: 1. That plaintiff is a banking corporation organized and existing under and by virtue of a special act of the Philippine Legislature, with office as principal place of business at the Masonic Temple Bldg., Escolta, Manila, P. I.; that the defendant National City Bank of New York is a foreign banking corporation with a branch office duly authorized and licensed to carry and engage in banking business in the Philippine Islands, with branch office and place of business in the National City Bank Bldg., City of Manila, P. I., and that the defendant Motor Service Company, Inc., is a corporation organized and existing under and by virtue of the general corporation law of the Philippine Islands, with office and principal place of business at 408 Rizal Avenue, City of Manila, P. I., engaged in the purchase and sale of automobile spare parts and accessories. 2. That on April 7 and 9, 1933, an unknown person or persons negotiated with defendant Motor Service Company, Inc., the checks marked as Exhibits A and A-1, respectively, which are made parts of the stipulation, in payment for automobile tires purchased from said defendant's stores, purporting to have been issued by the "Pangasinan Transportation Co., Inc. by J. L. Klar, Manager and Treasurer", against the Philippine National Bank and in favor of the International Auto Repair Shop, for P144.50 and P215.75; and said checks were indorsed by said unknown persons in the manner indicated at the back thereof, the Motor Service Co., Inc., believing at the time that the signature of J. L. Klar, Manager and Treasurer of the Pangasinan Transportation Co., Inc., on both checks were genuine. 3. The checks Exhibits A and A-1 were then indorsed for deposit by the defendant Motor Service Company, Inc, at the National City Bank of New York and the former was accordingly credited with the amounts thereof, or P144.50 and P215.75.

4. On April 8 and 10, 1933, the said checks were cleared at the clearing house and the Philippine National Bank credited the National City Bank of New York for the amounts thereof, believing at the time that the signatures of the drawer were genuine, that the payee is an existing entity and the endorsement at the back thereof regular and genuine. 5. The Philippine National Bank then found out that the purported signatures of J. L. Klar, as Manager and Treasurer of the Pangasinan Transportation Company, Inc., in said Exhibits A and A-1 were forged when so informed by the said Company, and it accordingly demanded from the defendants the reimbursement of the amounts for which it credited the National City Bank of New York at the clearing house and for which the latter credited the Motor Service Co., but the defendants refused, and continue to refuse, to make such reimbursements. 6. The Pangasinan Transportation Co., Inc., objected to have the proceeds of said check deducted from their deposit. 7. Exhibits B, C, D, E, F, and G, which were introduced at the trial in the municipal court of Manila and forming part of the record of the present case, are admitted by the parties as genuine and are made part of this stipulation as well as Exhibit H hereto attached and made a part hereof. Upon plaintiff's motion, the case was dismissed before trial as to the defendant National City Bank of New York. a decision was thereafter rendered giving plaintiff judgment for the total amount of P360.25, with interest and costs. From this decision the instant appeal was taken. Before us is the preliminary question of whether the original appeal taken by the plaintiff from the decision of the municipal court of Manila where this case originated, became perfected because of plaintiff's failure to attach to the record within 15 days from receipt of notice of said decision, the certificate of appeal bond required by section 76 of the Code of Civil Procedure. It is not disputed that both the appeal docket fee and the appeal cash bond were paid and deposited within the prescribed time. The issue is whether the mere failure to file the official receipt showing that such deposit was made within the said period is a sufficient ground to dismiss plaintiff's appeal. This question was settled by our decision in the case of Blanco vs.Bernabe and lawyers Cooperative Publishing Co. (page 124, ante), and no further consideration. No error was committed in allowing said appeal. We now pass on to consider and determine the main question presented by this appeal, namely, whether the appellee has the right to recover from the appellant, under the circumstances of this case, the value of the checks on which the signatures of the drawer were forged. The appellant maintains that the question should be answered in the negative and in support of its contention appellant advanced various reasons presently to be examined carefully. I. It is contended, first of all, that the payment of the checks in question made by the drawee bank constitutes an "acceptance", and, consequently, the case should be governed by the provisions of section 62 of the Negotiable Instruments Law, which says: SEC. 62. Liability of acceptor. The acceptor by accepting the instrument engages that he will pay it according to the tenor of his acceptance; and admits:

(a) The existence of the drawer, the genuineness of his signature, and his capacity and authority to draw the instrument; and (b) The existence of the payee and his then capacity to indorse. This contention is without merit. A check is a bill of exchange payable on demand and only the rules governing bills of exchange payable on demand are applicable to it, according to section 185 of the Negotiable Instruments Law. In view of the fact that acceptance is a step unnecessary, in so far as bills of exchange payable on demand are concerned (sec. 143), it follows that the provisions relative to "acceptance" are without application to checks. Acceptance implies, in effect, subsequent negotiation of the instrument, which is not true in case of the payment of a check because from the moment a check is paid it is withdrawn from circulation. The warranty established by section 62, is in favor of holders of the instrument after its acceptance. When the drawee bank cashes or pays a check, the cycle of negotiation is terminated, and it is illogical thereafter to speak of subsequent holders who can invoke the warranty provided in section 62 against the drawee. Moreover, according to section 191, "acceptance" means "an acceptance completed by delivery or notification" and this concept is entirely incompatible with payment, because when payment is made the check is retained by the bank, and there is no such thing as delivery or notification to the party receiving the payment. Checks are not to be accepted, but presented at once for payment. (1 Bouvier's Law Dictionary, 476.) There can be no such thing as "acceptance" in the ordinary sense of the term. A check being payable immediately and on demand, the bank can fulfill its duty to the depositor only by paying the amount demanded. The holder has no right to demand from the bank anything but payment of the check, and the bank has no right, as against the drawer, to do anything but pay it. (5 R. C. L., p. 516, par. 38.) A check is not an instrument which in the ordinary course of business calls for acceptance. The holder can never claim acceptance as his legal right. He can present for payment, and only for payment. (1 Morse on Banks and Banking, 6th ed., pp. 898, 899.) There is, however, nothing in the law or in, business practice against the presentation of checks for acceptance, before they are paid, in which case we have a "certification" equivalent to "acceptance" according to section 187, which provides that "where a check is certified by the bank on which it is drawn, the certification is equivalent to an acceptance", and it is then that the warranty under section 62 exists. This certification or acceptance consists in the signification by the drawee of his assent to the order of the drawer, which must not express that the drawee will perform his promise by any other means than the payment of money. (Sec. 132.) When the holder of a check procures it to be accepted or certified, the drawer and all indorsers are discharged from liability thereon (sec. 188), and then the check operates as an assignment of a part of the funds to the credit of the drawer with the bank. (Sec. 189.) There is nothing in the nature of the check which intrinsically precludes its acceptance, in like manner and with like effect as a bill of exchange or draft may be accepted. The bank may accept if it chooses; and it is frequently induced by convenience, by the exigencies of business, or by the desire to oblige customers, voluntarily to incur the obligation. The act by which the bank places itself under obligation to pay to the holder the sum called for by a check must be the expressed promise or undertaking of the bank signifying its intent to assume the obligation, or some act from which the law will imperatively imply such valid promise or undertaking. The most ordinary form which such an act assumes is the acceptance by the bank of the check, or, as it is perhaps more often called, the certifying of the check. (1 Morse on Banks and Banking, pp. 898, 899; 5 R. C. L., p. 520.) No doubt a bank may by an unequivocal promise in writing make itself liable in any event to pay the check upon demand, but this is not an "acceptance" of the check in the true sense of that term.

Although a check does not call for acceptance, and the holder can present it only for payment, the certification of checks is a means in constant and extensive use in the business of banking, and its effects and consequences are regulated by the law merchant. Checks drawn upon banks or bankers, thus marked and certified, enter largely into the commercial and financial transactions of the country; they pass from hand to hand, in the payment of debts, the purchase of property, and in the transfer of balances from one house and one bank to another. In the great commercial centers, they make up no inconsiderable portion of the circulation, and thus perform a useful, valuable, and an almost indispensable office. The purpose of procuring a check to be certified is to impart strength and credit to the paper by obtaining an acknowledgment from the certifying bank that the drawer has funds therein sufficient to cover the check and securing the engagement of the bank that the check will be paid upon presentation. A certified check has a distinctive character as a species of commercial paper, and performs important functions in banking and commercial business. When a check is certified, it ceases to possess the character, or to perform the functions, of a check, and represents so much money on deposit, payable to the holder on demand. The check becomes a basis of credit an easy mode of passing money from hand to hand, and answers the purposes of money. (5 R. C. L., pp. 516, 517.)lwphi1.nt All the authorities, both English and American, hold that a check may be accepted, though acceptance is not usual. By the law merchant, the certificate of the bank that a check is good is equivalent to acceptance. It implies that the check is drawn upon sufficient funds in the hands of the drawee, that they have been set apart for its satisfaction, and that they shall be so applied whenever the check is presented for payment. It is an undertaking that the check is good then, and shall continue good, and this agreement is as binding on the bank as its notes of circulation, a certificate of deposit payable to the order of the depositor, or any other obligation it can assume. The object of certifying a check, as regards both parties is to enable the holder to use it as money. The transferee takes it with the same readiness and sense of security that he would take the notes of the bank. It is available also to him for all the purposes of money. Thus it continues to perform its important functions until in the course of business it goes back to the bank for redemption, and is extinguished by payment. It cannot be doubted that the certifying bank intended these consequences, and it is liable accordingly. To hold otherwise would render these important securities only a snare and a delusion. A bank incurs no greater risk in certifying a check than in giving a certificate of deposit. In well-regulated banks the practice is at once to charge the check to the account of the drawer, to credit it in a certified check account, and, when the check is paid, to debit that account with the amount. Nothing can be simpler or safer than this process. (Merchants' Bank vs. States Bank, 10 Wall., 604, at p. 647; 19 Law. ed., 1008, 1019.) Ordinarily the acceptance or certification of a check is performed and evidenced by some word or mark, usually the words "good", "certified" or "accepted" written upon the check by the banker or bank officer. (1 Morse, Banks and Banking, 915; 1 Bouvier's Law Dictionary, 476.) The bank virtually says, that check is good; we have the money of the drawer here ready to pay it. We will pay it now if you will receive it. The holder says, No, I will not take the money; you may certify the check and retain the money for me until this check is presented. The law will not permit a check, when due, to be thus presented, and the money to be left with the bank for the accommodation of the holder without discharging the drawer. The money being due and the check presented, it is his own fault if the holder declines to receive the pay, and for his own convenience has the money appropriated to that check subject to its future presentment at any time within the statute of limitations. (1 Morse on Banks and Banking, p. 920.) The theory of the appellant and of the decisions on which it relies to support its view is vitiated by the fact that they take the word "acceptance" in its ordinary meaning and not in the technical sense in

which it is used in the Negotiable Instruments Law. Appellant says that when payment is made, such payment amounts to an acceptance, because he who pays accepts. This is true in common parlance but "acceptance" in legal contemplation. The word "acceptance" has a peculiar meaning in the Negotiable Instruments Law, and, as has been above stated, in the instant case there was payment but no acceptatance, or what is equivalent to acceptance, certification. With few exceptions, the weight of authority is to the effect that "payment" neither includes nor implies "acceptance". In National Bank vs. First National Bank ([19101, 141 Mo. App., 719; 125 S. W., 513), the court asks, if a mere promise to pay a check is binding on a bank, why should not the absolute payment of the check have the same effect? In response, it is submitted that the two things, that is acceptance and payment, are entirely different. If the drawee accepts the paper after seeing it, and then permits it to go into circulation as genuine, on all the principles of estoppel, he ought to be prevented from setting up forgery to defeat liability to one who has taken the paper on the faith of the acceptance, or certification. On the other hand, mere payment of the paper at the termination of its course does not act as an estoppel. The attempt to state a general rule covering both acceptance and payment is responsible for a large part of the conflicting arguments which have been advanced by the courts with respect to the rule. (Annotation at 12 A. L. R., 1090 1921].) In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the court said: We are of the opinion that "payment is not acceptance". Acceptance, as defined by section 131, cannot be confounded with payment. . . . Acceptance, certification, or payment of a check, by the express language of the statute, discharges the liability only of the persons named in the statute, to wit, the drawer and all indorsers, and the contract of indorsement by the negotiator if the check is discharged by acceptance, certification, or payment. But clearly the statute does not say that the contract of warranty of the negotiator, created by section 65, is discharged by these acts. The rule supported by the majority of the cases (14 A. L. R. 764), that payment of a check on a forged or unauthorized indorsement of the payee's name, and charging the same to the drawer's account, do not amount to an acceptance so as to make the bank liable to the payee, is supported by all of the recent cases in which the question is considered. (Cases cited, Annotation at 69 A. L. R., 1076, 1077 [1930].) Merely stamping a check "Paid" upon its payment on a forged or unauthorized indorsement is not an acceptance thereof so as to render the drawee bank liable to the true payee. (Anderson vs. Tacoma National Bank [1928], 146 Wash., 520; 264 Pac., 8; Annotation at 69 A. L. R., 1077, [1930].) In State Bank of Chicago vs. Mid-City Trust & Savings Bank (12 A. L. R., 989, 991, 992), the court said: The defendant in error contends that the payment of the check shows acceptance by the bank, urging that there can be no more definite act by the bank upon which a check has been drawn, showing acceptance than the payment of the check. Section 184 of the Negotiable Instruments Act (sec. 202)

provides that the provisions of the act applicable to bills of exchange apply to a check, and section 131 (sec. 149), that the acceptance of a bill must be in writing signed by the drawee. Payment is the final act which extinguishes a bill. Acceptance is a promise to pay in the future and continues the life of the bill. It was held in the First National Bank vs. Whitman (94 U. S., 343; 24 L. ed., 229), that payment of a check upon a forged indorsement did not operate as an acceptance in favor of the true owner. The contrary was held in Pickle vs. Muse (Fickle vs.People's Nat. Bank, 88 Tenn., 380; 7 L.R.A., 93; 17 Am. St. Rep., 900; 12 S. W., 919), and Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751) at a time when the Negotiable Instruments Act was not in force in those states. The opinion of the Supreme Court of the United States seems more logical, and the provision of the Negotiable Instruments Act now require an acceptance to be in writing. Under this statute the payment of a check on a forged indorsement, stamping it "paid," and charging it to the account of the drawer, do not constitute an acceptance of the check or create a liability of the bank to the true holder or the payee. (Elyria Sav. & Bkg. Co. vs. Walker Bin Co., 92 Ohio St., 406; L. R. A., 1916D, 433; 111 N. E., 147; Ann. Cas. 1917D, 1055; Baltimore & O. R. Co. vs. First National Bank, 102 Va., 753; 47 S. E., 837; State Bank of Chicago vs. Mid-City Trust & Savings Bank 12 A. L. R., pp. 989, 991, 992.) Before drawee's acceptance of check there is no privity of contract between drawee and payee. Drawee's payment of check on unauthorized indorsement does not constitute "acceptance" of check. (Sinclair Refining Co. vs. Moultrie Banking Co., 165 S. E., 860 [1932].) The great weight of authority is to the effect that the payment of a check upon a forged or unauthorized indorsement and the stamping of it "paid" does not constitute an acceptance. (Dakota Radio Apparatus Co.vs. First Nat. Bank of Rapid City, 244 N. W., 351, 352 [1932].) Payment of the check, cashing it on presentment is not acceptance. (South Boston Trust Co. vs. Levin, 249 Mass., 45, 48, 49; 143 N. E., 816; Blocker, Shepard Co. vs. Granite Trust Company, 187 Me., 53, 54 [1933].) In Rauch vs. Bankers National Bank of Chicago (143 Ill. App., 625, 636, 637 [1908]), the language of the decision was as follows: . . . The plaintiffs say that this acceptance was made by the very unauthorized payments of which they complain. This suggestion does not seem forceful to us. It is the contention which was made before the Supreme Court of the United States in First National Bank vs. Whitman (94 U. S., 343), and repudiated by that court. The language of the opinion in that case is so apt in the present case that we quote it: "It is further contended that such an acceptance of a check as creates a privity between the payee and the bank is established by the payment of the amount of this check in the manner described. This argument is based upon the erroneous assumption that the bank has paid this check. If this were true, it would have discharged all of its duty, and there would be an end to the claim against it. The bank supposed that it had paid the check, but this was an error. The money it paid was upon a pretended and not a real indorsement of the name of the payee. . . . We cannot recognize the argument that payment of the amount of the check or sight draft under such circumstances amounts to an acceptance creating a privity of contract with the real owner.

"It is difficult to construe a payment as an acceptance under any circumstances. . . . A banker or individual may be ready to make actual payment of a check or draft when presented, while unwilling to make a promise to pay at a future time. Many, on the other hand, are more ready to promise to pay than to meet the promise when required. The difference between the transactions is essential and inherent." And in Wharf vs. Seattle National Bank (24 Pac. [2d]), 120, 123 [1933]): It is the rule that payment of a check on unauthorized or forged indorsement does not operate as an acceptance of the check so as to authorize an action by the real owner to recover its amount from the drawee bank. (Michie on Banks and Banking, vol. 5, sec. 278, p. 521.) A full list of the authorities supporting the rule will be found in a footnote to the foregoing citation. (See also, Federal Land Bank vs.Collins, 156 Miss., 893; 127 So., 570; 69 A. L. R., 1068.) In a very recent case, Federal Land Bank vs. Collins (69 A. L. R., 1068, 1072-1074), this question was discussed at considerable length. The court said: In the light of the first of these statutes, counsel for appellant is forced to stand upon the narrow ledge that the payment of the check by the two banks will constitute an acceptance. The drawee bank simply marked it "paid" and did not write anything else except the date. The bank first paying the check, the Commercial National Bank and Trust Company, simply wrote its name as indorser and passed the check on to the drawee bank; does this constitute an acceptance? The precise question has not been presented to this court for decision. Without reference to authorities in other jurisdictions it would appear that the drawee bank had never written its name across the paper and therefore, under the strict terms of the statute, could not be bound as an acceptor; in the second place, it does not appear to us to be illogical and unsound to say that the payment of a check by the drawee, and the stamping of it "paid", is equivalent to the same thing as the acceptance of a check; however, there is a variety of opinions in the various jurisdictions on this question. Counsel correctly states that the theory upon which the numerous courts hold that the payment of a check creates privity between the holder of the check and the drawee bank is tantamount to a pro tanto assignment of that part of the funds. It is most easily understood how the payment of the check, when not authorized to be done by the drawee bank, might under such circumstances create liability on the part of the drawee to the drawer. Counsel cites the case of Pickle vs. Muse (88 Tenn, 380; 12 S. W., 919; 7 L. R. A., 93; 17 Am. St. Rep., 900), wherein Judge Lurton held that the acceptance of a check was necessary in order to give the holder thereof a right of action thereon against the bank, and further held in a case similar to this, so far as this question is concerned, that the acceptance of a check so as to give a right of action to the payee is inferred from the retention of the check by the bank and its subsequent charge of the amount to the drawer, although it was presented by, and payment made, an unauthorized person. Judge Lurton cited the case of National Bank of the Republic vs.Millard (10 Wall., 152; 19 L. ed., 897), wherein the Supreme Court of the United States, not having such a case before it, threw out the suggestion that, if it was shown that a bank had charged the check on its books against the drawer and made settlement with the drawee that the holder could recover on account of money had and received, invoking the rule of justice and fairness, it might be said there was an implied promise to the holder to pay it on demand. (See National Bank of the Republic vs. Millard, 10 Wall. [77 U. S.], 152; 19 L. ed., 899.) The Tennessee court then argued that it would be inequitable and unconscionable for the owner and payee of the check to be limited to an action against an insolvent drawer and might thereby lose the debt. They recognized the legal principle that there is no privity between the drawer bank and the holder, or payee, of the check, and proceeded to hold that no particular kind of writing was necessary to constitute an acceptance and

that it became a question of fact, and the bank became liable when it stamped it "paid" and charged it to the account of the drawer, and cites, in support of its opinion, Seventh National Bank vs. Cook (73 Pa., 483; 13 Am. Rep., 751); Saylor vs. Bushong (100 Pa., 23; 45 Am. Rep., 353); and Dodge vs. Bank (20 Ohio St., 234; 5 Am. Rep., 648). This decision was in 1890, prior to the enactment of the Negotiable Instruments Law by the State of Tennessee. However, in this case Judge Snodgrass points out that the Millard case, supra, was dicta. The Dodge case, from the Ohio court, held exactly as the Tennessee court, but subsequently in the case of Elyria Bank vs. Walker Bin Co. (92 Ohio St., 406; 111 N. E., 147; L. R. A. 1916D, 433; Ann. Cas. 1917D, 1055), the court held to the contrary, called attention to the fact that the Dodge case was no longer the law, and proceeded to announce that, whatever might have been the law before the passage of the Negotiable Instrument Act in that state, it was no longer the law; that the rule announced in the Dodge case had been "discarded." The court, in the latter case, expressed its doubts that the courts of Tennessee and Pennsylvania would adhere to the rule announced in the Pickle case, quoted supra, in the face of the Negotiable Instrument Law. Subsequent to the Millard case, the Supreme Court of the United States, in the case of First National Bank of Washington vs. Whitman (94 U. S., 343, 347; 24 L. ed., 229), where the bank, without any knowledge that the indorsement of the payee was unauthorized, paid the check, and it was contended that by the payment the privity of contract existing between the drawer and drawee was imparted to the payee, said: "It is further contended that such an acceptance of the check as creates a privity between the payee and the bank is established by the payment of the amount of this check in the manner described. This argument is based upon the erroneous assumption that the bank has paid this check. If this were true, it would have discharged all of its duty, and there would be an end of the claim against it. The bank supposed that it had paid the check; but this was an error. The money it paid was upon a pretended and not a real indorsement of the name of the payee. The real indorsement of the payee was as necessary to a valid payment as the real signature of the drawer; and in law the check remains unpaid. Its pretended payment did not diminish the funds of the drawer in the bank, or put money in the pocket of the person entitled to the payment. The state of the account was the same after the pretended payment as it was before. "We cannot recognize the argument that a payment of the amount of a check or sight draft under such circumstances amounts to an acceptance, creating a privity of contract with the real owner. It is difficult to construe a payment as an acceptance under any circumstances. The two things are essentially different. One is a promise to perform an act, the other an actual performance. A banker or an individual may be ready to make actual payment of a check or draft when presented, while unwilling to make a promise to pay at a future time. Many, on the other hand, are more ready to promise to pay than to meet the promise when required. The difference between the transactions is essential and inherent." Counsel for the appellant cite other cases holding that the stamping of the check "paid" and the charging of the amount thereof to the drawer constituted an acceptance, but we are of opinion that none of these cases cited hold that it is in compliance with the Negotiable Instruments Act; paying the check and stamping same is not the equivalent of accepting the check in writing signed by the drawee. The cases holding that payment as indicated above constituted acceptance were rendered prior to the adoption of the Negotiable Instruments Act in the particular state, and these decisions are divided into two classes: the one holding that the

check delivered by the drawer to the holder and presented to the bank or drawee constitutes an assignment pro tanto; the other holding that the payment of the check and the charging of same to the drawee although paid to an unauthorized person creates privity of contract between the holder and the drawee bank. We have already seen that our own court has repudiated the assignment pro tanto theory, and since the adoption of the Negotiable Instrument Act by this state we are compelled to say that payment of a check is not equivalent to accepting a check in writing and signing the name of the acceptor thereon. Payment of the check and the charging of same to the drawer does not constitute an acceptance. Payment of the check is the end of the voyage; acceptance of the check is to fuel the vessel and strengthen it for continued operation on the commercial sea. What we have said applies to the holder and not to the drawer of the check. On this question we conclude that the general rule is that an action cannot be maintained by a payee of the check against the bank on which is draw unless the check has been certified or accepted by the bank in compliance with the statute, even though at the time the check is that an action cannot be maintained by a payee of the drawer of the check out of which the check is legally payable; and that the payment of the check by the bank on which it is drawn, even though paid on the unauthorized indorsement of the name of the holder (without notice of the defect by the bank), does not constitute a certification thereof, neither is it an acceptance thereof; and without acceptance or certification, as provided by statute, there is no privity of contract between the drawee bank and the payee, or holder of the check. Neither is there an assignment pro tanto of the funds where the check is not drawn on a particular fund, or does not show on its face that it is an assignment of a particular fund. The above rule as stated seems to have been the rule in the majority of the states even before the passage of the uniform Negotiable Instruments Act in the several states. The decision in the case of First National Bank vs. Bank of Cottage Grove (59 Or., 388), which appellant cites in its brief (pp. 12, 13 ) has been expressly overruled by the Supreme Court of Massachusetts in South Boston Trust Co. vs. Levin (143 N. E., 816, 817), in the following language: In First National Bank vs. Bank of Cottage Grove (59 Or., 388; 117 Pac., 293, 296, at page 396), it was said: "The payment of a bill or check by the drawee amounts to more than an acceptance. The rule, holding that such a payment has all the efficacy of an acceptance, is founded upon the principle that the greater includes the less." We are unable to agree with this statement as there is no similarity between acceptance and payment; payment discharges the instrument, and no one else is expected to advance anything on the faith of it; acceptance, contemplates further circulation, induced by the fact of acceptance. The rule that the acceptor made certain admissions which will inure to the benefit of subsequent holders, has no applicability to payment of the instrument where subsequent holders can never exist. II. The old doctrine that a bank was bound to know its correspondent's signature and that a drawee could not recover money paid upon a forgery of the drawer's name, because it was said, the drawee was negligent not to know the forgery and it must bear the consequence of its negligence, is fast fading into the misty past, where it belongs. It was founded in misconception of the fundamental principles of law and common sense. (2 Morse, Banks and Banking, p. 1031.) Some of the cases carried the rule to its furthest limit and held that under no circumstances (except, of course, where the purchaser of the bill has participated in the fraud upon the drawee) would

the drawee be allowed to recover bank money paid under a mistake of fact upon a bill of exchange to which the name of the drawer had been forged. This doctrine has been freely criticized by the eminent authorities, as a rule too favorable to the holder, not the most fair, nor best calculated to effectuate justice between the drawee and the drawer. (5 R.C.L., p. 556.) The old rule which was originally announced by Lord Mansfield in the leading case of Price vs. Neal (3 Burr., 1354), elicited the following comment from Justice Holmes, then Chief Justice of the Supreme Court of Massachusetts, in the case of Dedham National Bank vs. Everett National Bank (177 Mass., 392). "Probably the rule was adopted from an impression of convenience rather than for any more academic reason; or perhaps we may say that Lord Mansfield took the case out of the doctrine as to payments under a mistake of fact by the assumption that a holder who simply presents negotiable paper for payment makes no representation as to the signature, and that the drawee pays at his peril." Such was the reaction that followed Lord Mansfield's rule which Justice Story of the United States Supreme adopted in the case of Bank of United States vs. Georgia (10 Wheat., 333), that in B. B. Ford & Co.vs. People's Bank of Orangeburg (74 S. C., 180), it was held that "an unrestricted indorsement of a draft and presentation to the drawee is a representation that the signature of the drawer is genuine", and in Lisbon First National Bank vs. Wyndmere Bank (15 N. D., 299), it was also held that "the drawee of a forged check who has paid the same without detecting the forgery, may upon discovery of the forgery, recover the money paid from the party who received the money, even though the latter was a good faith holder, provided the latter has not been misled or prejudiced by the drawee's failure to detect the forgery." Daniel, in his treatise on Negotiable Instruments, has the following to say: In all the cases which hold the drawee absolutely estoppel by acceptance or payment from denying genuineness of the drawer's name, the loss is thrown upon him on the ground of negligence on his part in accepting or paying, until he has ascertained the bill to be genuine. But the holder has preceded him in negligence, by himself not ascertaining the true character of the paper before he received it, or presented it for acceptance or payment. And although, as a general rule, the drawee is more likely to know the drawer's handwriting than a stranger is, if he is in fact deceived as to its genuineness, we do not perceive that he should suffer more deeply by mistake than a stranger, who, without knowing the handwriting, has taken the paper without previously ascertaining its genuineness. And the mistake of the drawee should always be allowed to be corrected, unless the holder, acting upon faith and confidence induced by his honoring the draft, would be placed in a worse position by according such privilege to him. This view has been applied in a well considered case, and is intimidated in another; and is forcibly presented by Mr. Chitty, who says it is going a great way to charge the acceptor with knowledge of his correspondent's handwriting, "unless some bona fideholder has purchased the paper on the faith of such an act." Negligence in making payment under a mistake of fact is not now deemed a bar to recovery of it, and we do not see why any exception should be made to the principle, which would apply as well as to release an obligation not consummated by payment. ( Vol. 2, 6th edition, pp. 1537-1539.) III. But now the rule is perfectly well settled that in determining the relative rights of a drawee who, under a mistake of fact, has paid, and a holder who has received such payment, upon a check to which the name of the drawer has been forged, it is only fair to consider the question of diligence or negligence of the parties in respect thereto. (Woods and Malone vs. Colony Bank [1902], 56 L. R. A., 929, 932.) The responsibility of the drawee who pays a forged check, for the genuineness of the drawer's

signature, is absolute only in favor of one who has not, by his own fault or negligence, contributed to the success of the fraud or to mislead the drawee. (National Bank of America vs. Bangs, 106 Mass., 441; 8 Am. Rep., 349; Woods and Malone vs.Colony Bank, supra; De Feriet vs. Bank of America, 23 La. Ann., 310; B. B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 10 L. R. A. [N. S.], 63.) If it appears that the one to whom payment was made was not an innocent sufferer, but was guilty of negligence in not doing something, which plain duty demanded, and which, if it had been done, would have avoided entailing loss on any one, he is not entitled to retain the moneys paid through a mistake on the part of the drawee bank. (First Nat. Bank of Danvers vs. First Nat. Bank of Salem, 151 Mass., 280; 24 N. E., 44; 21 A. S. R., 450; First Nat. Bank of Orleans vs. State Bank of Alma, 22 Neb., 769; 36 N. W., 289; 3 A. S. R., 294; American Exp. Co. vs. State Nat. Bank, 27 Okla., 824; 113 Pac., 711; 33 L. R. A. [N. S.], 188; B. B. Ford & Co. vs. People's Bank of Orangeburg, 74 S. C., 180; 54 S. E., 204; 114 A. S. R., 986; 7 Ann. Cas., 744; 10 L. R. A. [N. S.], 63; People's Bank vs. Franklin Bank, 88 Tenn. 299; 12 S. W., 716; 17 A. S. R.) 884; 6 L. R. A., 724; Canadian Bank of Commerce vs. Bingham, 30 Wash., 484; 71 Pac., 43; 60 L. R. A., 955.) In other words, to entitle the holder of a forged check to retain the money obtained he must be able to show that the whole responsibility of determining the validity of the signature was upon the drawee, and that the negligence of such drawee was not lessened by any failure of any precaution which, from his implied assertion in presenting the check as a sufficient voucher, the drawee had the right to believe he had taken. (Ellis vs. Ohio Life Insurance & Trust Co., 4 Ohio St., 628; Rouvant vs. Bank, 63 Tex., 610; Bank vs. Ricker, 71 Ill., 429; First National Bank of Danvers vs. First Nat. Bank of Salem, 24 N. E., 44, 45; B. B. Ford & Co. vs.People's Bank of Orangeburg, supra.) The recovery is permitted in such case, because, although the drawee was constructively negligent in failing to detect the forgery, yet if the purchaser had performed his duty, the forgery would in all probability have been detected and the fraud defeated. (First National Bank of Lisbon vs.Bank of Wyndmere, 15 N. D., 209; 10 L. R. A. [N. S.], 49.) In the absence of actual fault on the part of the drawee, his constructive fault in not knowing the signature of the drawer and detecting the forgery will not preclude his recovery from one who took the check under circumstances of suspicion without proper precaution, or whose conduct has been such as to mislead the drawee or induce him to pay the check without the usual scrutiny or other precautions against mistake or fraud. (National Bank of America vs. Bangs, supra; First National Bank vs. Indiana National Bank, 30 N. E., 808-810; Woods and Malone vs. Colony Bank, supra; First National Bank of Danvers vs. First Nat. Bank of Salem, 151 Mass., 280.) Where a loss, which must be borne by one of two parties alike innocent of forgery, can be traced to the neglect or fault of either, it is unreasonable that it would be borne by him, even if innocent of any intentional fraud, through whose means it has succeeded. (Gloucester Bank vs. Salem Bank, 17 Mass., 33; First Nat. Bank of Danvers vs. First National Bank of Salem, supra; B. B. Ford & Co. vs. People's Bank of Orangeburg, supra.) Again if the indorser is guilty of negligence in receiving and paying the check or draft, or has reason to believe that the instrument is not genuine, but fails to inform the drawee of his suspicions the indorser according to the reasoning of some courts will be held liable to the drawee upon his implied warranty that the instrument is genuine. (B. B. Ford & Co. vs. People's Bank of Orangeburg, supra; Newberry Sav. Bank vs. Bank of Columbia, 93 S. C., 294; 38 L. R. A. [N. S], 1200.) Most of the courts now agree that one who purchases a check or draft is bound to satisfy himself that the paper is genuine; and that by indorsing it or presenting it for payment or putting it into circulation before presentation he impliedly asserts that he has performed his duty, the drawee, who has, without actual negligence on his part, paid the forged demand, may recover the money paid from such negligent purchaser. (Lisbon First National Bank vs. Wyndmere Bank, supra.) Of course, the drawee must, in order to recover back the holder, show that he himself was free from fault. (See also 5 R. C. L., pp. 556-558.)

So, if a collecting bank is alone culpable, and, on account of its negligence only, the loss has occurred, the drawee may recover the amount it paid on the forged draft or check. (Security Commercial & Sav. Bank vs.Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.) But we are aware of no case in which the principle that the drawee is bound to know the signature of the drawer of a bill or check which he undertakes to pay has been held to be decisive in favor of a payee of a forged bill or check to which he has himself given credit by his indorsement. (Secalso, Mckleroy vs. Bank, 14 La. Ann., 458; Canal Bank vs. Bank of Albany, 1 Hill, 287; Rouvant vs. Bank, supra, First Nat. Bank vs. Indiana National Bank; 30 N. E., 808-810.) In First Nat. Bank vs. United States National Bank ([1921], 100 Or., 264; 14 A. L. R., 479; 197 Pac., 547), the court declared: "A holder cannot profit by a mistake which his negligent disregard of duty has contributed to induce the drawee to commit. . . . The holder must refund, if by his negligence he has contributed to the consummation of the mistake on the part of the drawee by misleading him. . . . If the only fault attributable to the drawee is the constructive fault which the law raises from the bald fact that he has failed to detect the forgery, and if he is not chargeable with actual fault in addition to such constructive fault, then he is not precluded from recovery from a holder whose conduct has been such as to mislead the drawee or induce him to pay the check or bill of exchange without the usual security against fraud. The holder must refund to a drawee who is not guilty of actual fault if the holder was negligent in not making due inquiry concerning the validity of the check before he took it, and if the drawee can be said to have been excused from making inquiry before taking the check because of having had a right to, presume that the holder had made such inquiry." The rule that one who first negotiates forged paper without taking some precaution to learn whether or not it is genuine should not be allowed to retain the proceeds of the draft or check from the drawee, whose sole fault was that he did not discover the forgery before he paid the draft or check, has been followed by the later cases. (Security Commercial & Savings Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945; Hutcheson Hardware Co. vs. Planters State Bank [1921], 26 Ga. App., 321; 105 S. E., 854; [Annotation at 71 A. L. R., 337].) Where a bank, without inquiry or identification of the person presenting a forged check, purchases it, indorses it, generally, and presents it to the drawee bank, which pays it, the latter may recover if its only negligence was its mistake in having failed to detect the forgery, since its mistake, did not mislead the purchaser or bring about a change in position. (Security Commercial & Savings Bank vs. Southern Trust & C. Bank [1925], 74 Cal. App., 734; 241 Pac., 945.) Also, a drawee could recover from another bank the portion of the proceeds of a forged check cashed by the latter and deposited by the forger in the second bank and never withdrawn, upon the discovery of the forgery three months later, after the drawee had paid the check and returned the voucher to the purported drawer, where the purchasing bank was negligent in taking the check, and was not injured by the drawee's negligence in discovering and reporting the forgery as to the amount left on deposit, since it was not a purchaser for value. (First State Bank & T. Co. vs. First Nat. Bank [1924], 314 Ill., 269; 145 N. E., 382.) Similarly, it has been held that the drawee of a check could recover the amount paid on the check, after discovery of the forgery, from another bank, which put the check into circulation by cashing it for the one who had forged the signature of both drawer and payee without making any inquiry as to who

he was although he was a stranger, after which the check reached, and was paid by, the drawee, after going through the hands of several intermediate indorsees. (71 A. L. R., p. 340.) In First National Bank vs. Brule National Bank ([1917], 12 A. L. R., 1079, 1085), the following statement was made: We are clearly of opinion, therefore that the warranty of genuineness, arising upon the act of the Brule National Bank in putting the check in circulation, was not discharged by payment of the check by the drawee (First National Bank), nor was the Brule National Bank deceived or misled to its prejudice by such payment. The Brule National Bank by its indorsement and delivery warranted its own identification of Kost and the genuineness of his signature. The indorsement of the check by the Brule National Bank was such as to assign the title to the check to its assignee, the Whitbeck National Bank, and the amount was credited to the indorser. The check bore no indication that it was deposited for collection, and was not in any manner restricted so as to constitute the indorsee the agent of the indorser, nor did it prohibit farther negotiation of the instrument, nor did it appear to be in trust for, or to the use of, any other person, nor was it conditional. Certainly the Pukwana Bank was justified in relying upon the warrant of genuineness, which implied the full identification of Kost, and his signature by the defendant bank. This view of the statute is in accord with the decisions of many courts. (First National Bank vs. State Bank, 22 Neb., 769; 3 Am. St. Rep., 294; 36 N. W., 289; First National Bank vs. First National Bank, 151 Mass., 280; 21 Am. St. Rep., 450; 24 N. E., 44; People's Bankvs. Franklin Bank, 88 Tenn., 299; 6 L. R. A., 727; 17 Am. St. Rep., 884; 12 S. W., 716.)" The appellant leans heavily on the case of Fidelity & Co. vs. Planenscheck (71 A. L. R., 331), decided in 1929. We have carefully examined this decision and we do not feel justified in accepting its conclusions. It is but a restatement of the long abandoned rule of Neal vs. Price, and it predicated on the wrong premise that the payment includes acceptance, and that a bank drawee paying a check drawn on it becomes ipso facto an acceptor within the meaning of section 62 of the Negotiable Instruments Act. Moreover in a more recent decision, that of Louisa National Bank vs. Kentucky National Bank (39 S. W. [2nd] 497, 501) decided in 1931, the Court of Appeals of Kentucky held the following: The appellee, on presentation for payment of $600 check, failed to discover it was a forgery. It was bound to know the signature of its customer, Armstrong, and it was derelict in failing to give his signature to the check sufficient attention and examination to enable it to discover instantly the forgery. The appellant, when the check was presented to it by Banfield, failed to make an inquiry of or about him and did not cause or have him to be identified. Its act in so paying to him the check is a degree of negligence on its part equivalent to positive negligence. It indorsed the check, and, while such indorsement may not be regarded within the meaning of the Negotiable Instrument Law as amounting to a warranty to appellant of that which it indorsed, it at least substantially served as a representation to it that it had exercised ordinary care and had complied with the rules and customs of prudent banking. Its indorsement was calculated, if it did not in fact do so, to lull the drawee bank into indifference as to the drawer's signature to it when paying the check and charging it to its customer's account and remitting its proceeds to appellant's correspondent. If in such a transaction between the drawee and the holder of a check both are without fault, no recovery may be had of the money so paid. (Deposit Bank of Georgetown vs. Fayette National Bank,supra, and cases cited.) Or the rule may be more accurately stated that, where

the drawee pays the money, he cannot recover it back from a holder in good faith, for value and without fault. If, on the other hand, the holder acts in bad faith, or is guilty of culpable negligence, a recovery may be had by the drawee of such holder. The negligence of the Bank of Louisa in failing to inquire of and about Banfield, and to cause or to have him identified before it parted with its money on the forged check, may be regarded as the primary and proximate cause of the loss. Its negligence in this respect reached in its effect the appellee, and induced incaution on its part. In comparison of the degrees of the negligence of the two, it is apparent that of the appellant excels in culpability. Both appellant and appellee inadvertently made a mistake, doubtless due to a hurry incident to business. The first and most grievous one was made by the appellant , amounting to its disregard of the duty, it owed itself as well as the duty it owed to the appellee, and it cannot on account thereof retain as against the appellee the money which it so received. It cannot shift the loss to the appellee, for such disregard of its duty inevitably contributed to induce the appellee to omit its duty critically to examine the signature of Armstrong, even if it did not know it instantly at the time it paid the check. (Farmers' Bank of Augusta vs.Farmer's Bank of Maysville, supra, and cases cited.) IV. The question now is to determine whether the appellant's negligence in purchasing the checks in question is such as to give the appellee the right to recover upon said checks, and on the other hand, whether the drawee bank was not itself negligent, except for its constructive fault in not knowing the signature of the drawer and detecting the forgery. We quote with approval the following conclusions of the court a quo: Check Exhibit A bears number 637023-D and is dated April 6, 1933, whereas check Exhibit A-1 bears number 637020-D and is dated April 7, 1933. Therefore, the latter check, which is prior in number to the former check, is however, issued on a later date. This circumstance must have aroused at least the curiosity of the Motor Service Co., Inc. The Motor Service Co., Inc., accepted the two checks from unknown persons. And not only this; check Exhibit A is indorsed by a subagent of the agent of the payee, International Auto Repair Shop. The Motor Service Co., Inc., made no inquiry whatsoever as to the extent of the authority of these unknown persons. Our Supreme Court said once that "any person taking checks made payable to a corporation, which can act only by agents, does so at his peril, and must abide by the consequences if the agent who indorses the same is without authority" (Insular Drug Co. vs. National Bank, 58, Phil., 684). xxx xxx xxx

Check Exhibit A-1, aside from having been indorsed by a supposed agent of the international Auto Repair Shop is crossed generally. The existence of two parallel lines transversally drawn on the face of this check was a warning that the check could only be collected through a banking institution (Jacobs, Law of Bills of Exchange, etc., pp., 179, 180; Bills of Exchange Act of England, secs. 76 and 79). Yet the Motor Service Co., Inc., accepted the check in payment for merchandise.

. . . In Exhibit H attached to the stipulation of facts as an integral part thereof, the Motor Service Co., Inc., stated the following: "The Pangasinan Transportation Co. is a good customer of this firm and we received checks from them every month in payment of their account. The two checks in question seem to be exactly similar to the checks which we received from the Pangasinan Transportation Co. every month." If the failure of the Motor Service Co., Inc., to detect the forgery of the drawer's signature in the two checks, may be considered as an omission in good faith because of the similarity stated in the letter, then the same consideration applies to the Philippine National Bank, for the drawer is a customer of both the Motor Service Co., Inc., and the Philippine National Bank. (B. of E., pp. 25, 28, 35.) We are of opinion that the facts of the present case do not make it one between two equally innocent persons, the drawee bank and the holder, and that they are governed by the authorities already cited and also the following: The point in issue has sometimes been said to be that of negligence. The drawee who has paid upon the forged signature is held to bear the loss, because he has been negligent in failing to recognize that the handwriting is not that of his customer. But it follows obviously that if the payee, holder, or presenter of the forged paper has himself been in default, if he has himself been guilty of a negligence prior to that of the banker, or if by any act of his own he has at all contributed to induce the banker's negligence, then he may lose his right to cast the loss upon the banker. The courts have shown a steadily increasing disposition to extend the application of this rule over the new conditions of fact which from time to time arise, until it can now rarely happen that the holder, payee, or presenter can escape the imputation of having been in some degree contributory towards the mistake. Without any actual change in the abstract doctrines of the law, which are clear, just, and simple enough, the gradual but sure tendency and effect of the decisions have been to put as heavy a burden of responsibility upon the payee as upon the drawee, contrary to the original custom. . . . (2 Morse on Banks and Banking, 5th ed., secs. 464 and 466, pp. 82-85 and 86, 87.) In First National Bank vs. Brule National Bank (12 A. L. R., 1079, 1088, 1089), the following statement appears in the concurring opinion: What, then, should be the rule? The drawee asks to recover for money had and received. If his claim did not rest upon a transaction relating to a negotiable instrument plaintiff could recover as for money paid under mistake, unless defendant could show some equitable reason, such as changed condition since, and relying upon, payment by plaintiff. In the Wyndmere Case, the North Dakota court holds that this rule giving right to recover money paid under mistake should extend to negotiable paper, and it rejects in its entirety the theory of estoppel and puts a case of this kind on exactly the same basis as the ordinary case of payment under mistake. But the great weight of authority, and that based on the better reasoning, holds that the exigencies of business demand a different rule in relation to negotiable paper. What is that rule? Is it an absolute estoppel against the drawee in favor of a holder, no matter how negligent such holder has been? It surely is not. The correct rule recognizes the fact that, in case of payment without a prior acceptance or certification, the holder takes the paper upon the of the prior indorsers and

the credit of the drawer, and not upon the credit of the drawee, in making payment, has a right to rely upon the assumption that the payee used due diligence, especially where such payee negotiated the bill or check to a holder, thus representing that it had so fully satisfied itself as to the identity and signature of the maker that it was willing to warrant as relates thereto to all subsequent holders. (Uniform Act, secs. 65 and 66.) Such correct rule denies the drawee the right to recover when the holder was without fault or when there has been some change of position calling for equitable relief. When a holder of a bill of exchange uses all due care in the taking of bill or check and the drawee thereafter pays same, the transaction is absolutely closed modern business could not be done on any other basis. While the correct rule promotes the fluidity of two recognized mediums of exchange, those mediums by which the great bulk of business is carried on, checks and drafts, upon the other hand it encourages and demands prudent business methods upon the part of those receiving such mediums of exchange. (Pennington County Bank vs. First State Bank, 110 Minn., 263; 26 L. R. A. [N. S.], 849; 136 Am. St. Rep., 496; 125 N. W., 119; First National Bank vs. State Bank, 22 Neb., 769; 3 Am. St. Rep., 294; 36 N. W., 289; Bank of Williamson, vs. McDowell County Bank, 66 W. Va., 545; 36 L. R. A. [N. S.], 605; 66 S. E., 761; Germania Bank vs. Boutell, 60 Minn., 189; 27 L. R. A., 635; 51 Am. St. Rep., 519; 62 N. W., 327; American Express Co. vs. State National Bank, 27 Okla., 824; 33 L. R. A. [N. S.], 188; 113 Pac., 711; Farmers' National Bank vs. Farmers' & Traders Bank, L. R. A., 1915A, 77, and note (159 Ky., 141; 166 S. W., 986].) That the defendant bank did not use reasonable business prudence is clear. It took this check from a stranger without other identification than that given by another stranger; its cashier witnessed the mark of such stranger thus vouching for the identity and signature of the maker; and it indorsed the check as "Paid," thus further throwing plaintiff off guard. Defendant could not but have known, when negotiating such check and putting it into the channel through which it would finally be presented to plaintiff for payment, that plaintiff, if it paid such check, as defendant was asking it to do, would have to rely solely upon the apparent faith and credit that defendant had placed in the drawer. From the very circumstances of this case plaintiff had to act on the facts as presented to it by defendant, upon such facts only. But appellant argues that it so changed its position, after payment by plaintiff, that in "equity and good conscience" plaintiff should not recover it says it did not pay over any money to the forger until after plaintiff had paid the check. There would be merit in such contention if defendant had indorsed the check for "collection," thus advising plaintiff that it was relying on plaintiff and not on the drawer. It stands in court where it would have been if it had done as it represented. In Woods and Malone vs. Colony Bank (56 L. R. A., 929, 932), the court said: . . . If the holder has been negligent in paying the forged paper, or has by his conduct, however innocent, misled or deceived the drawee to his damage, it would be unjust for him to be allowed to shield himself from the results of his own carelessness by asserting that the drawee was bound in law to know his drawer's signature. V. Section 23 of the Negotiable Instruments Act provides that "when a signature is forged or made without the authority of the person whose signature it purports to be, is wholly inoperative, and no right to retain the instrument, or to give a discharge therefor, or to enforce payment thereof against any

party thereto, can be acquired through or under such signature, unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority. It not appearing that the appellee bank did not warrant to the appellant the genuineness of the checks in question, by its acceptance thereof, nor did it perform any act which would have induced the appellant to believe in the genuineness of said instruments before appellant purchased them for value, it can not be said that the appellee is precluded from setting up the forgery and, therefore, the appellant is not entitled to retain the amount of the forged check paid to it by the appellee. VI. It has been held by many courts that a drawee of a check, who is deceived by a forgery of the drawer's signature may recover the payment back, unless his mistake has placed an innocent holder of the paper in a worse position than he would have been in if the discovery of the forgery had been made on presentation. (5 R. C. L., p. 559; 2 Daniel on Negotiable Instruments, 1538.) Forgeries often deceived the eye of the most cautious experts; and when a bank has been deceived, it is a harsh rule which compels it to suffer although no one has suffered by its being deceived. (17 A. L. R. 891; 5 R. C. L., 559.) In the instant case should the drawee bank be allowed recovery, the appellant's position would not become worse than if the drawee had refused the payment of these checks upon their presentation. The appellant has lost nothing by anything which the drawee has done. It had in its hands some forged worthless papers. It did not purchase or acquire these papers because of any representation made to it by the drawee. It purchased them from unknown persons and under suspicious circumstances. It had no valid title to them, because the persons from whom it received them did not have such title. The appellant could not have compelled the drawee to pay them, and the drawee could have refused payment had it been able to detect the forgery. By making a refund, the appellant would only returning what it had received without any title or right. And when appellant pays back the money it had received it will be entitled to have restored to it the forged papers it parted with. There is no good reason why the accidental payment made by the appellant should inure to the benefit of the appellant. If there were injury to the appellant said injury was caused not by the failure of the appellee to detect the forgery but by the very negligence of the appellant in purchasing commercial papers from unknown persons without making inquiry as to their genuineness. In the light of the foregoing discussion, we conclude: 1. That where a check is accepted or certified by the bank on which it is drawn, the bank is estopped to deny the genuineness of the drawer's signature and his capacity to issue the instrument; 2. That if a drawee bank pays a forged check which was previously accepted or certified by the said bank it cannot recover from a holder who did not participate in the forgery and did not have actual notice thereof; 3. That the payment of a check does not include or imply its acceptance in the sense that this word is used in section 62 of the Negotiable Instruments Law; 4. That in the case of the payment of a forged check, even without former acceptance, the drawee can not recover from a holder in due course not chargeable with any act of negligence or disregard of duty;

5. That to entitle the holder of a forged check to retain the money obtained thereon, there must be a showing that the duty to ascertain the genuineness of the signature rested entirely upon the drawee, and that the constructive negligence of such drawee in failing to detect the forgery was not affected by any disregard of duty on the part of the holder, or by failure of any precaution which, from his implied assertion in presenting the check as a sufficient voucher, the drawee had the right to believe he had taken; 6. That in the absence of actual fault on the part of the drawee, his constructive fault in not knowing the signature of the drawer and detecting the forgery will nor preclude his recovery from one who took the check under circumstances of suspicion and without proper precaution, or whose conduct has been such as to mislead the drawee or induce him to pay the check without the usual scrutiny or other precautions against mistake or fraud; 7. That on who purchases a check or draft is bound to satisfy himself that the paper is genuine, and that by indorsing it or presenting it for payment or putting it into circulation before presentation he impliedly asserts that he performed his duty; 8. That while the foregoing rule, chosen from a welter of decisions on the issue as the correct one, will not hinder the circulation of two recognized mediums of exchange by which the great bulk of business is carried on, namely, drafts and checks, on the other hand, it will encourage and demand prudent business methods on the part of those receiving such mediums of exchange; 9. That it being a matter of record in the present case, that the appellee bank in no more chargeable with the knowledge of the drawer's signature than the appellant is, as the drawer was as much the customer of the appellant as of the appellee, the presumption that a drawee bank is bound to know more than any indorser the signature of its depositor does not hold; 10. That according to the undisputed facts of the case the appellant in purchasing the papers in question from unknown persons without making any inquiry as to the identity and authority of the said persons negotiating and indorsing them, acted negligently and contributed to the appellee's constructive negligence in failing to detect the forgery; 11. That under the circumstances of the case, if the appellee bank is allowed to recover, there will be no change of position as to the injury or prejudice of the appellant. Wherefore, the assignments of error are overruled, and the judgment appealed from must be, as it is hereby, affirmed, with costs against the appellant. So ordered. Avancea, C. J., Villa-Real, Abad Santos, Imperial, Diaz, and Laurel, JJ., concur.

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION G.R. No. 84197 July 28, 1989 PIONEER INSURANCE & SURETY CORPORATION, petitioner, vs. THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents. G.R. No. 84157 July 28, 1989 JACOB S. LIM, petitioner, vs. COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER MACHINERY and HEAVY EQUIPMENT CO., INC,, FRANCISCO and MODESTO CERVANTES and CONSTANCIO MAGLANA, respondents. Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation. Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim. Renato J. Robles for BORMAHECO, Inc. and Cervanteses. Leonardo B. Lucena for Constancio Maglana.

GUTIERREZ, JR., J.: 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 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 owneroperator 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 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 coindemnitor 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: 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. 363369, 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 factopartnership 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 onehalf 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 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. Fernan, C.J., (Chairman), Bidin and Cortes, JJ., concur. Feliciano, J., took no part.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-29182 October 24, 1928

LEONCIA VIUDA DE CHAN DIACO (alias LAO LIONG NAW) appellee, vs. JOSE S. Y. PENG, assignee, appellant. C. A. Sobral for appellant. Amador Constantino for appellee.

OSTRAND, J.: 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. (e) The following account books: 1awph!l.net 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 Philippines under the status of merchants. He, therefore, recommended that the motion of the insolvent to dismiss the proceedings against her be denied. The report was assigned for hearing on May 21, 1927. Judge Del Rosario was then absent on leave and the matter was, therefore, submitted to Judge Francisco Zandueta, who had been temporarily assigned to take the place of Judge Del Rosario, and on June 6, 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 we think it can be safely held that a partnership may be adjudged bankrupt in the name of an ostensible partner, when such name is the name under which the partnership did business. The decision appealed from is hereby reversed, the reports and recommendations of the referee are approved, the order for the dismissal of the case is set aside, and the decision of Judge Simplicio Del Rosario dated July 23, 1926, will remain in full force and effect. No costs will be allowed. So ordered. Avancea, C. J., Johnson, Street, Malcolm, Villamor, Romualdez, and Villa-Real, JJ., concur.

Republic of the Philippines SUPREME COURT Manila THIRD DIVISION

G.R. No. 97212 June 30, 1993 BENJAMIN YU, petitioner, vs. NATIONAL LABOR RELATIONS COMMISSION and JADE MOUNTAIN PRODUCTS COMPANY LIMITED, WILLY CO, RHODORA D. BENDAL, LEA BENDAL, CHIU SHIAN JENG and CHEN HO-FU, respondents. Jose C. Guico for petitioner. Wilfredo Cortez for private respondents.

FELICIANO, J.: Petitioner Benjamin Yu was formerly the Assistant General Manager of the marble quarrying and export business operated by a registered partnership with the firm name of "Jade Mountain Products Company Limited" ("Jade Mountain"). The partnership was originally organized on 28 June 1984 with Lea Bendal and Rhodora Bendal as general partners and Chin Shian Jeng, Chen Ho-Fu and Yu Chang, all citizens of the Republic of China (Taiwan), as limited partners. The partnership business consisted of exploiting a marble deposit found on land owned by the Sps. Ricardo and Guillerma Cruz, situated in Bulacan Province, under a Memorandum Agreement dated 26 June 1984 with the Cruz spouses. 1 The partnership had its main office in Makati, Metropolitan Manila. Benjamin Yu was hired by virtue of a Partnership Resolution dated 14 March 1985, as Assistant General Manager with a monthly salary of P4,000.00. According to petitioner Yu, however, he actually received only half of his stipulated monthly salary, since he had accepted the promise of the partners that the balance would be paid when the firm shall have secured additional operating funds from abroad. Benjamin Yu actually managed the operations and finances of the business; he had overall supervision of the workers at the marble quarry in Bulacan and took charge of the preparation of papers relating to the exportation of the firm's products. Sometime in 1988, without the knowledge of Benjamin Yu, the general partners Lea Bendal and Rhodora Bendal sold and transferred their interests in the partnership to private respondent Willy Co and to one Emmanuel Zapanta. Mr. Yu Chang, a limited partner, also sold and transferred his interest in the partnership to Willy Co. Between Mr. Emmanuel Zapanta and himself, private respondent Willy Co acquired the great bulk of the partnership interest. The partnership now constituted solely by Willy Co and Emmanuel Zapanta continued to use the old firm name of Jade Mountain, though they moved the firm's main office from Makati to Mandaluyong, Metropolitan Manila. A Supplement to the

Memorandum Agreement relating to the operation of the marble quarry was entered into with the Cruz spouses in February of 1988. 2 The actual operations of the business enterprise continued as before. All the employees of the partnership continued working in the business, all, save petitioner Benjamin Yu as it turned out. On 16 November 1987, having learned of the transfer of the firm's main office from Makati to Mandaluyong, petitioner Benjamin Yu reported to the Mandaluyong office for work and there met private respondent Willy Co for the first time. Petitioner was informed by Willy Co that the latter had bought the business from the original partners and that it was for him to decide whether or not he was responsible for the obligations of the old partnership, including petitioner's unpaid salaries. Petitioner was in fact not allowed to work anymore in the Jade Mountain business enterprise. His unpaid salaries remained unpaid. 3 On 21 December 1988. Benjamin Yu filed a complaint for illegal dismissal and recovery of unpaid salaries accruing from November 1984 to October 1988, moral and exemplary damages and attorney's fees, against Jade Mountain, Mr. Willy Co and the other private respondents. The partnership and Willy Co denied petitioner's charges, contending in the main that Benjamin Yu was never hired as an employee by the present or new partnership. 4 In due time, Labor Arbiter Nieves Vivar-De Castro rendered a decision holding that petitioner had been illegally dismissed. The Labor Arbiter decreed his reinstatement and awarded him his claim for unpaid salaries, backwages and attorney's fees. 5 On appeal, the National Labor Relations Commission ("NLRC") reversed the decision of the Labor Arbiter and dismissed petitioner's complaint in a Resolution dated 29 November 1990. The NLRC held that a new partnership consisting of Mr. Willy Co and Mr. Emmanuel Zapanta had bought the Jade Mountain business, that the new partnership had not retained petitioner Yu in his original position as Assistant General Manager, and that there was no law requiring the new partnership to absorb the employees of the old partnership. Benjamin Yu, therefore, had not been illegally dismissed by the new partnership which had simply declined to retain him in his former managerial position or any other position. Finally, the NLRC held that Benjamin Yu's claim for unpaid wages should be asserted against the original members of the preceding partnership, but these though impleaded had, apparently, not been served with summons in the proceedings before the Labor Arbiter. 6 Petitioner Benjamin Yu is now before the Court on a Petition for Certiorari, asking us to set aside and annul the Resolution of the NLRC as a product of grave abuse of discretion amounting to lack or excess of jurisdiction. The basic contention of petitioner is that the NLRC has overlooked the principle that a partnership has a juridical personality separate and distinct from that of each of its members. Such independent legal personality subsists, petitioner claims, notwithstanding changes in the identities of the partners. Consequently, the employment contract between Benjamin Yu and the partnership Jade Mountain could not have been affected by changes in the latter's membership. 7 Two (2) main issues are thus posed for our consideration in the case at bar: (1) whether the partnership which had hired petitioner Yu as Assistant General Manager had been extinguished and replaced by a new partnerships composed of Willy Co and Emmanuel Zapanta; and (2) if indeed a new partnership had

come into existence, whether petitioner Yu could nonetheless assert his rights under his employment contract as against the new partnership. In respect of the first issue, we agree with the result reached by the NLRC, that is, that the legal effect of the changes in the membership of the partnership was the dissolution of the old partnership which had hired petitioner in 1984 and the emergence of a new firm composed of Willy Co and Emmanuel Zapanta in 1987. The applicable law in this connection of which the NLRC seemed quite unaware is found in the Civil Code provisions relating to partnerships. Article 1828 of the Civil Code provides as follows: Art. 1828. The dissolution of a partnership is the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business. (Emphasis supplied) Article 1830 of the same Code must also be noted: Art. 1830. Dissolution is caused: (1) without violation of the agreement between the partners; xxx xxx xxx (b) by the express will of any partner, who must act in good faith, when no definite term or particular undertaking is specified; xxx xxx xxx (2) in contravention of the agreement between the partners, where the circumstances do not permit a dissolution under any other provision of this article, by the express will of any partner at any time; xxx xxx xxx (Emphasis supplied) In the case at bar, just about all of the partners had sold their partnership interests (amounting to 82% of the total partnership interest) to Mr. Willy Co and Emmanuel Zapanta. The record does not show what happened to the remaining 18% of the original partnership interest. The acquisition of 82% of the partnership interest by new partners, coupled with the retirement or withdrawal of the partners who had originally owned such 82% interest, was enough to constitute a new partnership. The occurrence of events which precipitate the legal consequence of dissolution of a partnership do not, however, automatically result in the termination of the legal personality of the old partnership. Article 1829 of the Civil Code states that:

[o]n dissolution the partnership is not terminated, but continues until the winding up of partnership affairs is completed. In the ordinary course of events, the legal personality of the expiring partnership persists for the limited purpose of winding up and closing of the affairs of the partnership. In the case at bar, it is important to underscore the fact that the business of the old partnership was simply continued by the new partners, withoutthe old partnership undergoing the procedures relating to dissolution and winding up of its business affairs. In other words, the new partnership simply took over the business enterprise owned by the preceeding partnership, and continued using the old name of Jade Mountain Products Company Limited, without winding up the business affairs of the old partnership, paying off its debts, liquidating and distributing its net assets, and then re-assembling the said assets or most of them and opening a new business enterprise. There were, no doubt, powerful tax considerations which underlay such an informal approach to business on the part of the retiring and the incoming partners. It is not, however, necessary to inquire into such matters. What is important for present purposes is that, under the above described situation, not only the retiring partners (Rhodora Bendal, et al.) but also the new partnership itself which continued the business of the old, dissolved, one, are liable for the debts of the preceding partnership. In Singson, et al. v. Isabela Saw Mill, et al,8 the Court held that under facts very similar to those in the case at bar, a withdrawing partner remains liable to a third party creditor of the old partnership. 9 The liability of the new partnership, upon the other hand, in the set of circumstances obtaining in the case at bar, is established in Article 1840 of the Civil Code which reads as follows: Art. 1840. In the following cases creditors of the dissolved partnership are also creditors of the person or partnership continuing the business: (1) When any new partner is admitted into an existing partnership, or when any partner retires and assigns (or the representative of the deceased partner assigns) his rights in partnership property to two or more of the partners, or to one or more of the partners and one or more third persons, if the business is continued without liquidation of the partnership affairs; (2) When all but one partner retire and assign (or the representative of a deceased partner assigns) their rights in partnership property to the remaining partner, who continues the business without liquidation of partnership affairs, either alone or with others; (3) When any Partner retires or dies and the business of the dissolved partnership is continued as set forth in Nos. 1 and 2 of this Article, with the consent of the retired partners or the representative of the deceased partner, but without any assignment of his right in partnership property; (4) When all the partners or their representatives assign their rights in partnership property to one or more third persons who promise to pay the debts and who continue the business of the dissolved partnership;

(5) When any partner wrongfully causes a dissolution and remaining partners continue the business under the provisions of article 1837, second paragraph, No. 2, either alone or with others, and without liquidation of the partnership affairs; (6) When a partner is expelled and the remaining partners continue the business either alone or with others without liquidation of the partnership affairs; The liability of a third person becoming a partner in the partnership continuing the business, under this article, to the creditors of the dissolved partnership shall be satisfied out of the partnership property only, unless there is a stipulation to the contrary. When the business of a partnership after dissolution is continued under any conditions set forth in this article the creditors of the retiring or deceased partner or the representative of the deceased partner, have a prior right to any claim of the retired partner or the representative of the deceased partner against the person or partnership continuing the business on account of the retired or deceased partner's interest in the dissolved partnership or on account of any consideration promised for such interest or for his right in partnership property. Nothing in this article shall be held to modify any right of creditors to set assignment on the ground of fraud. xxx xxx xxx (Emphasis supplied) Under Article 1840 above, creditors of the old Jade Mountain are also creditors of the new Jade Mountain which continued the business of the old one without liquidation of the partnership affairs. Indeed, a creditor of the old Jade Mountain, like petitioner Benjamin Yu in respect of his claim for unpaid wages, is entitled to priority vis-a-vis any claim of any retired or previous partner insofar as such retired partner's interest in the dissolved partnership is concerned. It is not necessary for the Court to determine under which one or mare of the above six (6) paragraphs, the case at bar would fall, if only because the facts on record are not detailed with sufficient precision to permit such determination. It is, however, clear to the Court that under Article 1840 above, Benjamin Yu is entitled to enforce his claim for unpaid salaries, as well as other claims relating to his employment with the previous partnership, against the new Jade Mountain. It is at the same time also evident to the Court that the new partnership was entitled to appoint and hire a new general or assistant general manager to run the affairs of the business enterprise take over. An assistant general manager belongs to the most senior ranks of management and a new partnership is entitled to appoint a top manager of its own choice and confidence. The non-retention of Benjamin Yu as Assistant General Manager did not therefore constitute unlawful termination, or termination without just or authorized cause. We think that the precise authorized cause for termination in the case at bar was redundancy. 10 The new partnership had its own new General Manager, apparently Mr. Willy Co, the principal new owner himself, who personally ran the business of Jade Mountain. Benjamin Yu's old position as Assistant General Manager thus became superfluous or redundant. 11 It follows that

petitioner Benjamin Yu is entitled to separation pay at the rate of one month's pay for each year of service that he had rendered to the old partnership, a fraction of at least six (6) months being considered as a whole year. While the new Jade Mountain was entitled to decline to retain petitioner Benjamin Yu in its employ, we consider that Benjamin Yu was very shabbily treated by the new partnership. The old partnership certainly benefitted from the services of Benjamin Yu who, as noted, previously ran the whole marble quarrying, processing and exporting enterprise. His work constituted value-added to the business itself and therefore, the new partnership similarly benefitted from the labors of Benjamin Yu. It is worthy of note that the new partnership did not try to suggest that there was any cause consisting of some blameworthy act or omission on the part of Mr. Yu which compelled the new partnership to terminate his services. Nonetheless, the new Jade Mountain did not notify him of the change in ownership of the business, the relocation of the main office of Jade Mountain from Makati to Mandaluyong and the assumption by Mr. Willy Co of control of operations. The treatment (including the refusal to honor his claim for unpaid wages) accorded to Assistant General Manager Benjamin Yu was so summary and cavalier as to amount to arbitrary, bad faith treatment, for which the new Jade Mountain may legitimately be required to respond by paying moral damages. This Court, exercising its discretion and in view of all the circumstances of this case, believes that an indemnity for moral damages in the amount of P20,000.00 is proper and reasonable. In addition, we consider that petitioner Benjamin Yu is entitled to interest at the legal rate of six percent (6%)per annum on the amount of unpaid wages, and of his separation pay, computed from the date of promulgation of the award of the Labor Arbiter. Finally, because the new Jade Mountain compelled Benjamin Yu to resort to litigation to protect his rights in the premises, he is entitled to attorney's fees in the amount of ten percent (10%) of the total amount due from private respondent Jade Mountain. WHEREFORE, for all the foregoing, the Petition for Certiorari is GRANTED DUE COURSE, the Comment filed by private respondents is treated as their Answer to the Petition for Certiorari, and the Decision of the NLRC dated 29 November 1990 is hereby NULLIFIED and SET ASIDE. A new Decision is hereby ENTERED requiring private respondent Jade Mountain Products Company Limited to pay to petitioner Benjamin Yu the following amounts: (a) for unpaid wages which, as found by the Labor Arbiter, shall be computed at the rate of P2,000.00 per month multiplied by thirty-six (36) months (November 1984 to December 1987) in the total amount of P72,000.00; (b) separation pay computed at the rate of P4,000.00 monthly pay multiplied by three (3) years of service or a total of P12,000.00; (c) indemnity for moral damages in the amount of P20,000.00; (d) six percent (6%) per annum legal interest computed on items (a) and (b) above, commencing on 26 December 1989 and until fully paid; and (e) ten percent (10%) attorney's fees on the total amount due from private respondent Jade Mountain.

Costs against private respondents. SO ORDERED. Bidin, Davide, Jr., Romero and Melo, JJ., concur.

# Footnotes 1 Rollo, pp. 11, 28, 31, 35 and 43. 2 Id., pp. 31, 43 and 68. 3 Id., pp. 36 and 44. 4 Id., pp. 40-41. 5 Id., pp. 36-38. 6 Id., pp. 45-46. 7 Id., pp. 9-10. 8 88 SCRA 623 (1979). 9 88 SCRA 642-643. 10 Art. 283. Closure of establishment and reduction of personnel. The employer may alsoterminate the employment of any employee due to the installation of laborsaving devices,redundancy, retrenchment to prevent losses or the closing or cessation of operation of the establishment or undertaking unless the closing is for the purpose of circumventing the provisions of this title, by serving written notice on the workers and the Ministry of Labor and Employment at least one (1) month before the intended date thereof. In case of termination due tothe installation of labor-saving devices or redundancy, the worker affected thereby shall be entitled to a separation pay equivalent to at least his one (1) month pay or to at least one (1) month pay for every year of service, whichever is higher. In case of retrenchment to prevent losses or in cases of closures or cessation of operations of establishment or undertaking not due to serious business losses or financial reverses, the separation pay shall be equivalent to one (1) month pay or at least one-half () month pay for every year of service, whichever is higher. A fraction of at least six (6) months shall be considered one (1) whole year. (This provision is identical with that existing in 1987, except that the provision was numerically designated in 1987 as "Article 284"), Labor Code. 11 See, in this connection, Wiltshire File Co., Inc. v. National Labor Relations Commission, et al., 193 SCRA 665 (1991).

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-22825 February 14, 1925

TESTATE ESTATE OF LAZARO MOTA, deceased, ET AL., plaintiffs-appellants, vs. SALVADOR SERRA, defendant-appellee. Eduardo Gutierrez Repide for appellants. Hilado and Hilado, Fisher, DeWitt, Perkins and Brady, Araneta and Zaragosa, Antonio Sanz and Jose Galan y Blanco for appellee. VILLAMOR, J.: On February 1, 1919, plaintiffs and defendant entered into a contract of partnership, marked Exhibit A, for the construction and exploitation of a railroad line from the "San Isidro" and "Palma" centrals to the place known as "Nandong." The original capital stipulated was P150,000. It was covenanted that the parties should pay this amount in equal parts and the plaintiffs were entrusted with the administration of the partnership. The agreed capital of P150,000, however, did not prove sufficient, as the expenses up to May 15, 1920, had reached the amount of P226,092.92, as per statement Exhibit B, presented by the administrator and O.K.'d by the defendant. January 29, 1920, the defendant entered into a contract of sale with Venancio Concepcion, Phil. C. Whitaker, and Eusebio R. de Luzuriaga, whereby he sold to the latter the estate and central known as "Palma" with its running business, as well as all the improvements, machineries and buildings, real and personal properties, rights, choses in action and interests, including the sugar plantation of the harvest year of 1920 to 1921, covering all the property of the vendor. This contract was executed before a notary public of Iloilo and is evidenced by Exhibit 1 of the defendant, paragraph 5 of which reads as follows: 5. The party of the first part hereby states that he has entered into a contract with the owners of the "San Isidro" Central for the construction, operation, and exploitation of a railroad line of about 10 kilometers extending from the "Palma" Central and "San Isidro" Central to a point known as "Nandong," the expenses until the termination of which shall be for the account of the "San Isidro" Central, and of which expenses, one-half shall be borne by the "Palma" Central with the obligation to reimburse same within five (5) years with interest at the rate of 10 per cent per annum to the said "San Isidro" Central. The vendee hereby obligates himself to respect the aforesaid contract and all obligations arising therefrom. Before the delivery to the purchasers of the hacienda thus sold, Eusebio R. de Luzuriaga renounced all his rights under the contract of January 29, 1920, in favor of Messrs. Venancio Concepcion and Phil. C. Whitaker. This gave rise to the fact that on July 17, 1920, Venancio Concepcion and Phil. C. Whitaker and the herein defendant executed before Mr. Antonio Sanz, a notary public in and for the City of Manila,

another deed of absolute sale of the said "Palma" Estate for the amount of P1,695,961.90, of which the vendor received at the time of executing the deed the amount of P945,861.90, and the balance was payable by installments in the form and manner stipulated in the contract. The purchasers guaranteed the unpaid balance of the purchase price by a first and special mortgage in favor of the vendor upon the hacienda and the central with all the improvements, buildings, machineries, and appurtenances then existing on the said hacienda. Clause 6 of the deed of July 17, 1920, contains the following stipulations: 6. Messrs. Phil. C. Whitaker and Venancio Concepcion hereby state that they are aware of the contract that Mr. Salvador Serra has with the proprietors of the "San Isidro" Central for the operation and exploitation of a railroad line about 10 kilometers long from the "Palma" and "San Isidro" centrals to the place known as "Nandong;" and hereby obligate themselves to respect the said contract and subrogate themselves into the rights and obligations thereunder. They also bind themselves to comply with all the contracts heretofore entered by the vendor with the customers, coparceners on shares and employees. Afterwards, on January 8, 1921, Venancio Concepcion and Phil. C. Whitaker bought from the plaintiffs the one-half of the railroad line pertaining to the latter, executing therefor the document Exhibit 5. The price of this sale was P237,722.15, excluding any amount which the defendant might be owing to the plaintiffs. Of the purchase price, Venancio Concepcion and Phil. C. Whitaker paid the sum of P47,544.43 only. In the deed Exhibit 5, the plaintiffs and Concepcion and Whitaker agreed, among other things, that the partnership "Palma" and "San Isidro," formed by the agreement of February 1, 1919, between Serra, Lazaro Mota, now deceased, and Juan J. Vidaurrazaga for himself and in behalf of his brother, Felix and Dionisio Vidaurrazaga, should be dissolved upon the execution of this contract, and that the said partnership agreement should be totally cancelled and of no force and effect whatever. So it results that the "Hacienda Palma," with the entire railroad, the subject-matter of the contract of partnership between plaintiffs and defendant, became the property of Whitaker and Concepcion. Phil. C. Whitaker and Venancio Concepcion having failed to pay to the defendant a part of the purchase price, that is, P750,000, the vendor, the herein defendant, foreclosed the mortgage upon the said hacienda, which was adjudicated to him at the public sale held by the sheriff for the amount of P500,000, and the defendant put in possession thereof, including what was planted at the time, together with all the improvements made by Messrs. Phil. C. Whitaker and Venancio Concepcion. Since the defendant Salvador Serra failed to pay one-half of the amount expended by the plaintiffs upon the construction of the railroad line, that is, P113,046.46, as well as Phil. C. Whitaker and Venancio Concepcion, the plaintiffs instituted the present action praying: (1) That the deed of February 1, 1919, be declared valid and binding; (2) that after the execution of the said document the defendant improved economically so as to be able to pay the plaintiffs the amount owed, but that he refused to pay either in part or in whole the said amount notwithstanding the several demands made on him for the purpose; and (3) that the defendant be sentenced to pay plaintiffs the aforesaid sum of P113,046.46, with the stipulated interest at 10 per cent per annum beginning June 4, 1920, until full payment thereof, with the costs of the present action. Defendant set up three special defenses: (1) The novation of the contract by the substitution of the debtor with the conformity of the creditors; (2) the confusion of the rights of the creditor and debtor; and (3) the extinguishment of the contract, Exhibit A.

The court a quo in its decision held that there was a novation of the contract by the substitution of the debtor, and therefore absolved the defendant from the complaint with costs against the plaintiffs. With regard to the prayer that the said contract be declared valid and binding, the court held that there was no way of reviving the contract which the parties themselves in interest had spontaneously and voluntarily extinguished. (Exhibit 5.) Plaintiffs have appealed from this judgment and as causes for the review, they allege that the trial court erred: (a) In holding that Messrs. Whitaker and Concepcion, upon purchasing the "Palma" Central, were subrogated in the place of the defendant in all his rights and obligations under the contract relating to the railroad line existing between the "Palma" and the "San Isidro" centrals and that the plaintiffs agreed to this subrogation; (b) in holding that the deed Exhibit A of February 1, 1919, had been extinguished in its entirety and made null and void by the agreement Exhibit 5 dated December 16, 1920; (c) in absolving the defendant from the complaint and in sentencing the plaintiffs to pay the costs; and (d) in not sentencing the defendant to pay the plaintiffs the sum of P113,046.46, with legal interest at 10 per cent per annum from June 4, 1920, until full payment, with costs against the defendant. Taking for granted that the defendant was under obligation to pay the plaintiffs one-half of the cost of the construction of the railroad line in question, by virtue of the contract of partnership Exhibit A, the decisive point here to determine is whether there was a novation of the contract by the substitution of the debtor with the consent of the creditor, as required by article 1205 of the Civil Code. If so, it is clear that the obligation of the defendant was, in accordance with article 1156 of the same code, extinguished. It should be noted that in order to give novation its legal effect, the law requires that the creditor should consent to the substitution of a new debtor. This consent must be given expressly for the reason that, since novation extinguishes the personality of the first debtor who is to be substituted by new one, it implies on the part of the creditor a waiver of the right that he had before the novation which waiver must be express under the principle that renuntiatio non praesumitur, recognized by the law in declaring that a waiver of right may not be performed unless the will to waive is indisputably shown by him who holds the right. The fact that Phil. C. Whitaker and Venancio Concepcion were willing to assume the defendant's obligation to the plaintiffs is of no avail, if the latter have not expressly consented to the substitution of the first debtor. Neither can the letter, Exhibit 6, on page 87 of the record be considered as proof of the consent of the plaintiffs to the substitution of the debtor, because that exhibit is a letter written by plaintiffs to Phil. C. Whitaker and Venancio Concepcion for the very reason that the defendant had told them (plaintiffs) that after the sale of the "Hacienda Palma" to Messrs. Phil. C. Whitaker and Venancio Concepcion, the latter from then on would bear the cost of the repairs and maintenance of the railroad line and of the construction of whatever addition thereto might be necessary. So the plaintiffs by their letter of August 14th, submitted a statement of account to Phil. C. Whitaker and Venancio Concepcion containing the accounts of the "San Isidro" Central, as stated June 30, 1920, saying that they had already explained previously the reason for the increase in the expenses and since the retiring partner, Mr. Serra, had already given conformity with the accounts, as stated May 15, 1920, it remained only to hear the conformity of the new purchasers for the accounts covering the period from May 15 to June 30, 1920, and their authority for future investments, or their objection, if any, to the amounts previously expended. Neither can the testimony of Julio Infante in connection with Exhibit 7 be taken as evidence of the consent of the plaintiffs to the change of the person of the debtor for that of Messrs. Phil. C. Whitaker and Venancio Concepcion. This witness testified, in substance, that he is acquainted with the

partnership formed by the owners of the "Hacienda Palma" and Hacienda San Isidro" for the construction of the railroad line; that the cost of the construction thereof was originally estimated at P150,000; that the owner of the "Hacienda Palma" would pay one-half of this amount; that when the "Hacienda Palma" was sold to Messrs. Phil. C. Whitaker and Venancio Concepcion, the latter agreed to pay one-half of the cost of P150,000; that as the cost of construction exceeded P200,000, he, as an employee of Messrs. Phil. C. Whitaker and Venancio Concepcion, could not O.K. the accounts as presented by the plaintiffs, and suggested that they take up in writing their points of view directly with Messrs. Phil. C. Whitaker and Venancio Concepcion. Then the plaintiffs did as suggested, and wrote the letter Exhibit 7 in which they asked the new owners of the "Hacienda Palma" their decision upon the following three questions: 1. Will the "Palma" Central accept the statement of account as presented by the "San Isidro" Central regarding the actual cost of the railroad line "Palma-San Isidro-Nandong?" 2. Is the "Palma" Central willing to continue as co-proprietor of the railroad line for the exploitation of the sugar-cane business of "Nandong" and neighboring barrios, and therefore to pay 50 per cent of the expenses that may be incurred in completing the line? It was but natural that the plaintiffs should have done this. Defendant transferred his hacienda to Messrs. Phil. C. Whitaker and Venancio Concepcion and made it known to the plaintiffs that the new owners would hold themselves liable for the cost of constructing the said railroad line. Plaintiffs could not prevent the defendant from selling to Phil. C. Whitaker and Venancio Concepcion his "Hacienda Palma" with the rights that he had over the railroad in question. The defendant ceased to be a partner in said line and, therefore, the plaintiffs had to take the vendees as their new partners. Plaintiffs had to come to an understanding with the new owners of the "Hacienda Palma" in connection with the railroad line "Palma-San Isidro-Nandong." But in all of this, there was nothing to show the express consent, the manifest and deliberate intention of the plaintiffs to exempt the defendant from his obligation and to transfer it to his successors in interest, Messrs. Phil. C. Whitaker and Venancio Concepcion. The plaintiffs were not a party to the document Exhibit 1. Neither in this document, nor in others in the record, do we find any stipulation whereby the obligation of the defendant was novated with the consent of the creditor, and as it has been held in the case of Martinez vs. Cavives (25 Phil., 581), the oral evidence tending to prove such a fact as this is not in law sufficient. As has been said, in all contracts of novation consisting in the change of the debtor, the consent of the creditor is indispensable, pursuant to article 1205 of the Civil Code which reads as follows: Novation which consists in the substitution of a new debtor in the place of the original one may be made without the knowledge of the latter, but not without the consent of the creditor. Mr. Manresa in his commentaries on articles 1205 and 1206 of the Civil Code (vol. 8, 1907 ed., pp. 424426) says as follows: Article 1205 clearly says in what this kind of novation must consist, because in stating that another person must be substituted in lieu of the debtor, it means that it is not enough to extend the juridical relation to that other person, but that it is necessary to place the latter in the same position occupied by the original debtor. Consequently, the obligation contracted by a third person to answer for the debtor, as in the case of suretyship, in the last analysis, does not work as a true novation, because the third

person is not put in the same position as the debtor the latter continues in his same place and with the same obligation which is guaranteed by the former. Since it is necessary that the third person should become a debtor in the same position as the debtor whom he substitutes, this change and the resulting novation may be respected as to the whole debt, thus untying the debtor from his obligation, except the eventual responsibilities of which we shall speak later, or he may continue with the character of such debtor and also allow the third person to participate in the obligation. In the first case, there is a complete and perfect novation; in the second, there is a change that does not free the debtor nor authorize the extinguishment of the accessory obligations of the latter. In this last hypothesis, if there has been no agreement as to solidarity, the first and the new debtor should be considered as obligated severally. The provisions of article 1205 which require the consent of the creditor as an indispensable requisite in this kind of novation and not always that of the debtor, while not making it impossible to express the same, imply the distinction between these two forms of novation and it is based on the simple consideration of justice that since the consequences of the substitution may be prejudicial to the creditor, but not to the debtor, the consent of the creditor alone is necessary. The two forms of this novation, also impliedly recognized by article 1206 which employs the word "delegate," as applied to the debt, are the expromission and the delegation. Between these, there is a marked difference of meaning and, as a consequence, a logical difference of requisite and another clear difference as to their effects, of which we shall speak later. In the expromission, the initiative of the change does not emanate from the debtor and may be made even without his consent, since it consists in a third person assuming his obligation; it logically requires the consent of this third man and of the creditor and in this last requisite lies the difference between novation and payment, as the latter can be effected by a third person even against the will of the creditor, whereas in the former case it cannot. In the delegation, the debtor offers and the creditor accepts a third person who consents to the substitution so that the intervention and the consent of these three persons are necessary and they are respectively known as delegante, delegatario, and delegado. It must be noted that the consent need not be given simultaneously and that it may be given afterwards, as for example, that of the creditor delegatario to the proposition of the debtor accepted by the delegado. Delegation notably differs from the mere indication made by the debtor that a third person shall pay the debt; in this case, there is no novation and the former is not acquitted of his obligation and his relations with the third person are regulated by the rules of agency. The French Code in article 1276 expressly provides for this case, as well as the inverse one where the debtor points out somebody else to answer for the payment, declaring that there is no novation in either case. The same sound criterion is impliedly accepted by our Code. In the case of E.C. McCullough & Co. vs. Veloso and Serna (46 Phil., 1), it appears that McCullough and Co., Inc., sold to Veloso a real estate worth P700,000 on account of which Veloso paid P50,000, promising to pay the balance at the times and manner stipulated in the contract. He further bound

himself to pay 10 per cent of the amount of the debt as attorney's fees in case of litigation. To secure the unpaid balance of the purchaser price he executed a first mortgage upon the property in favor of the vendor. Subsequently, Veloso sold the property for P100,000 to Joaquin Serna who bound himself to respect the mortgage in favor of McCullough and Co., Inc., and to assume Veloso's obligation to pay the unpaid balance of the purchase price of the property at the times agreed upon in the contract between Veloso and McCullough and Co., Inc. Veloso had paid on account of the price the amount of P50,000, and Serna also made several payments aggregating the total amount of P250,000. But after this, neither Veloso nor Serna made further payments and thus gave cause for a litigation. The court in deciding the case said: The defendant contends that having sold the property to Serna, and the latter having assumed the obligation to pay the plaintiff the unpaid balance of the price secured by the mortgage upon the property, he was relieved from this obligation and it then devolved upon Serna to pay the plaintiff. This means that as a consequence of the contract between the defendant and Serna, the contract between the defendant and the plaintiff was novated by the substitution of Serna as a new debtor. This is untenable. In order that this novation may take place, the law requires the consent of the creditor (art. 1205 of the Civil Code). The plaintiff did not intervene in the contract between Veloso and Serna and did not expressly give his consent to this substitution. Novation must be express, and cannot be presumed. In Martinez vs. Cavives (25 Phil., 581), it was held that: . . . The consent of the new debtor is as essential to the novation as is that of the creditor . . . . There is no express stipulation in any of the documents of record that the obligation of the defendant was novated, and the parol evidence tending to show that it was novated is not sufficient in law to establish that fact. The same doctrine was upheld in the case of Vaca vs. Kosca (26 Phil., 388): A new debtor cannot be substituted for the original obligor in the first contract without the creditor's consent. The supreme court of Spain has constantly laid down the same doctrine with regard to novation of contracts: The obligations and rights in a contract cannot be novated with regard to a third person who has not intervened in the execution thereof. (Decision of June 28, 1860.) Novation by the change of debtors cannot be effected without the express approval of the creditor. (Decisions of February 8, 1862 and June 12, 1867.) Novation should not be established by presumptions but by the express will of the parties. (Decisions of February 14, 1876 and June 16, 1883.)

In order that novation of a contract by subrogation of the debtor may take effect and thus liberate the first debtor from the obligation, it is necessary that the subrogation be made with the consent of the creditor. (Decision of March 2, 1897.) It is undeniable that obligations judicially declared, as well as those acquired by any title, can be novated by substituting a new debtor in place of the primitive, only when the creditor gives his consent to the substitution. (Decision of November 15, 1899.) Novation can in no case be presumed in contracts, but it is necessary that it should result from the will of the parties, or that the old and the new one be altogether incompatible. (Decision of December 31, 1904.) An obligation cannot be deemed novated by means of modifications which do not substantially change the essence thereof, nor when it is not extinguished by another obligation, nor when the debtor is not substituted. (Decision of March 14, 1908.) The consent of the creditor required in a novation consisting of the change of debtors (art. 1205, Civil Code) must appear in an express and positive manner and must be given with the deliberate intention of exonerating the primitive debtor of his obligations and transfer them wholly upon the new debtor. (Decision of June 22, 1911.) In the decision in the case of Martinez vs. Cavives, supra, the following decisions of the several courts of the United States are cited, wherein this question was decided in the same manner: In Latiolais, admrx. vs. Citizens' Bank of Louisiana (33 La. Ann., 1444), one Duclozel mortgaged property to the defendant bank for the triple purpose of obtaining shares in the capital stock of the bank, bonds which the bank was authorized to issue, and loans to him as a stockholder. Duclozel subsequently sold this mortgaged property to one Sproule, who, as one of the terms of the sale, assumed the liabilities of his vendor to the bank. Sproule sold part of the property to Graff and Chalfant. The debt becoming due, the bank brought suit against the last two named and Sproule as owners. Duclozel was not made a party. The bank discontinued these proceedings and subsequently brought suit against Latiolais, administratrix of Duclozel, who had died. The court said: "But the plaintiff insists that in its petition in the proceeding first brought the bank ratified the sale made by Duclozel to Sproule, and by the latter to other parties, in treating them as owners. Be that so, but it does not follow in the absence of either a formal and express or of an implied consent to novate, which should be irresistibly inferred from surrounding circumstances, that it has discharged Duclozel unconditionally, and has accepted those parties as new delegated debtors in his place. Nemo presumitur donare. "Novation is a contract, the object of which is: either to extinguish an existing obligation and to substitute a new one in its place; or to discharge an old debtor and substitute a new one to him; or to substitute a new creditor to an old creditor with regard to whom the debtor is discharged.

"It is never presumed. The intention must clearly result from the terms of the agreement or by a full discharge of the original debt. Novation by the substitution of a new debtor can take place without the consent of the debtor, but the delegation does not operate a novation, unless the creditor has expressly declared that he intends to discharge with delegating debtor, and the delegating debtor was not in open failure or insolvency at the time. The mere indication by a debtor of a person who is to pay in his place does not operate a novation. Delegatus debitor est odiosus in lege. "The most that could be inferred would be that the bank in the exercise of a sound discretion, proposed to better its condition by accepting an additional debtor to be and remain bound with the original one." In Fidelity L. & T. Co. vs. Engleby (99 Va., 168), the court said: "Whether or not a debt has been novated is a question of fact and depends entirely upon the intention of the parties to the particular transaction claimed to be novated. In the absence of satisfactory proof to the contrary, the presumption is that the debt has not been extinguished by taking the new evidence in the absence of an intention expressed or implied, being treated as a conditional payment merely." In Hamlin vs. Drummond (91 Me., 175; 39 A., 551), it was said that novation is never presumed but must always be proven. In Netterstorn vs. Gallistel (110 Ill. App., 352), it was said that the burden of establishing a novation is on the party who asserts its existence; that novation is not easily presumed; and that it must clearly appear before the court will recognize it. Notwithstanding the doctrines above quoted, defendant's counsel calls our attention to the decision of the supreme court of Spain of June 16, 1908, wherein it was held that the provisions of article 1205 of Code do not mean nor require that the consent of the creditor to the change of a debtor must be given just at the time when the debtors agree on the substitution, because its evident object being the full protection of the rights of the creditor, it is sufficient if the latter manifests his consent in any form and at any time as long as the agreement among the debtors holds good. And defendant insists that the acts performed by the plaintiffs after the "Hacienda Palma" was sold to Messrs. Phil. C. Whitaker and Venancio Concepcion constitute evidence of the consent of the creditor. First of all, we should have an idea of the facts upon which that decision was rendered by the supreme court of Spain. A partnership known as "La Azucarera de Pravia" obtained a fire insurance policy from the company "La Union y Fenix Espanol," by virtue of which, said company insured in consideration of an annual premium of 3,000pesetas, the buildings, machinery and other apparatuses pertaining to the "Pravia Factory" for ten years and for half their value, and another insurance from another insurance company insuring the same property and effects for the other half of their value. Later, "La Azucarera de Pravia," with other sugar companies, ceded all its property to another company known as "Sociedad General Azucarera de Espaa," in which in consideration of certain amount of stock that the said "Sociedad General Azucarera de Espaa" issued to the "La Azucarera de Pravia," the latter was merged with the former. After the cession, "La Union y Fenix Expaol" sued the "Sociedad General Azucarera de Espaa" demanding the payment of the premium that should have been paid by the "La Azucarera de Pravia," which payment the "Sociedad General Azucarera de Espaa" refused to make on the ground that the "La Azucarera de Pravia" was not merged with the "Sociedad General Azucarera de Espaa," but merely transferred its properties to the latter in consideration of the stock that was issued

to the "La Azucarera de Pravia." It was further contended by the "Sociedad General Azucarera de Espaa" that even if it were true that in the contract of cession it appeared that the "La Azucarera de Pravia" was merged with the "Sociedad General Azucarera de Espaa," nevertheless, there was no such merger in law, for in truth and in fact, the "La Azucarera de Pravia" had ceded only its property, but not its rights and obligations; that the existence of the partnership known as "La Azucarera de Pravia" was proven by its registration in the mercantile register, which was not cancelled, did it contain any statement to the effect that the "La Azucarera de Pravia" had been extinguished or had ceased to do business even after the cession of properties to the "Sociedad General Azucarera de Espaa." Another argument advanced by the "Sociedad General" was that at the time the "Azucarera de Pravia" ceded its properties to the "Sociedad General Azucarera de Espaa," the insurance company "La Union y Fenix Espanol" did not assent to the subrogation of the "Sociedad General Azucarera" into the rights and obligations of the "Azucarera de Pravia," assuming that there had been such a subrogation or substitution of a debtor by another. The supreme court of Spain gave judgment in favor of the "La Union y Fenix Espaol" insurance company for the following reasons: 1. While it is true that it cannot be strictly said that "La Azucarera de Pravia" was merged with the "Sociedad General Azucarera de Espaa," the document whereby the property of the "La Azucarera de Pravia" was ceded to the "Sociedad General Azucarera de Espaa" clearly and expressly recites that this company upon taking charge of the immovable property of the "La Azucarera de Pravia" accepted in general, with respect to the property ceded, "everything belonging to the same," after making provisions about active and passive easements, contracts for transportation and other matters. The supreme court held that by virtue of the words hereinabove quoted, the "Sociedad General Azucarera de Espaa" took over the obligation to pay the insurance premiums of the "La Azucarera de Pravia" inasmuch as said insurance pertained to the property that was ceded. 2. While it is true that "La Union y Fenix Espaol" insurance company did not give its consent to the contract of cession at the moment of its execution, yet the mere fact that the said insurance company now sues the "Sociedad General Azucarera de Espaa" is an incontrovertible proof that the said insurance company accepts the substitution of the new debtor. By comparing the facts of that case with the defenses of the case at bar, it will be seen that, whereas in the former case the creditor sued the new debtor, in the instant case the creditor sues the original debtor. The supreme court of Spain in that case held that the fact that the creditor sued the new debtor was proof incontrovertible of his assent to the substitution of the debtor. This would seem evident because the judicial demand made on the new debtor to comply with the obligation of the first debtor is the best proof that the creditor accepts the change of the debtor. His complaint is an authentic document where his consent is given to the change of the debtor. We are not holding that the creditor's consent must necessarily be given in the same instrument between the first and the new debtor. The consent of the creditor may be given subsequently, but in either case it must be expressly manifested. In the present case, however, the creditor makes judicial demand upon the first debtor for the fulfillment of his obligation, evidently showing by this act that he does not give his consent to the substitution of the new debtor. We are of the opinion that the decision of the supreme court of Spain of June 16, 1908, cannot be successfully invoked in support of defendant's contention. Wherefore, we hold that in

accordance with article 1205 of the Civil Code, in the instant case, there was no novation of the contract, by the change of the person of the debtor. Another defense urged by the defendant is the merger of the rights of debtor and creditor, whereby under article 1192 of the Civil Code, the obligation, the fulfillment of which is demanded in the complaint, became extinguished. It is maintained in appellee's brief that the debt of the defendant was transferred to Phil. C. Whitaker and Venancio Concepcion by the document Exhibit 1. These in turn acquired the credit of the plaintiffs by virtue of the debt, Exhibit 5; thus the rights of the debtor and creditor were merged in one person. The argument would at first seem to be incontrovertible, but if we bear in mind that the rights and titles which the plaintiffs sold to Phil. C. Whitaker and Venancio Concepcion refer only to one-half of the railroad line in question, it will be seen that the credit which they had against the defendant for the amount of one-half of the cost of construction of the said line was not included in the sale contained in Exhibit 5. That the plaintiffs sold their rights and titles over one-half of the line, is evident from the very Exhibit 5. The purchasers, Phil. C. Whitaker and Venancio Concepcion, to secure the payment of the price, executed a mortgage in favor of the plaintiffs on the same rights and titles that they had bought and also upon what they had purchased from Mr. Salvador Serra. In other words, Phil. C. Whitaker and Venancio Concepcion mortgaged unto the plaintiffs what they had bought from the plaintiffs and also what they had bought from Salvador Serra. If Messrs. Phil. C. Whitaker and Venancio Concepcion had purchased something from Mr. Salvador Serra, the herein defendant, regarding the railroad line, it was undoubtedly the one-half thereof pertaining to Mr. Salvador Serra. This clearly shows that the rights and titles transferred by the plaintiffs to Phil. C. Whitaker and Venancio Concepcion were only those they had over the other half of the railroad line. Therefore, as already stated, since there was no novation of the contract between the plaintiffs and the defendant, as regards the obligation of the latter to pay the former one-half of the cost of the construction of the said railroad line, and since the plaintiffs did not include in the sale, evidenced by Exhibit 5, the credit that they had against the defendant, the allegation that the obligation of the defendant became extinguished by the merger of the rights of creditor and debtor by the purchase of Messrs. Phil. C. Whitaker and Venancio Concepcion is wholly untenable. Appellants assign also as a ground of their appeal the holding of the court that by the termination of the partnership, as shown by the document Exhibit 5, no legal rights can be derived therefrom. By virtue of the contract Exhibit 5, the plaintiffs and Phil. C. Whitaker and Venancio Concepcion, by common consent, decided to dissolve the partnership between the "Hacienda Palma" and "Hacienda San Isidro," thus cancelling the contract of partnership of February 1, 1919. Counsel for appellee in his brief and oral argument maintains that the plaintiffs cannot enforce any right arising out of that contract of partnership, which has been annulled, such as the right to claim now a part of the cost of the construction of the railroad line stipulated in that contract. Defendant's contention signifies that any person, who has contracted a valid obligation with a partnership, is exempt from complying with his obligation by the mere fact of the dissolution of the partnership. Defendant's contention is untenable. The dissolution of a partnership must not be understood in the absolute and strict sense so that at the termination of the object for which it was created the partnership is extinguished, pending the winding up of some incidents and obligations of the partnership, but in such case, the partnership will be reputed as existing until the juridical relations arising out of the contract are dissolved. This doctrine has been upheld by the supreme court of Spain in its decision of February 6, 1903, in the following case: There was a partnership formed between several

persons to purchase some lands sold by the state. The partnership paid the purchase price and distributed among its members the lands so acquired, but after the lapse of some time, one of the partners instituted an action in the court of Badajoz, praying that he be accepted as a partner with the same rights and obligations as the others, for the reason that he had not been allowed all that he had a right to. The court granted the petition, which judgment was affirmed by the Audiencia de Caceres. From that decision the defendant sued out a writ of error alleging infringement of articles 1680 and 1700 of the Civil Code, on the proposition that all contracts are reputed consummated and therefore extinguished, when the contracting parties fulfill all the obligations arising therefrom and that by the payment of the money and the granting and distribution of the lands without any opposition, the juridical relations between the contracting parties become extinguished and none of the parties has any right of action under the contract. The supreme court, holding that some corrections and liquidations asked by the actor were still pending, denied the writ, ruling that the articles cited were not infringed because a partnership cannot be considered as extinguished until all the obligations pertaining to it are fulfilled. (11 Manresa, page 312.) The dissolution of a firm does not relieve any of its members from liability for existing obligations, although it does save them from new obligations to which they have not expressly or impliedly assented, and any of them may be discharged from old obligations by novation of other form of release. It is often said that a partnership continues, even after dissolution, for the purpose of winding up its affairs. (30 Cyc., page 659.) Another question presented by appellee's counsel in his memorandum and oral argument is that as in the partnership articles of February 1, 1919, it was covenanted that the defendant would put up onehalf of the cost of the railroad line within five years from the date, that is, from February 1, 1919, with interest at 10 per cent per annum, the present action is premature since, from the execution of the contract until October 25, 1922, the date of the complaint, the five years, within which the defendant could pay his part of the cost of the construction of the line, had not yet elapsed. Suffice it to say that the plaintiff and the successors in interest of the defendant, by mutual consent, dissolved the partnership on June 16, 1920, cancelling the contract Exhibit A to all of which the defendant consented as evidence by his allegations in his answer. If this is so, there is no reason for waiting for the expiration of the five years which the parties themselves had seen fit to stipulate and therefore the provisions of article 113, regarding the fulfillment of pure obligations, must be applied in this case. For all of the foregoing, the judgment appealed from is reversed, and we hold that the defendant Salvador Serra is indebted to the plaintiffs, the Testate Estate of Lazaro Mota, et al., in the amount of P113,046.46, and said defendant is hereby sentenced to pay the plaintiffs the said amount, together with the agreed interest at the rate of 10 per cent per annum from the date of the filing of the complaint. Without special pronouncement as to costs, it is so ordered. Johnson, Street, Malcolm, Ostrand, Johns, and Romualdez, JJ., concur.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. 17024 March 24, 1922

DOMINGO BEARNEZA, plaintiff-appelle, vs. BALBINO DEQUILLA, defendant-appellant. C. Lozano and Cecilio I. Lim for appellant. Montinola, Montinola & Hontiveros for appellee. ROMUALDEZ, J.: In the year 1903, Balbino Dequilla, the herein defendant, and Perpetua Bearneza formed a partnership for the purpose of exploiting a fish pond situated in the barrio of Talisay, municipality of Barotac Nuevo, Province of Iloilo, Perpetua obligating herself to contribute to the payment of the expenses of the business, which obligation she made good, and both agreeing to divide the profits between themselves, which they had been doing until the death of the said Perpetua in the year 1912. The deceased left a will in one of the clauses of which she appointed Domingo Bearnez, the herein plaintiff, as her heir to succeed to all her rights and interests in the fish pond in question. Demand having been made upon Balbino Dequilla by Domingo Bearneza for the delivery of the part of the fish pond belonging to his decedent, Perpetua, and delivery having been refused, Domingo Bearneza brought this action to recover said part of the fish pond belonging to his decedent, Perpetua, and delivery having been refused, Domingo Bearneza brought this action recover said part of the fish pond and one-half of the profits received by the defendant from the fish pond from the year 1913 to 1919, as damages (the amended complaint was filed on April 12, 1920), amounting, according to plaintiff, to the sum of thirteen thousand one hundred pesos (13,100). In his answer, the defendant denies generally and specifically the allegations of the complaint, and alleges, as special defense, that "the formation of the supposed partnership between the plaintiff and the defendant for the exploitation of the aforesaid fish pond was not carried into effect, on account of the plaintiff having refused to defray the expenses of reconstruction and exploitation of said fish pond." As another special defense, the defendant alleges "that in the event that the court should hold the plaintiff to be entitled to the undivided one-half of the fish pond, claimed in the complaint, the plaintiff's action has prescribed, the time for bringing the same having elapsed." Proceedings having been held as usual, the court below rendered judgment, declaring the plaintiff owner of one-half of the fish pond, which was composed of the portions known as "Alimango" and "Dalusan," but without awarding him any of the damages claimed by him, the same not having been proven, in the opinion of the court, and ordering the defendant to pay the costs.

From this judgment the defendant appeals, making various assignments of error. The plaintiff did not appeal from that part of the judgment denying his claim for damages; hence the only question we are called upon to decide is whether or not the plaintiff has any right to maintain an action for the recovery of one-half of the said fish pond. The partnership formed by Perpetua Bearneza and Balbino Dequilla, as to the existence of which the proof contained in the record is conclusive and there is no dispute, was of a civil nature. It was a particular partnership, as defined in article 1678 of the Civil Code, it having had for its subject-matter a specified thing, to with, the exploitation of the aforementioned fish pond. Although, as the trial court says in its decision, the defendant, in his letters to Perpetua or her husband, makes reference to the fish pond, calling it "our," or "your fish pond," this reference cannot be held to include the land on which the said fish pond was built. It has not been proven that Perpetua Bearneza participated in the ownership of said land, and Exhibits 2 and 3 of the defendant show that he has been paying, as exclusive owner of the fish pond, the land tax thereon, although in Exhibit X he says that the said land belongs to the State. The conclusion, therefore, from the evidence is that the land on which the fish pond was constructed did not constitute a part of the subject- matter of the aforesaid partnership. Now, this partnership not having been organized in the form of a mercantile partnership, and, therefore, the provisions of the Code of Commerce not being applicable thereto (article 1670 of the Civil Code), it was dissolved by the death of Perpetua Bearneza, and falls under the provisions of article 1700, subsection 3, of the same Code, and not under the exception established in the last paragraph of said article 1700 of the Civil Code. Neither can it be maintained that the partnership continued to exist after the death of Perpetua, inasmuch as it does not appear that any stipulation to that effect has ever been made by her and the defendant, pursuant to the provisions of article 1704 of the Code last cited. The partnership having been dissolved by the death of Perpetua Bearneza, its subsequent legal status was that of a partnership in liquidation, and the only rights inherited by her testamentary heir, the herein plaintiff, were those resulting from the said liquidation in favor of the deceased partner, and nothing more. Before this liquidation is made, which up to the present has not been effected, it is impossible to determine what rights or interests, if any, the deceased had, the partnership bond having been dissolved. There is no sufficient ground for holding that a community of property existed between the plaintiff and the defendant, it not being known whether the deceased still had any interest in the partnership property which could have been transmitted by will to the plaintiff. There being no community of property, article 395 of the Civil Code cited by the plaintiff in support of his contention can have no application to the case at bar. Neither can it be said that the partnership continued between the plaintiff and the defendant. It is true that the latter's act in requiring the heirs of Perpetua to contribute to the payment of the expenses of exploitation of the aforesaid fishing industry was an attempt to continue the partnership, but it is also true that neither the said heirs collectively, nor the plaintiff individually, took any action in response to that requirement, nor made any promise to that effect, and therefore no new contract of partnership existed.

We find that the plaintiff has not sufficiently shown his right of action. The judgment appealed from is modified, the same being affirmed insofar as it denies the plaintiff's claim for damages, and reversed insofar as it declares the said plaintiff owner of one-half of the fish pond, "Alimango" and "Dalusan," here in dispute. No special finding as to costs is made. So ordered. Araullo, C.J., Malcolm, Avancea, Villamor, Ostrand and Johns, JJ., concur.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-3518 February 29, 1952

URBANO LOTA (Substituted by SOLOMON LOTA in his capacity as Administrator of the Estate of URBANO LOTA), plaintiff-appellant, vs. BENIGNO TOLENTINO, defendant-appellee. Manuel P. Calanog and Jose A. Buendia for appellant. Potenciano Villegas for appellee. PARAS, C.J.: This is an appeal from a resolution of the Court of First Instance of Batangas of May 4, 1949, worded in full as follows: On April 6, 1949, counsel for plaintiff filed a motion praying that deceased defendant be substituted by his heirs, Marta Sadiasa and Efigenia, Resurreccion and Mercedes, all surnamed Tolentino, as parties defendant in this case. To said motion counsel for defendant interposed an opposition upon the following grounds: I. That the nature of the action for accounting and liquidation of the partnership filed by plaintiff since March 3, 1937, is purely personal in character and, upon the death of the defendant on November 22, 1939, the claim was already extinguished. II. Assuming that the action for accounting and liquidation of the partnership is not purely personal in character and that such claim is not yet extinguished, the case should now be dismissed in view of the failure of the plaintiff to prosecute his action for an unreasonable length of time. III. Assuming further that the plaintiff's claim was not yet extinguished upon the death of the defendant on November 22, 1939, the rights, if any, sought to be enforced by the plaintiff in the complaint have already been lost by claches. The question before the Court therefore is whether the motion for substitution should be granted and the case allowed to go to trial on the merits, or whether the defendant's opposition should be sustained and the case dismissed. The following factual background appears of record: On March 3, 1937, plaintiff filed an action against defendant to order the latter (a) to render an accounting of his management of their partnership, and (b) to deliver the plaintiff whatever share he may have in the assets of the partnership after the liquidation has been approved by the Court.

The partnership above-mentioned was entered into by and between plaintiff and defendant in the year 1918, whereby they agreed to engage in general business in the municipality of Alabat, province of Batangas, both to divide the profits and losses share alike, and defendant to be manager of the partnership. Plaintiff alleges that from 1918 until 1928 defendant had rendered an annual accounting, but has refused to do so from 1929 to 1937, hence, plaintiff's complaint. To plaintiff's complaint, defendant filed an answer, alleging that defendant was the industrial partner in said partnership; that he rendered a yearly accounting and liquidation thereof from 1918 to 1932, and that in the latter year, 1932, the partnership was dissolved and defendant delivered all its properties and assets to the plaintiff. Hence, defendant prays for the dismissal of plaintiff's complaint. The plaintiff died in 1938, and on September 28, 1939, he was substituted by the administrator of his estate, Solomon Lota. On December 8, 1939, defendant's counsel made a suggestion upon the record that defendant died on November 26, 1939. On January 9, 1940, the Court gave plaintiff 30 days to amend the complaint by substituting for the deceased defendant the administrator of his estate or his legal representative. On January 28, 1941, the Court ordered the dismissal of the case for lack of prosecution. This order was reconsidered and set aside upon a showing by plaintiff that on March 28, 1941, he had filed a petition for the issuance of letters of administration to deceased defendant's surviving spouse, Marta Sadiasa, for the purpose of substituting her for the deceased defendant, said petition being Special Proceedings No. 3859 of this Court entitled "Intestate Estate of the late Benigno Tolentino, Solomon Lota, petitioner." This special proceedings was, however, dismissed for failure of the administratrix to file a bond and to take her oath. It will thus be seen that from defendant's death on November 26, 1939, to the present, or almost ten years, no administrator or legal representative had been actually substituted to take the place of said defendant. It was only on April 6, 1949, that plaintiff made another try to substitute said deceased by filing his motion, referred to in the first paragraph of this resolution, praying that defendant's heirs be substituted for him as parties defendant. The following considerations stand in the way of plaintiff's motion for substitution: 1. It being undisputed that defendant was the manager of the partnership formed by and between him and the plaintiff, and that said defendant died on November 26, 1939, during the pendency of the present for accounting and liquidation against defendant, the said action should have been discontinued as it could no longer be maintained against deceased defendant. Under these circumstances, the remedy and duty of the plaintiff are as set out in the following ruling of the Supreme Court in Po Yeng Cheo vs. Lim Ka Yam, (44 Phil. 172, 178): In the first place, it is well settled that when a member of a mercantile partnership dies, the duty of liquidating its affairs devolves upon the surviving member, or members of the firm, not upon the legal representative of the deceased partner. (Wahl vs. Donaldson Sim and Co., 5 Phil., 11; Sugo and Shibatavs. Green, 6 Phil., 744). And the same rule must be equally applicable to a civil

partnership clothed with the form of the commercial association (ART. 1670, Civil Code; Lichauco vs. Lichauco, 33 Phil., 350). If, as it appears of record, plaintiff died prior to defendant's death, the duty to liquidate devolved upon the legal representative of the plaintiff because it was the latter who sought to establish a claim against the defendant. 2. If after such liquidation, there should be found money or property due the partnership from the deceased defendant, a claim therefor should be filed against the latter's estate in administration. Again, this is the procedure marked out in the case just cited: Upon the death of Lim Ka Yam it therefore become the duty of his surviving associates to take the proper steps to settle the affairs of the firms, and any claim against him, or his estate, for a sum of money due to the partnership by reason of any misappropriation of its funds by him or damages resulting from his wrongful acts as a manager, should be prosecuted against his estate in administration in the manner pointed out in sections 686 to 701, inclusive, of the Code of Civil Procedure. Moreover, when it appears, as here, that the property pertaining to Kwong Cheong Tay, like the shares in the Ya sieng Chyip Konski and Manila Electric Railroad and Light Company, are in the possession of the deceased partner, the proper step for the surviving associates to take would be to make application to the court having charge of the administration to require the administration to surrender such property. (Po Yeng Cheo vs. Lim Ka Yam, supra.) This procedure was not also followed in the case at bar because plaintiff, or his legal representative, did not procure the appointment and qualification of an administrator of the estate of deceased defendant, altho he had already filed a petition looking towards such administration. This plaintiff was under a duty to do if he considered himself a creditor with a legitimate claim enforceable against the estate of deceased defendant. 3. What plaintiff, or his legal representative, insisted on doing in the present case is to continue and press his action for accounting and liquidation against the heirs of deceased defendant, a procedure which, as above stated, runs counter to that set out in the Po Yeng Cheo vs. Lim Ka Yam case. But even in this, plaintiff, or his legal representative, proceeded half-heartedly, because he only filed a petition for the appointment of an administrator for the estate of deceased defendant, but did not see to it that administrator filed a bond and qualify as such. Hence, the said petition for administration was dismissed. 4. Also, conceding, without admitting, that the present action for accounting would lie against defendant, it is this Court's opinion that such a duty to account died with the defendant, was extinguished upon his death, and was not shifted upon his heirs. The heirs of the defendant have never been partners in the partnership formed by and between plaintiff and defendant, and said heirs are hardly in a position and hardly called upon to effect an accounting of said partnership. 5. Finally, it will be recalled that the partnership in question was organized in 1918 and dissolved in 1932. The action for accounting was commenced on March 3, 1937. And the present motion for substitution was filed on April 6, 1949, only. Trial on the merits at this late date might prove futile and fruitless if no partnership property is found in the possession of defendant's heirs, let

alone the allegation of said defendant in his answer to the complaint back in 1937 that he had already delivered all the properties and assets of the partnership to the plaintiff. If the principle of laches is ever to be applied, it should be applied to this case. Wherefore, the plaintiff's action for substitution is denied and defendant's prayer for the dismissal for this case against the plaintiff. The present appellant is Solomon Lota, in his capacity as administrator of the estate of Urbano Lota, original plaintiff, who died in l938. The decisive question that arises is whether or not, after the death of the defendant Benigno Tolentino on November 22, 1939, plaintiff's action for accounting and liquidation of the partnership formed in l918 between Urbano Lota and Benigno Tolentino, of which the latter was the industrial and managing partner, may be continued against the heirs of Benigno Tolentino. This question was decided adversely to the appellant by the lower court and, in our opinion, correctly. The applicable authority is the case of Po Yeng Cheo vs. Lim Ka Yam, 44 Phil. 172, in which the following pronouncements were made: In the first place, it is well settled that when a member of a mercantile partnership dies, the duty of liquidating its affairs devolves upon the surviving member, or members, of the firm, not upon the legal representatives of the deceased partner. (Wahl vs. Donaldson Sim and Co., 5 Phil., 11; Sugo and Shibata vs. Green, 6 Phil., 744.) And the same rule must be equally applicable to a civil partnership clothed with the form of a commercial association (art. 1670, Civil Code: Lichauco vs. Licahuco, 33 Phil., 350). Upon the death of Lim Ka Yam it therefore become the duty of his surviving associates to take the proper steps to settle the affairs of the firm, and any claim against him, or his state, for a sum of money due to the partnership by reason of any misappropriation of its funds by him, or for damages resulting from his wrongful acts as manager, should be prosecuted against his estate in administration in the manner pointed out in sections 686 to 701, inclusive, of the Code of Civil Procedure. Moreover, when it appears, as here, that the property pertaining to Kwong Cheong Tay, like the shares in the Yut Siong Chyip Konski and Manila Electric Railroad and Light Company, are in the possession of the partner, the proper step for the surviving associates to take would be to make application to the court having charge of the administration to require the administrator to surrender such property. But in the second place, as already indicated, the proceedings in this cause, considered in the character of an action for an accounting, were futile; and the court, abandoning entirely the effort to obtain an accounting, gave judgment against the administrator upon the supposed liability of his intestate to respond for the plaintiffs proportionate share of the capital and assets. But of course the action was not maintenable in this aspect after the death of the defendant; and the motion to discontinue the action against the administrator should have been granted. (pp. 178-179.) Another ground equally decisive against the appellant correctly advanced by the lower court in dismissing the present action for accounting, is lack of prosecution on the part of the appellant. It may be fittingly recalled that the action for accounting and liquidation was filed on March 3, l937. No sooner had the defendant Benigno Tolentino died on November 22, l939, than said fact was made record by his attorney. On January 9, 1940, the lower court gave the plaintiff (who had then died and was substituted on September 28, 1939, by the administrator of his estate, Solomon Lota), 30 days to amend the complaint by substituting the administrator or legal representative of the deceased defendant Benigno Tolentino. On January 28, 1941, the lower court dismissed the case for lack of prosecution on the part of

the plaintiff, but the order of dismissal was reconsidered, upon a showing by the plaintiff that on March 28, 1941, an administration proceeding for the estate of Benigno Tolentino was instituted by the plaintiff. On August 8, 1941 the lower court issued, at the instance of the plaintiff, letters of administration to Tolentino's surviving spouse, Marta Sadiasa, who however failed to qualify. Accordingly, the court dismissed the administration proceeding on January 3, 1949, for lack of interest. It was only as late as April 6, l949, that the plaintiff filed the motion to substitute, not even the legal representative of Benigno Tolentino but his heirs. If the plaintiff was genuinely interested in substituting the proper party, assuming that plaintiff's action may still be pursued after Tolentino's death, he should have taken timely measures to have the administratrix appointed on August 8, 1941, qualify or, in case of her failure or refusal, to procure the appointment of another administrator; because the plaintiff could have availed himself of section 6, Rule 80, of the Rules of Court, providing that "letters of administration may be granted to any qualified applicant, though it appears that there are other competent persons having better right to the administration, if such persons fail to appear when notified and claim the issuance of letters to themselves." Certainly, inaction for almost eight years (after the issuance of letters of administration) on the part of the appellant, sufficiently implies indifference to or desistance from its suit. The theory of the appellant is that the heirs may properly be substituted for the deceased Benigno Tolentino, because they are in possession of property allegedly belonging to the partnership in question, and the appellant seeks the recovery thereof. Apart from the fact that said allegation seems to refer to cause of action foreign to the claim for accounting and liquidation against Tolentino, and should have been made in proper pleading to duly admitted by the lower court, the filing of appellant's motion for substitution more than twelve years after the institution of the complaint came too late and already called for the prosecution. It is immaterial that, before the appealed resolution was issued by the lower court, the appellant attempted to have the deceased defendant had not yet been properly substituted. The resolution herein complained of will therefore be as it is hereby affirmed, with costs against the appellant. So ordered. Feria, Pablo, Padilla, Tuason, Montemayor, Reyes, Jugo and Bautista Angelo, JJ., concur.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-11840 July 26, 1960

ANTONIO C. GOQUIOLAY and THE PARTNERSHIP "TAN SIN AN and ANTONIO C. GOQUIOLAY, plaintiffsappellants, vs. WASHINGTON Z. SYCIP, ET AL., defendants-appellees. Jose C. Colayco, Manuel O. Chan and Padilla Law Offices for appellants. Sycip, Quisumbing, Salazar and Associates for appellees. REYES, J. B. L., J.: Direct appeal from the decision of the Court of First Instance of Davao (the amount involved being more than P200,00) dismissing the plaintiffs-appellants' complaint. From the stipulation of facts of the parties and the evidence on record, it would appear that on May 29, 1940, Tan Sin An and Antonio C. Goquiolay", entered into a general commercial partnership under the partnership name "Tan Sin An and Antonio C. Goquiolay", for the purpose in dealing in real state. The partnership had a capital of P30,000.00, P18,000.00 of which was contributed by Goquiolay and P12,000.00 by Tan Sin An. The agreement lodge upon Tan Sin An the sole management of the partnership affairs, stipulating that III. The co-partnership shall be composed of said Tan Sin An as sole managing and partner (sic), andAntonio C. Goquiolay as co-partner. IV. Vhe affairs of co-partnership shall be managed exclusively by the managing and partner (sic) or by his authorized agent, and it is expressly stipulated that the managing and partner (sic) may delegate the entire management of the affairs of the co-partnership by irrevocable power of attorney to any person, firm or corporation he may select upon such terms as regards compensation as he may deem proper, and vest in such persons, firm or corporation full power and authority, as the agent of the co-partnership and in his name, place and stead to do anything for it or on his behalf which he as such managing and partner (sic) might do or cause to be done. V. The co-partner shall have no voice or participation in the management of the affairs of the copartnership; but he may examine its accounts once every six (6) months at any time during ordinary business hours, and in accordance with the provisions of the Code of Commerce. (Article of Co-Partnership). The lifetime of the partnership was fixed at ten (10) years and also that

In the event of the death of any of the partners at any time before the expiration of said term, the co-partnership shall not be dissolved but will have to be continued and the deceased partner shall be represented by his heirs or assigns in said co-partnership (Art. XII, Articles of CoPartnership). However, the partnership could be dissolved and its affairs liquidated at any time upon mutual agreement in writing of the partners (Art. XIII, articles of Co-Partnership). On May 31, 1940, Antonio Goquiolay executed a general power of attorney to this effect: That besides the powers and duties granted the said Tan Sin An by the articles of co-partnership of said co-partnership "Tan Sin An and Antonio Goquiolay", that said Tan Sin An should act as the Manager for said co-partnership for the full period of the term for which said co-partnership was organized or until the whole period that the said capital of P30,000.00 of the co-partnership should last, to carry on to the best advantage and interest of the said co-partnership, to make and execute, sign, seal and deliver for the co-partnership, and in its name, all bills, bonds, notes, specialties, and trust receipts or other instruments or documents in writing whatsoever kind or nature which shall be necessary to the proper conduction of the said businesses, including the power to mortgage and pledge real and personal properties, to secure the obligation of the copartnership, to buy real or personal properties for cash or upon such terms as he may deem advisable, to sell personal or real properties, such as lands and buildings of the co-partnership in any manner he may deem advisable for the best interest of said co-partnership, to borrow money on behalf of the co-partnership and to issue promissory notes for the repayment thereof, to deposit the funds of the co-partnership in any local bank or elsewhere and to draw checks against funds so deposited ... . On May 29, 1940, the plaintiff partnership "Tan Sin An and Goquiolay" purchased the three (3) parcels of land, known as Lots Nos. 526, 441 and 521 of the Cadastral Survey of Davao, subject-matter of the instant litigation, assuming the payment of a mortgage obligation of P25,000.00, payable to "La Urbana Sociedad Mutua de Construccion y Prestamos" for a period of ten (10) years, with 10% interest per annum. Another 46 parcels were purchased by Tan Sin An in his individual capacity, and he assumed payment of a mortgage debt thereon for P35,000.00 with interest. The downpayment and the amortization were advanced by Yutivo and Co., for the account of the purchasers. On September 25, 1940, the two separate obligations were consolidated in an instrument executed by the partnership and Tan Sin An, whereby the entire 49 lots were mortgaged in favor of the "Banco Hipotecario de Filipinas" (as successor to "La Urbana") and the covenantors bound themselves to pay, jointly and severally, the remaining balance of their unpaid accounts amounting to P52,282.80 within eight 8 years, with 8% annual interest, payable in 96 equal monthly installments. On June 26, 1942, Tan Sin An died, leaving as surviving heirs his widow, Kong Chai Pin, and four minor children, namely: Tan L. Cheng, Tan L. Hua, Tan C. Chiu and Tan K. Chuan. Defendant Kong Chai Pin was appointed administratrix of the intestate estate of her deceased husband. In the meantime, repeated demands for payment were made by the Banco Hipotecario on the partnership and on Tan Sin An. In March, 1944, the defendant Sing Yee and Cuan, Co., Inc., upon request

of defendant Yutivo Sans Hardware Co., paid the remaining balance of the mortgage debt, and the mortgage was cancelled. Then in 1946, Yutivo Sons Hardware Co. and Sing Yee and Cuan Co., Inc. filed their claims in the intestate proceedings of Tan Sin An for P62,415.91 and P54,310.13, respectively, as alleged obligations of the partnership "Tan Sin An and Antonio C. Goquiolay" and Tan Sin An, for advances, interest and taxes paid in amortizing and discharging their obligations to "La Urbana" and the "Banco Hipotecario". Disclaiming knowledge of said claims at first, Kong Chai Pin later admitted the claims in her amended answer and they were accordingly approved by the Court. On March 29, 1949, Kong Chai Pin filed a petition with the probate court for authority to sell all the 49 parcels of land to Washington Z, Sycip and Betty Y. Lee, for the purpose preliminary of settling the aforesaid debts of Tan Sin An and the partnership. Pursuant to a court order of April 2, 1949, the administratrix executed on April 4, 1949, a deed of sale1 of the 49 parcels of land to the defendants Washington Sycip and Betty Lee in consideration of P37,000.00 and of vendees' assuming payments of the claims filed by Yutivo Sons Hardware Co. and Sing Yee and Cuan Co., Inc. Later, in July, 1949, defendants Sycip and Betty Lee executed in favor of the Insular Development Co., Inc. a deed of transfer covering the said 49 parcels of land. Learning about the sale to Sycip and Lee, the surviving partner Antonio Goquiolay filed, on or about July 25, 1949, a petition in the intestate proceedings seeking to set aside the order of the probate court approving the sale in so far as his interest over the parcels of land sold was concerned. In its order of December 29, 1949, the probate court annulled the sale executed by the administratrix with respect to the 60% interest of Antonio Goquiolay over the properties sold. Kong Chai Pin appealed to the Court of Appeals, which court later certified the case to us (93 Phil., 413; 49 Off. Gaz. [7] 2307). On June 30, 1953, we rendered decision setting aside the orders of the probate court complained of and remanding the case for new trial, due to the non-inclusion ofindispensable parties. Thereafter, new pleadings were filed. The second amended complaint in the case at bar prays, among other things, for the annulment of the sale in favor of Washington Sycip and Betty Lee, and their subsequent conveyance in favor of Insular Development Co., Inc., in so far as the three (3) lots owned by the plaintiff partnership are concerned. The answer averred the validity of the sale by Kong Chai Pin as successor partner, in lieu of the late Tan Sin An. After hearing, the complaint was dismissed by the lower court in its decision dated October 30, 1956; hence, this appeal taken directly to us by the plaintiffs, as the amount involved is more than P200,000.00. Plaintiffs-appellants assign as errors that I The lower court erred in holding that Kong Chai Pin became the managing partner of the partnership upon the death of her husband, Tan Sin An, by virtue of the articles of Partnership executed between Tan Sin An and Antonio Goquiolay, and the general power of attorney granted by Antonio Goquiolay. II The lower court erred in holding that Kong Chai Pin could act alone as sole managing partner in view of the minority of the other heirs. III The lower court erred in holding that Kong Chai Pin was the only heir qualified to act as managing partner.

IV The lower court erred in holding that Kong Chai Pin had authority to sell the partnership properties by virtue of the articles of partnership and the general power of attorney granted to Tan Sin An in order to pay the partnership indebtedness. V The lower court erred in finding that the partnership did not pay its obligation to the Banco Hipotecario. VI The lower court erred in holding that the consent of Antonio Goquiolay was not necessary to consummate the sale of the partnership properties. VII The lower court erred in finding that Kong Chai Pin managed the business of the partnership after the death of her husband, and that Antonio Goquiolay knew it. VIII The lower court erred in holding that the failure of Antonio Goquiolay to oppose the management of the partnership by Kong Chai Pin estops him now from attacking the validity of the sale of the partnership properties. IX The lower court erred in holding that the buyers of the partnership properties acted in good faith. X The lower court erred in holding that the sale was not fraudulent against the partnership and Antonio Goquiolay. XI The lower court erred in holding that the sale was not only necessary but beneficial to the partnership. XII The lower court erred in dismissing the complaint and in ordering Antonio Goquiolay to pay the costs of suit. There is a merit in the contention that the lower court erred in holding that the widow, Kong Chai Pin, succeeded her husband, Tan Sin An, in the sole management of the partnership, upon the latter's death. While, as we previously stated in our narration of facts, the Articles of Co-Partnership and the power of attorney executed by Antonio Goquiolay, conferred upon Tan Sin An the exclusive management of the business, such power, premised as it is upon trust and confidence, was a mere personal right that terminated upon Tan's demise. The provision in the articles stating that "in the event of death of any one of the partners within the 10-year term of the partnership, the deceased partner shall be represented by his heirs", could not have referred to the managerial right given to Tan Sin An; more appropriately, it related to the succession in the proprietary interest of each partner. The covenant that Antonio Goquiolay shall have no voice or participation in the management of the partnership, being a limitation upon his right as a general partner, must be held coextensive only with Tan's right to manage the affairs, the contrary not being clearly apparent. Upon the other hand, consonant with the articles of co-partnership providing for the continuation of the firm notwithstanding the death of one of the partners, the heirs of the deceased, by never repudiating or refusing to be bound under the said provision in the articles, became individual partners with Antonio Goquiolay upon Tan's demise. The validity of like clauses in partnership agreements is expressly sanctioned under Article 222 of the Code of Commerce.2

Minority of the heirs is not a bar to the application of that clause in the articles of co-partnership (2 Vivante, Tratado de Derecho Mercantil, 493; Planiol, Traite Elementaire de Droit Civil, English translation by the Louisiana State Law Institute, Vol. 2, Pt. 2, p. 177). Appellants argue, however, that since the "new" members' liability in the partnership was limited merely to the value of the share or estate left by the deceased Tan Sin An, they became no more than limited partners and, as such, were disqualified from the management of the business under Article 148 of the Code of Commerce. Although ordinarily, this effect follows from the continuance of the heirs in the partnership,3 it was not so with respect to the widow Kong Chai Pin, who, by her affirmative actions, manifested her intent to be bound by the partnership agreement not only as a limited but as a general partner. Thus, she managed and retained possession of the partnership properties and was admittedly deriving income therefrom up to and until the same were sold to Washington Sycip and Betty Lee. In fact, by executing the deed of sale of the parcels of land in dispute in the name of the partnership, she was acting no less than as a managing partner. Having thus preferred to act as such, she could be held liable for the partnership debts and liabilities as a general partner, beyond what she might have derived only from the estate of her deceased husband. By allowing her to retain control of the firm's property from 1942 to 1949, plaintiff estopped himself to deny her legal representation of the partnership, with the power to bind it by the proper contracts. The question now arises as to whether or not the consent of the other partners was necessary to perfect the sale of the partnership properties to Washington Sycip and Betty Lee. The answer is, we believe, in the negative. Strangers dealing with a partnership have the right to assume, in the absence of restrictive clauses in the co-partnership agreement, that every general partner has power to bind the partnership, specially those partners acting with ostensible authority. And so, we held in one case: . . . Third persons, like the plaintiff, are not bound in entering into a contract with any of the two partners, to ascertain whether or not this partner with whom the transaction is made has the consent of the other partner. The public need not make inquiries as to the agreements had between the partners. Its knowledge is enough that it is contracting with the partnership which is represented by one of the managing partners. "There is a general presumption that each individual partner is an agent for the firm and that he has authority to bind the firm in carrying on the partnership transactions." [Mills vs. Riggle, 112 Pac., 617] "The presumption is sufficient to permit third persons to hold the firm liable on transactions entered into by one of the members of the firm acting apparently in its behalf and within the scope of his authority." [Le Roy vs. Johnson, 7 U.S. Law, Ed., 391] (George Litton vs. Hill & Ceron, et al., 67 Phil., 513-514). We are not unaware of the provision of Article 129 of the Code of Commerce to the effect that If the management of the general partnership has not been limited by special agreement to any of the members, all shall have the power to take part in the direction and management of the common business, and the members present shall come to an agreement for all contracts or obligations which may concern the association. (Emphasis supplied)

but this obligation is one imposed by law on the partners among themselves, that does not necessarily affect the validity of the acts of a partner, while acting within the scope of the ordinary course of business of the partnership, as regards third persons without notice. The latter may rightfully assume that the contracting partner was duly authorized to contract for and in behalf of the firm and that, furthermore, he would not ordinarily act to the prejudice of his co-partners. The regular course of business procedure does not require that each time a third person contracts with one of the managing partners, he should inquire as to the latter's authority to do so, or that he should first ascertain whether or not the other partners had given their consent thereto. In fact, Article 130 of the same Code of Commerce provides that even if a new obligation was contracted against the express will of one of the managing partners, "it shall not be annulled for such reason, and it shall produce its effects without prejudice to the responsibility of the member or members who contracted it, for the damages they may have caused to the common fund." Cesar Vivante (2 Tratado de Derecho Mercantil, pp. 114-115) points out: 367. Primera hipotesis. A falta de pactos especiales, la facultad de administrar corresponde a cada socio personalmente. No hay que esperar ciertamente concordia con tantas cabezas, y para cuando no vayan de acuerdo, la disciplina del Codigo no ofrece un sistema eficaz que evite los inconvenientes. Pero, ante el silencio del contrato, debia quiza el legislador privar de la administracion a uno de los socios en beneficio del otro? Seria una arbitrariedad. Debera quiza declarar nula la Sociedad que no haya elegido Administrador? El remedio seria peor que el mal. Debera, tal vez, pretender que todos los socios concurran en todo acto de la Sociedad? Pero este concurso de todos habria reducido a la impotencia la administracion, que es asunto d todos los dias y de todas horas. Hubieran sido disposiciones menos oportunas que lo adoptado por el Codigo, el cual se confia al espiritu de reciproca confianza que deberia animar la colaboracion de los socios, y en la ley inflexible de responsabilidad que implica comunidad en los intereses de los mismos. En esta hipotesis, cada socio puede ejercer todos los negocios comprendidos en el contrato social sin dar de ello noticia a los otros, porque cada uno de ellos ejerce la administracion en la totalidad de sus relaciones, salvo su responsabilidad en el caso de una administracion culpable. Si debiera dar noticia, el beneficio de su simultania actividad, frecuentemente distribuida en lugares y en tiempos diferentes, se echaria a perder. Se objetara el que de esta forma, el derecho de oposicion de cada uno de los socios puede quedar frustrado. Pero se puede contestar que este derecho de oposicion concedido por la ley como un remedio excepcional, debe subordinarse al derecho de ejercer el oficio de Administrador, que el Codigo concede sin limite: "se presume que los socios se han concedido reciprocamente la facultad de administrar uno para otro." Se haria precipitar esta hipotesis en la otra de una administracion colectiva (art. 1,721, Codigo Civil) y se acabaria con pedir el consentimiento, a lo menos tacito, de todos los socios lo que el Codigo excluye ........, si se obligase al socio Administrador a dar noticia previa del negocio a los otros, a fin de que pudieran oponerse si no consintieran. Commenting on the same subject, Gay de Montella (Codigo de Comercio, Tomo II, 147-148) opines: Para obligar a las Compaias enfrente de terceros (art. 128 del Codigo), no es bastante que los actos y contratos hayan sido ejecutados por un socio o varios en nombre colectivo, sino que es preciso el concurso de estos dos elementos, uno, que el socio o socios tengan reconocida la facultad de administrar la Compaia, y otro, que el acto o contrato haya sido ejecutado en

nombre de la Sociedad y usando de su firma social. Asi se que toda obligacion contraida bajo la razon social, se presume contraida por la Compaia. Esta presunion es impuesta por motivos de necesidad practica. El tercero no puede cada vez que trata con la Compaia, inquirir si realmente el negocio concierne a la Sociedad. La presuncion es juris tantum y no juris et de jure, de modo que si el gerente suscribe bajo la razon social una obligacion que no interesa a la Sociedad, este podra rechazar la accion del tercero probando que el acreedor conocia que la obligacion no tenia ninguna relacion con ella. Si tales actos y contratos no comportasen la concurrencia de ambos elementos, seria nulos y podria decretarse la responsabilidad civil o penal contra sus autores. En el caso que tales actos o contratos hayan sido tacitamente aprobados por la Compaia, o contabilizados en sus libros, si el acto o contrato ha sido convalidado sin protesta y se trata de acto o contrato que ha producido beneficio social, tendria plena validez, aun cuando le faltase algunos o ambos de aquellos requisitos antes sealados. Cuando los Estatutos o la escritura social no contienen ninguna clausula relativa al nombramiento o designacion de uno o mas de un socio para administrar la Compaia (art. 129 del Codigo) todos tienen por un igual el derecho de concurir a la decision y manejo de los negocios comunes. . . . Although the partnership under consideration is a commercial partnership and, therefore, to be governed by the Code of Commerce, the provisions of the old Civil Code may give us some light on the right of one partner to bind the partnership. States Art. 1695 thereof: Should no agreement have been made with respect to the form of management, the following rules shall be observed: 1. All the partners shall be considered agents, and whatever any one of the may do individually shall bind the partnership; but each one may oppose any act of the others before it has become legally binding. The records fail to disclose that appellant Goquiolay made any opposition to the sale of the partnership realty to Washington Z. Sycip and Betty Lee; on the contrary, it appears that he (Goquiolay) only interposed his objections after the deed of conveyance was executed and approved by the probate court, and, consequently, his opposition came too late to be effective. Appellants assails the correctness of the amounts paid for the account of the partnership as found by the trial court. This question, however, need not be resolved here, as in the deed of conveyance executed by Kong Chai Pin, the purchasers Washington Sycip and Betty Lee assumed, as part consideration of the purchase, the full claims of the two creditors, Sing Yee and Cuan Co., Inc. and Yutivo Sons Hardware Co. Appellants also question the validity of the sale covering the entire firm realty, on the ground that it, in effect, threw the partnership into dissolution, which requires consent of all the partners. This view is untenable. That the partnership was left without the real property it originally had will not work its dissolution, since the firm was not organized to exploit these precise lots but to engage in buying and selling real estate, and "in general real estate agency and brokerage business". Incidentally, it is to be

noted that the payment of the solidary obligation of both the partnership and the late Tan Sin An, leaves open the question of accounting and contribution between the co-debtors, that should be ventilated separately. Lastly, appellants point out that the sale of the partnership properties was only a fraudulent device by the appellees, with the connivance of Kong Chai Pin, to ease out Antonio Goquiolay from the partnership. The "devise", according to the appellants, started way back sometime in 1945, when one Yu Khe Thai sounded out Antonio Goquiolay on the possibility of selling his share in the partnership; and upon his refusal to sell, was followed by the filing of the claims of Yutivo Sons Hardware Co. and Sing Yee and Cuan Co., Inc. in the intestate estate proceedings of Tan Sin An. As creditors of Tan Sin An and the plaintiff partnership (whose liability was alleged to be joint and several), Yutivo Sons Hardware Co., and Sing Yee Cuan Co., Inc. had every right to file their claims in the intestate proceedings. The denial of the claims at first by Kong Chai Pin ( for lack of sufficient knowledge) negatives any conspiracy on her part in the alleged fraudulent scheme, even if she subsequently decided to admit their validity after studying the claims and finding it best to admit the same. It may not be amiss to remark that the probate court approved the questioned claims. There is complete failure of proof, moreover, that the price for which the properties were sold was unreasonably low, or in any way unfair, since appellants presented no evidence of the market value of the lots as of the time of their sale to appellees Sycip and Lee. The alleged value of P31,056.58 in May of 1955 is no proof of the market value in 1949, specially because in the interval, the new owners appear to have converted the land into a subdivision, which they could not do without opening roads and otherwise improving the property at their own expense. Upon the other hand, Kong Chai Pin hardly had any choice but to execute the questioned sale, as it appears that the partnership had neither cash nor other properties with which to pay its obligations. Anyway, we cannot consider seriously the inferences freely indulged in by the appellants as allegedly indicating fraud in the questioned transactions, leading to the conveyance of the lots in dispute to the appellee Insular Development Co., Inc. Wherefore, finding no reversible error in the appealed judgment, we affirm the same, with costs against appellant Antonio Goquiolay. Padilla, Montemayor, Bautista Angelo, Labrador, Concepcion, Endencia, Barrera, and Gutierrez David, JJ.,concur. RESOLUTION December 10, 1963 REYES, J. B. L., J.: The matter now pending is the appellant's motion for reconsideration of our main decision, wherein we have upheld the validity of the sale of the lands owned by the partnership Goquiolay & Tan Sin An, made in 1949 by the widow of the managing partner, Tan Sin An (executed in her dual capacity of Administratrix of her husband's estate and as partner, in lieu of the husband), in favor of buyers Washington Sycip and Betty Lee for the following consideration:

Cash paid Debts assumed by purchase: To Yutivo To Sing Yee Cuan & Co. TOTAL

P37,000.00 62,415.91 54,310.13 P153,726.04

Appellant Goquiolay, in his motion for reconsideration, insists that, contrary to our holding, Kong Chai Pin, widow of the deceased partner Tan Sin An, never became more than a limited partner, incapacitated by law to manage the affairs of the partnership; that the testimony of her witnesses Young and Lim belies that she took over administration of the partnership property; and that, in any event, the sale should be set aside because it was executed with the intent to defraud appellant of his share in the properties sold. Three things must be always held in mind in the discussion of this motion to reconsider, being basic and beyond controversy: (a) That we are dealing here with the transfer of partnership property by one partner, acting in behalf of the firm, to a stranger. There is no question between partners inter se, and this aspects of the case was expressly reserved in the main decision of 26 July 1960; (b) That the partnership was expressly organized "to engage in real estate business, either by buying and selling real estate". The Article of co-partnership, in fact, expressly provided that: IV. The object and purpose of the co-partnership are as follows: 1. To engage in real estate business, either by buying and selling real estates; to subdivide real estates into lots for the purpose of leasing and selling them.; (c) That the properties sold were not part of the contributed capital (which was in cash) but land precisely acquired to be sold, although subject a mortgage in favor of the original owners, from whom the partnership had acquired them. With these points firmly in mind, let us turn to the points insisted upon by appellant. It is first averred that there is "not one iota evidence" that Kong Chai Pin managed and retained possession of the partnership properties. Suffice it to point out that appellant Goquiolay himself admitted that . . . Mr. Yu Eng Lai asked me if I can just let Mrs. Kong Chai Pin continue to manage the properties (as) she had no other means of income. Then I said, because I wanted to help Mrs. Kong Chai Pin, she could just do it and besides I am not interested in agricultural lands. I allowed her to take care of the properties in order to help her and because I believe in God and I wanted to help her. Q. So the answer to my question is you did not take any steps?

A. I did not. Q. And this conversation which you had with Mrs. Yu Eng Lai was few months after 1945? A. In the year 1945. (Emphasis supplied) The appellant subsequently ratified this testimony in his deposition of 30 June 1956, page 8-9, wherein he sated: that plantation was being occupied at that time by the widow, Mrs. Tan Sin An, and of course they are receiving quite a lot of benefit from that plantation. Discarding the self-serving expressions, these admissions of Goquiolay are certainly entitled to greater weight than those of Hernando Young and Rufino Lim, having been made against the party's own interest. Moreover, the appellant's reference to the testimony of Hernando Young, that the witness found the properties "abandoned and undeveloped", omits to mention that said part of the testimony started with the question: Now, you said that about 1942 or 1943 you returned to Davao. Did you meet Mrs. Kong Chai Pin there in Davao at that time? Similarly, the testimony of Rufino Lim, to the effect that the properties of the partnership were undeveloped, and the family of the widow (Kong Chai Pin) did not receive any income from the partnership properties, was given in answer to the question: According to Mr. Goquiolay, during the Japanese occupation Tan Sin An and his family lived on the plantation of the partnership and derived their subsistence from that plantation. What can you say to that? (Dep. 19 July 1956, p. 8) And also What can you say so to the development of these other properties of the partnership which you sawduring the occupation?" (Dep., p. 13, Emphasis supplied) to which witness gave the following answer: I saw the properties in Mamay still undeveloped. The third property which is in Tigatto is about eleven (11) hectares and planted with abaca seedlings planted by Mr. Sin An. When I went there with Hernando Young we saw all the abaca destroyed. The place was occupied by the Japanese Army. They planted camotes and vegetables to feed the Japanese Army. Of course they never paid any money to Tan Sin An or his family. (Dep., Lim. pp. 13-14.) (Emphasis supplied) Plainly, Both Young and Lim's testimonies do not belie, or contradict, Goquiolay's admission that he told Mr. Yu Eng Lai that the widow "could just do it" (i e., continue to manage the properties. Witnesses Lim

and Young referred to the period of Japanese occupation; but Goquiolay's authority was, in fact, given to the widow in 1945, after the occupation. Again, the disputed sale by the widow took place in 1949. That Kong Chai Pin carried out no acts of management during the Japanese occupation (1942-1944) does not mean that she did not do so from 1945 to 1949. We thus fine that Goquiolay did not merely rely on reports from Lim and Young; he actually manifested his willingness that the widow should manage the partnership properties. Whether or not she complied with this authority is a question between her and the appellant, and is not here involved. But the authority was given, and she did have it when she made the questioned sale, because it has never revoked. It is argued that the authority given by Goquiolay to the widow Kong Chai Pin was only to manage the property, and that it did not include the power to alienate, citing Article 1713 of the Civil Code of 1889. What this argument overlooks is that the widow was not a mere agent, because she had become a partner upon her husband's death, as expressly provided by the articles of co-partnership. Even more, granting that by succession to her husband, Tan Sin An, the widow only a became the limited partner, Goquiolay's authorization to manage the partnership property was proof that he considered and recognized her has general partner, at least since 1945. The reason is plain: Under the law (Article 148, last paragraph, Code of Commerce), appellant could not empower the widow, if she were only a limited partner, to administer the properties of the firm, even as a mere agent: Limited partners may not perform any act of administration with respect to the interests of the co-partnership, not even in the capacity agents of the managing partners.(Emphasis supplied) By seeking authority to manage partnership property, Tan Sin An's widow showed that she desired to be considered a general partner. By authorizing the widow to manage partnership property (which a limited partner could not be authorized to do), Goquiolay recognized her as such partner, and is now in estoppel to deny her position as a general partner, with authority to administer and alienate partnership property. Besides, as we pointed out in our main decision, the heir ordinarily (and we did not say "necessarily") becomes a limited partner for his own protection, because he would normally prefer to avoid any liability in excess of the value of the estate inherited so as not to jeopardize his personal assets. But this statutory limitation of responsibility being designed to protect the heir, the latter may disregard it and instead elect to become a collective or general partner, with all the rights and privileges of one, and answering for the debts of the firm not only with the inheritance bud also with the heir's personal fortune. This choice pertains exclusively to the heir, and does not require the assent of the surviving partner. It must be remembered that the articles of co-partnership here involved expressly stipulated that: In that event of the death of any of the partners at any time before the expiration of said term, the co-partnership shall not be dissolved but will have to be continued and the deceased partner shall be represented by his heirs or assigns in said co-partnership" (Art. XII, Articles of Co-Partnership).

The Articles did not provide that the heirs of the deceased would be merely limited partner; on the contrary they expressly stipulated that in case of death of either partner "the co-partnership ... will have to be continued" with the heirs or assigns. It certainly could not be continued if it were to be converted from a general partnershipinto a limited partnership, since the difference between the two kinds of associations is fundamental; and specially because the conversion into a limited association would leave the heirs of the deceased partner without a share in the management. Hence, the contractual stipulation does actually contemplate that the heirs would become general partners rather than limited ones. Of course, the stipulation would not bind the heirs of the deceased partner should they refuse to assume personal and unlimited responsibility for the obligations of the firm. The heirs, in other words, can not be compelled to become general partners against their wishes. But because they are not so compellable, it does not legitimately follow that they may not voluntarily choose to become general partners, waiving the protective mantle of the general laws of succession. And in the latter event, it is pointless to discuss the legality of any conversion of a limited partner into a general one. The heir never was a limited partner, but chose to be, and became, a general partner right at the start. It is immaterial that the heirs name was not included in the firm name, since no conversion of status is involved, and the articles of co-partnership expressly contemplated the admission of the partner's heirs into the partnership. It must never be overlooked that this case involves the rights acquired by strangers, and does not deal with the rights arising between partners Goquiolay and the widow of Tan Sin An. The issues between the partners inter se were expressly reversed in our main decision. Now, in determining what kind of partner the widow of partner Tan Sin An had elected to become, strangers had to be guided by her conduct and actuations and those of appellant Goquiolay. Knowing that by law a limited partner is barred from managing the partnership business or property, third parties (like the purchasers) who found the widow possessing and managing the firm property with the acquiescense (or at least without apparent opposition) of the surviving partners were perfectly justified in assuming that she had become a general partner, and, therefore, in negotiating with her as such a partner, having authority to act for, and in behalf of, the firm. This belief, be it noted, was shared even by the probate court that approved the sale by the widow of the real property standing in the partnership name. That belief was fostered by the very inaction of appellant Goquiolay. Note that for seven long years, from partner Tan Sin An's death in 1942 to the sale in 1949, there was more than ample time for Goquiolay to take up the management of these properties, or at least ascertain how its affairs stood. For seven years Goquiolay could have asserted his alleged rights, and by suitable notice in the commercial registry could have warned strangers that they must deal with him alone, as sole general partner. But he did nothing of the sort, because he was not interested (supra), and he did not even take steps to pay, or settle, the firm debts that were overdue since before the outbreak of the last war. He did not even take steps, after Tan Sin An died, to cancel, or modify, the provisions of the partnership articles that he (Goquiolay) would have no intervention in the management of the partnership. This laches certainly contributed to confirm the view that the widow of Tan Sin An had, or was given, authority to manage and deal with the firm's properties, apart from the presumption that a general partner dealing with partnership property has the requisite authority from his co-partners (Litton vs. Hill and Ceron, et al., 67 Phil., 513; quoted in our main decision, p. 11). The stipulation in the articles of partnership that any of the two managing partners may contract and sign in the name of the partnership with the consent of the other, undoubtedly

creates an obligation between the two partners, which consists in asking the other's consent before contracting for the partnership. This obligation of course is not imposed upon a third person who contracts with the partnership. Neither is it necessary for the third person to ascertain if the managing partner with whom he contracts has previously obtained the consent of the other. A third person may and has a right to presume that the partner with whom he contracts has, in the ordinary and natural course of business, theconsent of his co-partner; for otherwise he would not enter into the contract. The third person would naturally not presume that the partner with whom he enters into the transaction is violating the articles of partnership, but on the contrary, is acting in accordance therewith. And this finds support in the legal presumption that the ordinary course of business has been followed (No. 18, section 334, Code of Civil Procedure), and that the law has been obeyed (No. 31, section 334). This last presumption is equally applicable to contracts which have the force of law between the parties. (Litton vs. Hill & Ceron, et al., 67 Phil., 509, 516) (Emphasis supplied) It is next urged that the widow, even as a partner, had no authority to sell the real estate of the firm. This argument is lamentably superficial because it fails to differentiate between real estate acquired and held asstock-in-trade and real state held merely as business site (Vivante's "taller o banco social") for the partnership. Where the partnership business is to deal in merchandise and goods, i.e., movable property, the sale of its real property (immovables) is not within the ordinary powers of a partner, because it is not in line with the normal business of the firm. But where the express and avowed purpose of the partnership is to buy and sell real estate (as in the present case), the immovables thus acquired by the firm form part of its stock-in-trade, and the sale thereof is in pursuance of partnership purposes, hence within the ordinary powers of the partner. This distinction is supported by the opinion of Gay de Montella1, in the very passage quoted in the appellant's motion for reconsideration: La enajenacion puede entrar en las facultades del gerente: cuando es conforme a los fines sociales. Pero esta facultad de enajenar limitada a las ventas conforme a los fines sociales, viene limitada a los objetos de comecio o a los productos de la fabrica para explotacion de los cuales se ha constituido la Sociedad. Ocurrira una cosa parecida cuando el objeto de la Sociedad fuese la compra y venta de inmuebles, en cuyo caso el gerente estaria facultado para otorgar las ventas que fuere necesario.(Montella) (Emphasis supplied) The same rule obtains in American law. In Rosen vs. Rosen, 212 N. Y. Supp. 405, 406, it was held: a partnership to deal in real estate may be created and either partner has the legal right to sell the firm real estate In Chester vs. Dickerson, 54 N. Y. 1, 13 Am. Rep. 550: And hence, when the partnership business is to deal in real estate, one partner has ample power, as a general agent of the firm, to enter into an executory contract for the sale of real estate. And in Rovelsky vs. Brown, 92 Ala. 522, 9 South 182, 25 Am. St., Rep. 83:

If the several partners engaged in the business of buying and selling real estate can not bind the firm by purchases or sales of such property made in the regular course of business, then they are incapable of exercising the essential rights and powers of general partners and their association is not really a partnership at all, but a several agency. Since the sale by the widow was in conformity with the express objective of the partnership, "to engage * * * in buying and selling real estate" (Art IV, No. 1, Articles of Copartnership), it can not be maintained that the sale was made in excess of her powers as general partner. Considerable stress is laid by appellant in the ruling of the Supreme Court of Ohio in McGrath, et al., vs. Cowen, et al., 49 N. E., 338. But the facts of that case are vastly different from the one before us. In the McGrath case, the Court expressly found that: The firm was then, and for some time had been, insolvent, in the sense that its property was insufficient to pay its debts, though it still had good credit, and was actively engaged in the prosecution of its business. On that day, which was Saturday, the plaintiff caused to be prepared, ready for execution, the four chattel mortgages in question, which cover all the tangible property then belonging to the firm,including the counters, shelving, and other furnishings and fixtures necessary for, and used in carrying on, its business, and signed the same in this form: "In witness whereof, the said Cowen & McGrath, a firm, and Owen McGrath, surviving partner of said firm, and Owen McGrath, individually, have here-unto set their hands, this 20th day of May, A. D. 1893. Cowen & McGrath, by Owen McGrath. Owen McGrath, Surviving partner of Cowen & McGrath. Owen McGrath" At the same time, the plaintiff had prepared, ready for filing, the petition for the dissolution of the partnership and appointment of a receiver, which he subsequently filed, as hereinafter stated. On the day the mortgages were signed, they were placed in the hands of the mortgagees, which was the first intimation to them that there was any intention to make then. At that time none of the claims secured by the mortgages were due, except, it may be, a small part of one of them, and none of the creditors to whom the mortgages were made had requested security, or were pressing for the payment of their debts. ... The mortgages appear to be without a sufficient condition of defeasance, and contain a stipulation authorizing the mortgagees to take immediate possession of the property, which they did as soon as the mortgages were filed, through the attorney who then represented them, as well as the plaintiff; and the stores were at once closed, and possession delivered by them to the receiver appointed upon the filing of the petition. The avowed purpose of the plaintiff in the course pursued by him, was to terminate the partnership, place its property beyond the control of the firm, and insure the preference of the mortgages, all of which was known to them at the time: ... . (Cas cit., p. 343, Emphasis supplied) It is natural that from these facts the Supreme Court of Ohio should draw the conclusion that conveyances were made with intent to terminate the partnership, and that they were not within the powers of McGrath as partner. But there is no similarly between those acts and the sale by the widow of Tan Sin An. In the McGrath case, the sale included even the fixtures used in the business, in our case, the lands sold were those acquired to be sold. In the McGrath case, none of the creditors were pressing for payment; in our case, the creditors had been unpaid for more than seven years, and their claims had been approved by the probate court for payment. In the McGrath case, the partnership received nothing beyond the discharge of its debts; in the present case, not only were its debts assumed by the buyers, but the latter paid, in addition, P37,000.00 in cash to the widow, to the profit of the partnership. Clearly, the McGrath ruling is not applicable.

We will now turn to the question to fraud. No direct evidence of it exists; but appellant points out, as indicia thereof, the allegedly low price paid for the property, and the relationship between the buyers, the creditors of the partnership, and the widow of Tan Sin An. First, as to the price: As already noted, this property was actually sold for a total of P153,726.04, of which P37,000.00 was in cash, and the rest in partnership debts assumed by the purchaser. These debts (P62,415.91 to Yutivo, and P54,310.13 to Sing Yee Cuan & Co.) are not questioned; they were approved by the Court, and its approval is now final. The claims were, in fact, for the balance on the original purchase price of the land sold (due first to La Urbana, later to the Banco Hipotecario) plus accrued interests and taxes, redeemed by the two creditors-claimants. To show that the price was inadequate, appellant relies on the testimony of the realtor Mata, who in 1955, six years after the sale in question, asserted that the land was worth P312,000.00. Taking into account the continued rise of real estate values since liberation, and the fact that the sale in question was practically a forced sale because the partnership had no other means to pay its legitimate debts, this evidence certainly does not show such "gross inadequacy" as to justify rescission of the sale. If at the time of the sale (1949 the price of P153,726.04 was really low, how is it that appellant was not able to raise the amount, even if the creditor's representative, Yu Khe Thai, had already warned him four years before (1946) that the creditors wanted their money back, as they were justly entitled to? It is argued that the land could have been mortgaged to raise the sum needed to discharge the debts. But the lands were already mortgaged, and had been mortgaged since 1940, first to La Urbana, and then to the Banco Hipotecario. Was it reasonable to expect that other persons would loan money to the partnership when it was unable even to pay the taxes on the property, and the interest on the principal since 1940? If it had been possible to find lenders willing to take a chance on such a bad financial record, would not Goquiolay have taken advantage of it? But the fact is clear on the record that since liberation until 1949 Goquiolay never lifted a finger to discharge the debts of the partnership. Is he entitled now to cry fraud after the debts were discharged with no help from him? With regard to the relationship between the parties, suffice it to say that the Supreme Court has ruled that relationship alone is not a badge of fraud (Oria Hnos. vs. McMicking, 21 Phil., 243; also Hermandad de Smo. Nombre de Jesus vs. Sanchez, 40 Off. Gaz., 1685). There is no evidence that the original buyers, Washington Sycip and Betty Lee, were without independent means to purchase the property. That the Yutivos should be willing to extend credit to them, and not to appellant, is neither illegal nor immoral; at the very least, these buyers did not have a record of inveterate defaults like the partnership "Tan Sin An & Goquiolay". Appellant seeks to create the impression that he was the victim of a conspiracy between the Yutivo firm and their component members. But no proof is adduced. If he was such a victim, he could have easily defeated the conspirators by raising money and paying off the firm's debts between 1945 and 1949; but he did; he did not even care to look for a purchaser of the partnership assets. Were it true that the conspiracy to defraud him arose (as he claims) because of his refusal to sell the lands when in 1945 Yu Khe Thai asked him to do so, it is certainly strange that the conspirators should wait 4 years, until 1949, to have the sale effected by the widow of Tan Sin An, and that the sale should have been routed through the probate court taking cognizance of Tan Sin An's estate, all of which increased the risk that the supposed fraud should be detected. Neither was there any anomaly in the filing of the claims of Yutivo and Sing Yee Cuan & Co., (as subrogees of the Banco Hipotecario) in proceedings for the settlement of the estate of Tan Sin An. This

for two reasons:First, Tan Sin An and the partnership "Tan Sin An & Goquiolay" were solidary (joint and several) debtors (Exhibit "N" mortgage to the Banco Hipotecario), and Rule 87, section 6, is to the effect that: Where the obligation of the decedent is joint and several with another debtor, the claim shall be filedagainst the decedent as if he were the only debtor, without prejudice to the right of the estate to recover contribution from the other debtor. (Emphasis supplied) Secondly, the solidary obligation was guaranteed by a mortgage on the properties of the partnership and those of Tan Sin An personally, and a mortgage in indivisible, in the sense that each and every parcel under mortgage answers for the totality of the debt (Civ. Code of 1889, Article 1860; New Civil Code, Art. 2089). A final and conclusive consideration. The fraud charged not being one used to obtain a party's consent to a contract (i.e., not being deceit or dolus in contrahendo), if there is fraud at all, it can only be a fraud of creditorsthat gives rise to a rescission of the offending contract. But by express provision of law (Article 1294, Civil Code of 1889; Article 1383, New Civil Code), "the action for rescission is subsidiary; it can not be instituted except when the party suffering damage has no other legal means to obtain reparation for the same". Since there is no allegation, or evidence, that Goquiolay can not obtain reparation from the widow and heirs of Tan Sin An, the present suit to rescind the sale in question is not maintenable, even if the fraud charged actually did exist. Premises considered, the motion for reconsideration is denied. Bengzon, C. J., Padilla, Concepcion, Barrera, and Dizon, JJ., concur.

Separate Opinions BAUTISTA ANGELO, J., dissenting: This is an appeal from a decision of the Court of First Instance of Davao dismissing the complaint filed by Antonio C. Goquiolay, et al., seeking to annul the sale made by Kong Chai Pin of three parcels of land to Washington Z. Sycip and Betty Y. Lee on the ground that it was executed without proper authority and under fraudulent circumstances. In a decision rendered on July 26, 1960, we affirmed this decision although on grounds different from those on which the latter is predicated. The case is once more before us on a motion for reconsideration filed by appellants raising both questions of fact and of law. On May 29, 1940, Tan Sin An and Antonio C. Goquiolay executed in Davao City a commercial partnership for a period of ten years with a capital of P30,000.00 of which Goquiolay contributed P18,000.00 representing 60% while Tan Sin An P12,000.00 representing 40%. The business of the partnership was to engage in buying real estate properties for subdivision, resale and lease. The partnership was duly registered, and among the conditions agreed upon in the partnership agreement which are material to this case are: (1) that Tan Sin An would be the exclusive managing partner, and (2) in the event of the death of any of the partners the partnership would continue, the deceased to be represented by his

heirs. On May 31, 1940, Goquiolay executed a general power of attorney in favor of Tan Sin An appointing the latter manager of the partnership and conferring upon him the usual powers of management. On May 29, 1940, the partnership acquired three parcels of land known as Lots Nos. 526, 441 and 521 of the cadastral survey of Davao, the only assets of the partnership, with the capital originally invested, financing the balance of the purchase price with a mortgage in favor of "La Urbana Sociedad Mutua de Construccion Prestamos" in the amount of P25,000.00 payable in ten years. On the same date, Tan Sin An, in his individual capacity, acquired 46 parcels of land executing a mortgage thereon in favor of the same company for the sum of P35,000.00. On September 25, 1940, these two mortgage obligations were consolidated and transferred to the Banco Hipotecario de Filipinas and as a result Tan Sin An, in his individual capacity, and the partnership bound themselves to pay jointly and severally the total amount of P52,282.80, with 8% annual interest thereon within the period of eight years mortgaging in favor of said entity the 3 parcels of land belonging to the partnership to Tan Sin An. Tan Sin An died on June 26, 1942 and was survived by his widow, defendant Kong Chai Pin, and four children, all of whom are minors of tender age. On March 18, 1944, Kong Chai Pin was appointed administratrix of the intestate estate of Tan Sin An. And on the same date, Sing, Yee and Cuan Co., Inc. paid to the Banco Hipotecario the remaining unpaid balance of the mortgage obligation of the partnership amounting to P46,116.75 in Japanese currency. Sometime in 1945, after the liberation of Manila, Yu Khe Thai, president and general manager of Yutivo Sons Hardware Co. and Sing, Yee and Cuan Co., Inc., called for Goquiolay and the two had a conference in the office of the former during which he offered to buy the interest of Goquiolay in the partnership. In 1948, Kong Chai Pin, the widow, sent her counsel, Atty. Dominador Zuo, to ask Goquiolay to execute in her favor a power of attorney. Goquiolay refused both to sell his interest in the partnership as well as to execute the power of attorney. Having failed to get Goquiolay to sell his share in the partnership, Yutivo Sons Hardware Co., and Sing, Yee and Cuan Co., Inc. filed in November, 1946 a claim each in the intestate proceedings of Tan Sin An for the sum of P84,705.48 and P66,529.91, respectively, alleging that they represent obligations of both Tan Sin An and the partnership. After first denying any knowledge of the claims, Kong Chai Pin, as administratrix, admitted later without qualification the two claims in an amended answer she filed on February 28, 1947. The admission was predicated on the ground that she and the creditors were closely related by blood, affinity and business ties. On due course, these two claims were approved by the court. On March 29, 1949, more than two years after the approval of the claims, Kong Chai Pin filed a petition in the probate court to sell all the properties of the partnership as well as some of the conjugal properties left by Tan Sin An for the purpose of paying the claims. Following approval by the court of the petition for authority to sell, Kong Chai Pin, in her capacity as administratrix, and presuming to act as managing partner of the partnership, executed on April 4, 1949 a deed of sale of the properties owned by Tan Sin An and by the partnership in favor of Betty Y. Lee and Washington Z. Sycip in consideration of the payment to Kong Chai Pin of the sum of P37,000.00, and the assumption by the buyers of the claims filed by Yutivo Sons Hardware Co. and Sing, Yee and Cuan Co., Inc. in whose favor the buyers executed a mortgage on the properties purchased. Betty Y. Lee and Washington Z. Sycip subsequently executed a deed of sale of the same properties in favor of their co-defendant Insular Development Company, Inc. It should be noted that these transactions took place without the knowledge of Goquiolay and it is

admitted that Betty Y. Lee and Washington Z. Sycip bought the properties on behalf of the ultimate buyer, the Insular Development Company, Inc., with money given by the latter. Upon learning of the sale of the partnership properties, Goquiolay filed on July 25, 1949 in the intestate proceedings a petition to set aside the order of the court approving the sale. The court granted the petition. While the order was pending appeal in the Supreme Court, Goquiolay filed the present case on January 15, 1953 seeking to nullify the sale as stated in the early part of this decision. In the meantime, the Supreme Court remanded the original case to the probate court for rehearing due to lack of necessary parties. The plaintiffs in their complaint challenged the authority of Kong Chai Pin to sell the partnership properties on the ground that she had no authority to sell because even granting that she became a partner upon the death of Tan Sin An the power of attorney granted in favor of the latter expired after his death. Defendants, on the other hand, defended the validity of the sale on the theory that she succeeded to all the rights and prerogatives of Tan Sin An as managing partner. The trial court sustained the validity of the sale on the ground that under the provisions of the articles of partnership allowing the heirs of the deceased partner to represent him in the partnership after hid death Kong Chai Pin became a managing partner, this being the capacity held by Tan Sin An when he died. In the decision rendered by this Court on July 26, 1960, we affirmed this decision but on different grounds, among which the salient points are: (1) the power of attorney given by Goquiolay to Tan Sin An as manager of the partnership expired after his death; (2) his widow Kong Chai Pin did not inherit the management of the partnership, it being a personal right; (3) as a general rule, the heirs of a deceased general partner come into the partnership in the capacity only of limited partners; (4) Kong Chai Pin, however, became a general partner because she exercised certain alleged acts of management; and (5) the sale being necessary to pay the obligations of the partnership, she was therefore authorized to sell the partnership properties without the consent of Goquiolay under the principle of estoppel, the buyers having the right to rely on her acts of management and to believe her to be in fact the managing partner. Considering that some of the above findings of fact and conclusions of law are without legal or factual basis, appellants have in due course filed a motion for reconsideration which because of the importance of the issues therein raised has been the subject of mature deliberation. In support of said motion, appellants advanced the following arguments: 1. If the conclusion of the Court is that heirs as a general rule enter the partnership as limited partners only, therefore Kong Chai Pin, who must necessarily have entered the partnership as a limited partneroriginally, could have not chosen to be a general partner by exercising the alleged acts of management, because under Article 148 of the Code of Commerce a limited partner cannot intervene in the management of the partnership even if given a power of attorney by the general partners. An Act prohibited by law cannot give rise to any right and is void under the express provisions of the Civil Code.

2. The buyers were not strangers to Kong Chai Pin, all of them being members of the Yu (Yutivo) family, the rest, members of the law firm which handles the Yutivo interests and handled the papers of sale. They did not rely on the alleged acts of management they believed (this was the opinion of their lawyers) that Kong Chai Pin succeeded her husband as a managing partner and it was on this theory alone that they submitted the case in the lower court. 3. The alleged acts of management were denied and repudiated by the very witnesses presented by the defendants themselves. The arguments advanced by appellants are in our opinion well-taken and furnish sufficient basis to reconsider our decision if we want to do justice to Antonio C. Goquiolay. And to justify this conclusion, it is enough that we lay stress on the following points: (1) there is no sufficient factual basis to conclude that Kong Chai Pin executed acts of management to give her the character of general manager of the partnership, or to serve as basis for estoppel that may benefit the purchasers of the partnership properties; (2) the alleged acts of management, even if proven, could not give Kong Chai Pin the character of general manager for the same is contrary to law and well-known authorities; (3) even if Kong Chai Pin acted as general manager she had no authority to sell the partnership properties as to make it legal and valid; and (4) Kong Chai Pin had no necessity to sell the properties to pay the obligation of the partnership and if she did so it was merely to favor the purchasers who were close relatives to the prejudice of Goquiolay. 1. This point is pivotal for if Kong Chai Pin did not execute the acts of management imputed to her our ruling we apparently gave particular importance to the fact that it was Goquiolay himself who tried to prove the acts of management. Appellants, however, have emphasized the fact, and with reason, that the appellees themselvesare the ones who denied and refuted the so-called acts of management imputed to Kong Chai Pin. To have a clear view of this factual situation, it becomes necessary that we analyze the evidence of record. Plaintiff Goquiolay, it is intimated, testified on cross-examination that he had a conversation with one Hernando Young in Manila in the year 1945 who informed him that Kong Chai Pin "was attending to the properties and deriving some income therefrom and she had no other means of livelihood except those properties and some rentals derived from the properties." He went on to say by way of remark that she could continue doing this because he wanted to help her. On point that he emphasized was that he was "not interested in agricultural lands." On the other hand, defendants presented Hernando Young, the same person referred to by Goquiolay, who was a close friend of the family of Kong Chai Pin, for the purpose of denying the testimony of Goquiolay. Young testified that in 1945 he was still in Davao, and insisted no less than six times during his testimony that he was not in Manila in 1945, the year when he allegedly gave the information to Goquiolay, stating that he arrived in Manila for the first time in 1947. He testified further that he had visited the partnership properties during the period covered by the alleged information given by him to Goquiolay and that he found them "abandoned and underdeveloped," and that Kong Chai Pin was not deriving any income from them. The other witness for the defendants, Rufino Lim, also testified that he had seen the partnership properties and corroborated the testimony of Hernando Young in all respects: "the properties in Mamay were underdeveloped, the shacks were destroyed in Tigato, and the family of Kong Chai Pin did not receive any income from the partnership properties." He specifically rebutted the testimony of

Goquiolay in his deposition given on June 30, 1956 that Kong Chai Pin and her family were living in the partnership properties and stated that the 'family never actually lived in the properties of the partnership even before the war or after the war." It is unquestionable that Goquiolay was merely repeating an information given to him by a third person, Hernando Young he stressed this point twice. A careful analysis of the substance of Goquiolay's testimony will show that he merely had no objection to allowing Kong Chai Pin to continue attending to the properties in order to give her some means of livelihood, because, according to the information given him by Hernando Young, which he assumed to be true, Kong Chai Pin had no other means of livelihood. But certainly he made it very clear that he did not allow her to manage the partnership when he explained his reason for refusing to sign a general power of attorney for Kong Chai Pin which her counsel, Atty. Zuo, brought with him to his house in 1948. He said: . . . Then Mr. Yu Eng Lai told me that he brought with him Atty. Zuo and he asked me if I could execute a general power of attorney for Mrs. Kong Chai Pin. Then I told Atty. Zuo what is the use of executing a general power of attorney for Mrs. Kong Chai Pin when Mrs. Kong Chai Pin had already got that plantation for agricultural purposes, I said for agricultural purposes she can use that plantation ... (T.s.n., p. 9, Hearing on May 5, 1955) It must be noted that in his testimony Goquiolay was categorically stating his opposition to the management of the partnership by Kong Chai Pin and carefully made the distinction that his conformity was for her to attend to the partnership properties in order to give her merely a means of livelihood. It should be stated that the period covered by the testimony refers to the period of occupation when living condition was difficult and precarious. And Atty. Zuo, it should also be stated, did not deny the statement of Goquiolay. It can therefore be seen that the question as to whether Kong Chai Pin exercised certain acts of management of the partnership properties is highly controverted. The most that we can say is that the alleged acts are doubtful more so when they are disputed by the defendants themselves who later became the purchasers of the properties, and yet these alleged acts, if at all, only refer to management of the properties and not to management of the partnership, which are two different things. In resume, we may conclude that the sale of the partnership properties by Kong Chai Pin cannot be upheld on the ground of estoppel, first, because the alleged acts of management have not been clearly proven; second, because the record clearly shows that the defendants, or the buyers, were not misled nor did they rely on the acts of management, but instead they acted solely on the opinion of their counsel, Atty. Quisumbing, to the effect that she succeeded her husband in the partnership as managing partner by operation of law; and third, because the defendants are themselves estopped to invoke a defense which they tried to dispute and repudiate. 2. Assuming arguendo that the acts of management imputed to Kong Chai Pin are true, could such acts give her the character of general manager of the partnership as we have concluded in our decision? Out answer is in the negative because it is contrary to law and precedents. Garrigues, a well-known commentator, is clearly of the opinion that mere acceptance of the inheritance does not make the heir of a general partner a general partner himself. He emphasized that the heir must declare that he is entering the partnership as a general partner unless the deceased partner has made it an express

condition in his will that the heir accepts the condition of entering the partnership as a prerequisite of inheritance, in which case acceptance of the inheritance is enough.1 But here Tan Sin An died intestate. Now, could Kong Chai Pin be deemed to have declared her intention to become general partner by exercising acts of management? We believe not, for, in consonance with out ruling that as a general rule the heirs of a deceased partner succeed as limited partners only by operation of law, it is obvious that the heir, upon entering the partnership, must make a declaration of his character, otherwise he should be deemed as having succeeded as limited partner by the mere acceptance of inheritance. And here Kong Chai Pin did not make such declaration. Being then a limited partner upon the death of Tan Sin An by operation of law, the peremptory prohibition contained in Article 1482 of the Code of Commerce became binding upon her and as a result she could not change her status by violating its provisions not only under the general principle that prohibited acts cannot produce any legal effect, but also because under the provisions of Article 1473 of the same Code she was precluded from acquiring more rights than those pertaining to her as a limited partner. The alleged acts of management, therefore, did not give Kong Chai Pin the character of general manager to authorize her to bind the partnership. Assuming also arguendo that the alleged acts of management imputed to Kong Chai Pin gave her the character of a general partner, could she sell the partnership properties without authority from the other partners? Our answer is also in the negative in the light of the provisions of the articles of partnership and the pertinent provisions of the Code of Commerce and the Civil Code. Thus, Article 129 of the Code of Commerce says: If the management of the general partnership has not been limited by special agreement to any of the members, all shall have the power to take part in the direction and management of the common business, and the members present shall come to an agreement for all contracts or obligations which may concern the association. And the pertinent portions of the Articles of partnership provides: VII. The affairs of the co-partnership shall be managed exclusively by the managing partner or by his authorized agent, and it is expressly stipulated that the managing partner may delegate the entire management of the affairs of the co-partnership by irrevocable power of attorney to any person, firm or corporation he may select, upon such terms as regards compensation as he may deem proper, and vest in such person, firm or corporation full power and authority, as the agent of the co-partnership and in his name, place and stead to do anything for it or on his behalf which he as such managing partner might do or cause to be done. (Page 23, Record on Appeal) It would thus be seen that the powers of the managing partner are not defined either under the provisions of the Code of Commerce or in the articles of partnership, a situation which, under Article 2 of the same Code, renders applicable herein the provisions of the Civil Code, And since, according to well-known authorities, the relationship between a managing partner and the partnership is substantially the same as that of the agent and his principal,4 the extent of the power of Kong Chai Pin must, therefore, be determined under the general principles governing agency. And, on this point, the law says that an agency created in general terms includes only acts of administration, but with regard to the power to compromise, sell, mortgage, and other acts of strict ownership, an express power of

attorney is required.5 Here Kong Chai Pin did not have such power when she sold the properties of the partnership. Of course, there is authority to the effect that a managing partner, even without express power of attorney, may perform acts affecting ownership if the same are necessary to promote or accomplish a declared object of the partnership, but here the transaction is not for this purpose. It was effected not to promote any avowed object of the partnership.6 Rather, the sale was effected to pay an obligation of the partnership by selling its real properties which Kong Chai Pin could not do without express authority. The authorities supporting this view are overwhelming. La enajenacion puede entrar en las facultades del gerente, cuando es conforme a los fines sociales. Pero esta facultad de enajenar limitada a las ventas conforme a los fines sociales, viene limitada a los objetos de comercio, o los productos de la fabrica para explotacion de los cuales se ha constituido la Sociedad. Ocurrira una cosa parecida cuando el objeto de la Sociedad fuese la compra y venta de inmuebles, en cuyo caso el gerente estaria facultado para otorgar las ventas que fuere necesario. Por el contrario, el gerente no tiene atribuciones para vender las instalaciones del comercio ni la fabrica, ni las maquinarias, vehiculos de transporte, etc., que forman parte de la explotacion social. En todos estas casos, igualmente que si tratase de la venta de una marca o procedimiento mecanico o quimico, etc.,siendo actos de disposicion seria necesario contar con la conformidad expresa de todos los socios. (R. Gay de Montella, id., pp. 223-224, Emphasis supplied) Los poderes de los Administradores no tienen ante el silencio del contrato otros limites que los sealados por el objeto de la Sociedad y, por consiguiente, pueden llevar a cabo todas las operaciones que sirven para aquel ejercicio, incluso cambiando repetidas veces los propios acuerdos segun el interes convenido de la Sociedad. Pueden contratar y despedir a los empleados, tomar en arriendo almacenas y tiendas, expedir cambiales, girarlas, avalarlas, dar en prenda o en hipoteca los bienes de la sociedad y adquirir inmuebles destinados a su explotacion o al empleo estable de sus capitales. Pero no podran ejecutar los actos que estan en contradiccion con la explotacion que les fue confiada no podran cambiar el objeto, el domicilio la razon social; fundir a la Sociedad en otra; ceder la accion, y por tanto, el uso de la firma social a otro renunciar definitivamente el ejercicio de uno de otro ramo comercio que se les haya confiado y enajenar o piqnorar el taller o el banco social excepto que la venta o piqnoracion tengan por el objeto procurar los medios necesarios para la continuacion de la empresa social. (Cesar Vivante, Tratado de Derecho Mercantil, pp. 124-125, Vol II, la. ed.; Emphasis supplied) The act of one partner to bind the firm, must be necessary for the carrying on of its business. If all that can be said of it was that it was convenient, or that it facilitated the transaction of the business of the firm, that is not sufficient, in the absence of evidence of saction by other partners. Nor, it seems, will necessity itself be sufficient if it be an extraordinary necessity. What is necessary for carrying on the business of the firm under ordinary circumstances and in the usual way, is the test. Lindl. Partn. Sec. 126. While, within this rule, one member of a partnership may, in the usual and ordinary course of its business, make a valid sale or pledge, by way of mortgage or otherwise, of all or part of its effects intended for sale, to a bona fide purchaser or mortgage, without the consent of the other members of the firm, it is not within the scope of his implied authority to make a final disposition of all of its effects, including those employed as the means of carrying on its business, the object and effect of which is to immediately terminate the partnership, and place its property beyond its control. Such a

disposition, instead of being within the scope of the partnership business, or in the usual and ordinary way of carrying it on, is necessarily subversive of the object of the partnership, and contrary to the presumed intention of the partnership in its formation. (McGrath, et al. vs. Cowen, et al., 49 N.F. 338, 343; Emphasis supplied) Since Kong Chai Pin sold the partnership properties not in line with the business of the partnership but to pay its obligation without first obtaining the consent of the other partners, the sale is invalid being in excess of her authority. 4. Finally, the same under consideration was effected in a suspicious manner as may be gleaned from the following circumstances: (a) The properties subject of the instant sale which consist of three parcels of land situated in the City of Davao have an area of 200 hectares more or less, or 2,000,000 square meters. These properties were purchased by the partnership for purposes of subdivision. According to realtor Mata, who testified in court, these properties could command at the time he testified a value of not less than P312,000.00, and according to Dalton Chen, manager of the firm which took over the administration, since the date of sale no improvement was ever made thereon precisely because of this litigation. And yet, for said properties, aside from the sum of P37,000.00 which was paid for the properties of the deceased and the partnership, only the paltry sum of P66,529.91 was paid as a consideration therefor, of which the sum of P46,116.75 was even paid in Japanese currency. (b) Considering the area of the properties Kong Chai Pin had no valid reason to sell them if her purpose was only to pay the partnership's obligation. She could have negotiated a loan if she wanted to pay it by placing the properties as security, but preferred to sell them even at such low prices because of her close relationship with the purchasers and creditors who conveniently organized a partnership to exploit them, as may be seen from the following relationship of their pedigree: KONG CHAI PIN, the administratrix, was a granddaughter of Jose P. Yutivo, founder of the defendant Yutivo Sons Hardware Co. YUTIVO SONS HARDWARE CO, and SIN YEE CUAN CO, INC., alleged creditors, are owned by the heirs of Jose P. Yutivo (Sing, Yee & Cuan are the three children of Jose). YU KHE THAI is a grandson of the same Jose P. Yutivo, and president of the two alleged creditors. He is the acknowledged head of the Yu families. WASHINGTON Z. SYCIP, one of the original buyers, is married to Ana Yu, a daughter of Yu Khe Thai, BETTY Y. LEE, the other original buyer is also a daughter of Yu Khe Thai. The INSULAR DEVELOPMENT CO., the ultimate buyer, was organized for the specific purpose of buying the partnership properties. Its incorporators were: Ana Yu and Betty V. Lee, Atty. Quisumbing and Salazar the lawyers who studied the papers of sale and have been counsel for the Yutivo interests; Dalton Chen a brother-in-law of Yu Khe Thai and an executive of Sing Yee & Cuan Co; Lillian Yu, daughter of Yu Eng Poh, an executive of Yutivo Sons Hardware, and Simeon Daguiwag, a trusted employee of the Yutivos. (c) Lastly, even since Tan Sin An died in 1942 the creditors, who were close relatives of Kong Chai Pin, have already conceived the idea of possessing the lands for purposes of subdivision, excluding Goquiolay from their plan, and this is evident from the following sequence of events:

Tan Sin An died in 1942 and intestate proceedings were opened in 1944. In 1946, the creditors of the partnership filed their claim against the partnership in the intestate proceedings. The creditors studied ways and means of liquidating the obligation of the partnership, leading to the formation of the defendant Insular Development Co., composed of members of the Yutivo family and the counsel of record of the defendants, which subsequently bought the properties of the partnership and assumed the obligation of the latter in favor of the creditors of the partnership, Yutivo Sons Hardware and Sing, Yee & Cuan, also of the Yutivo family. The buyers took time to study the commercial potentialities of the partnership properties and their lawyers carefully studied the document and other papers involved in the transaction. All these steps led finally to the sale of the three partnership properties. Upon the strength of the foregoing considerations, I vote to grant motion for reconsideration. Labrador, Paredes, and Makalintal, JJ., concur.

Footnotes
1

In her capacity as administratrix of the intestate estate and as a managing partner of the plaintiff partnership (Exh. "AA-6").
2

"General and limited partnership shall furthermore be dissolved by reason of the following cases: (1) The death of one of the general partners, if the partnership contract does not contain an express provision for the continuation of the heirs of the deceased partner in the partnership or for the continuation of the partnership among the surviving partners". (See also Codigo Civil, Manresa, Vol XI, pp. 423-424, 1950 ed.)
3

Gay de Montella, Tratado Practico de Sociedades Mercantiles, Vol. II, p. 289; Tratado de Derecho Mercantil, Vivante, Vol. II, pp. 493-494. RESOLUTION
1

Tratado Practico de Sociedades Mercantiles, Tomo I, p. 223. (Emphasis supplied)

Bautista Angelo, J., dissenting:


1

"Tratado de Derecho Mercantil, Tomo I, Vol. 30 pp. 1211-1212.

"... The limited partner may not perform any act in the administration of the interests of the company, even in the capacity of attorney-in-fact of the managing partners."
3

"Should any limited partner include his name or allow its inclusion in the firm name, he shall be subject, with respect to persons not members of the company, to the same responsibilities as the managers, without acquiring more rights than those corresponding to his character as limited partner." (Emphasis supplied)

Derecho Mercantil, David Supino, 4a ed., p. 179; Cesar Vivante, Tratado de Derecho Mercantil, pp. 124-125, Vol. II, la. ed., R. Gay de Montella, Tratado Practico de Sociedades Mercantiles, pp. 223-224. Tomo I, 3a. ed.
5

Article 1713, Spanish Civil Code.

The main business of the partnership is to engage in the real estate business in general, particularly in buying and selling real estate. (Page 23, Record on Appeal)

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-11840 December 10, 1963

ANTONIO C. GOQUIOLAY, ET AL., plaintiffs-appellants, vs. WASHINGTON Z. SYCIP, ET AL., defendants-appellees. Norberto J. Quisumbing and Sycip, Salazar and Associates for defendants-appellees. Jose C. Calayco for plaintiffs-appellants.. RESOLUTION REYES, J.B.L., J.: The matter now pending is the appellant's motion for reconsideration of our main decision, wherein we have upheld the validity of the sale of the lands owned by the partnership Goquiolay & Tan Sin An, made in 1949 by the widow of the managing partner, Tan Sin An (Executed in her dual capacity as Administratrix of the husband's estate and as partner in lieu of the husband), in favor of the buyers Washington Sycip and Betty Lee for the following consideration: Cash paid Debts assumed by purchaser: To Yutivo To Sing Yee Cuan & Co., TOTAL 62,415.91 54,310.13 P153,726.04 P37,000.00

Appellant Goquiolay, in his motion for reconsideration, insist that, contrary to our holding, Kong Chai Pin, widow of the deceased partner Tan Sin An, never became more than a limited partner, incapacitated by law to manage the affairs of partnership; that the testimony of her witness Young and Lim belies that she took over the administration of the partnership property; and that, in any event, the sale should be set aside because it was executed with the intent to defraud appellant of his share in the properties sold. Three things must be always held in mind in the discussion of this motion to reconsider, being basic and beyond controversy:

(a) That we are dealing here with the transfer of partnership property by one partner, acting in behalf of the firm, to a stranger. There is no question between partners inter se, and this aspect to the case was expressly reserved in the main decision of 26 July 1960; (b) That partnership was expressly organized: "to engage in real estate business, either by buying and sellingreal estate". The Articles of co-partnership, in fact, expressly provided that: IV. The object and purpose of the copartnership are as follows: 1. To engage in real estate business, either by buying and selling real estates; to subdivide real estates into lots for the purpose of leasing and selling them.; (c) That the properties sold were not part of the contributed capital (which was in cash) but land precisely acquired to be sold, although subject to a mortgage in favor of the original owners, from whom the partnership had acquired them. With these points firmly in mind, let us turn to the points insisted upon by appellant. It is first averred that there is "not one iota of evidence" that Kong Chai Pin managed and retained possession of the partnership properties. Suffice it to point out that appellant Goquiolay himself admitted that ... Mr. Yu Eng Lai asked me if I can just let Mrs. Kong Chai Pin continue to manage the properties (as) she had no other means of income. Then I said, because I wanted to help Mrs. Kong Chai Pin, she could just do it and besides I am not interested in agricultural lands. I allowed her to take care of the properties in order to help her and because I believe in God and wanted to help her. Q So the answer to my question is you did not take any steps? A I did not. Q And this conversation which you had with Mrs. Yu Eng Lai was few months after 1945? A In the year 1945. (Emphasis supplied). The appellant subsequently ratified this testimony in his deposition of 30 June 1956, pages 8-9, wherein he stated: that plantation was being occupied at that time by the widow, Mrs. Tan Sin An, and of course they are receiving quiet a lot benefit from the plantation. Discarding the self-serving expressions, these admissions of Goquiolay are certainly entitled to greater weight than those of Hernando Young and Rufino Lim, having been made against the party's own interest.

Moreover, the appellant's reference to the testimony of Hernando Young, that the witness found the properties "abandoned and undeveloped", omits to mention that said part of the testimony started with the question: Now, you said that about 1942 or 1943 you returned to Davao. Did you meet Mrs. Kong Chai Pin there in Davao at that time? Similarly, the testimony of Rufino Lim, to the effect that the properties of the partnership were undeveloped, and the family of the widow (Kong Chai Pin) did not receive any income from the partnership properties, was given in answer to the question: According to Mr. Goquiolay, during the Japanese occupation Tan Sin an and his family lived on the plantation of the partnership and derived their subsistence from that plantation. What can you say to that? (Dep. 19 July 1956, p. 8). And also What can you say as to the development of these other properties of the partnership which you sawduring the occupation? (Dep. p. 13, Emphasis supplied). to which witness gave the following answer: I saw the properties in Mamay still undeveloped. The third property which is in Tigato is about eleven (11) hectares and planted with abaca seedlings planted by Mr. Sin An. When I went there with Hernando Young we saw all the abaca destroyed. The place was occupied by the Japanese Army. They planted camotes and vegetables to feed the Japanese Army. Of course they never paid any money to Tan Sin An or his family. (Dep., Lim, pp. 13-14. Emphasis supplied). Plainly, both Young and Lim's testimonies do not belie, or contradict, Goquiolay's admission that he told Mr. Yu Eng Lai that the widow "could just do it" (i.e., continue to manage the properties). Witnesses Lim and Young referred to the period of Japanese occupation; but Goquiolay's authority was, in fact, given to the widow in 1945, after the occupation. Again, the disputed sale by the widow took place in 1949. That Kong Chai Pin carried out no acts of management during the Japanese occupation (1942-1944) does not mean that she did not do so from 1945 to 1949. We thus find that Goquiolay did not merely rely on reports from Lim and Young; he actually manifested his willingness that the widow should manage the partnership properties. Whether or not she complied with this authority is a question between her and the appellant, and is not here involved. But the authority was given, and she did have it when she made the questioned sale, because it was never revoked. It is argued that the authority given by Goquiolay to the widow Kong Chai Pin was only to manage the property, and that it did not include the power to alienate, citing Article 1713 of the Civil Code of 1889. What this argument overlooks is that the widow was not a mere agent, because she had become a partner upon her husband's death, as expressly provided by the articles of copartnership. Even more,

granting that by succession to her husband, Tan Sin An, the widow only became a limited partner, Goquiolay's authorization to manage the partnership property was proof that he considered and recognized her as general partner, at least since 1945. The reason is plain: Under the law (Article 148, last paragraph, Code of Commerce), appellant could not empower the widow, if she were only a limited partner, to administer the properties of the firm, even as a mere agent: Limited partners may not perform any act of administration with respect to the interests of the copartnership, not even in the capacity of agents of the managing partners. (Emphasis supplied). By seeking authority to manage partnership property, Tan Sin An's widow showed that she desired to be considered a general partner. By authorizing the widow to manage partnership property (which a limited partner could not be authorized to do), Goquiolay recognized her as such partner, and is now in estoppel to deny her position as a general partner, with authority to administer and alienate partnership property. Besides, as we pointed out in our main decision, the heir ordinarily (and we did not say "necessarily") becomes a limited partner for his own protection, because he would normally prefer to avoid any liability in excess of the value of the estate inherited so as not to jeopardize his personal assets. But this statutory limitation of responsibility being designed to protect the heir, the latter may disregard it and instead elect to become a collective or general partner, with all the rights and privileges of one, and answering for the debts of the firm not only with the inheritance but also with the heir's personal fortune. This choice pertains exclusively to the heir, and does not require the assent of the surviving partner. It must be remember that the articles of co-partnership here involved expressly stipulated that: In the event of the death of any of the partners at any time before the expiration of said term, the co-partnership shall not be dissolved but will have to be continued and the deceased partner shall be represented by his heirs or assigns in said co-partnership (Art. XII, Articles of CoPartnership). The Articles did not provide that the heirs of the deceased would be merely limited partners; on the contrary, they expressly stipulated that in case of death of either partner "the co-partnership ... will have to be continued" with the heirs or assigns. It certainly could not be continued if it were to be converted from a general partnership into a limited partnership, since the difference between the two kinds of associations is fundamental; and specially because the conversion into a limited association would have the heirs of the deceased partner without a share in the management. Hence, the contractual stipulation does actually contemplate that the heirs would become general partners rather than limited ones. Of course, the stipulation would not bind the heirs of the deceased partner should they refuse to assume personal and unlimited responsibility for the obligations of the firm. The heirs, in other words, can not be compelled to become general partners against their wishes. But because they are not so compellable, it does not legitimately follow that they may not voluntarily choose to become general partners, waiving the protective mantle of the general laws of succession. And in the latter event, it is pointless to discuss the legality of any conversion of a limited partner into a general one. The heir never was a limited partner, but chose to be, and became, a general partner right at the start.

It is immaterial that the heir's name was not included in the firm name, since no conversion of status is involved, and the articles of co-partnership expressly contemplated the admission of the partner's heirs into the partnership. It must never be overlooked that this case involved the rights acquired by strangers, and does not deal with the rights existing between partners Goquiolay and the widow of Tan Sin An. The issues between the partnersinter se were expressly reserved in our main decision. Now, in determining what kind of partner the widow of partner Tan Sin an Had elected to become, strangers had to be guided by her conduct and actuations and those of appellant Goquiolay. Knowing that by law a limited partner is barred from managing the partnership business or property, third parties (like the purchasers) who found the widow possessing and managing the firm property with the acquiescence (or at least without apparent opposition) of the surviving partners were perfectly justified in assuming that she had become a general partner, and, therefore, in negotiating with her as such a partner, having authority to act for, and in behalf of the firm. This belief, be it noted, was shared even by the probate court that approved the sale by the widow of the real property standing in the partnership name. That belief was fostered by the very inaction of appellant Goquiolay. Note that for seven long years, from partner Tan Sin An's death in 1942 to the sale in 1949, there was more than ample time for Goquiolay to take up the management of these properties, or at least ascertain how its affairs stood. For seven years Goquiolay could have asserted his alleged rights, and by suitable notice in the commercial registry could have warned strangers that they must deal with him alone, as sole general partner. But he did nothing of the sort, because he was not interested (supra), and he did not even take steps to pay, or settle the firm debts that were overdue since before the outbreak of the last war. He did not even take steps, after Tan Sin An died, to cancel, or modify, the provisions of the partnership articles that he (Goquiolay) would have no intervention in the management of the partnership. This laches certainly contributed to confirm the view that the widow of Tan Sin An had, or was given, authority to manage and deal with the firm's properties apart from the presumption that a general partner dealing with partnership property has to requisite authority from his co-partners (Litton vs. Hill and Ceron, et al., 67 Phil. 513; quoted in our main decision, p. 11). The stipulation in the articles of partnership that any of the two managing partners may contract and sign in the name of the partnership with the consent of the other, undoubtedly creates on obligation between the two partners, which consists in asking the other's consent before contracting for the partnership. This obligation of course is not imposed upon a third person who contracts with the partnership. Neither it is necessary for the third person to ascertain if the managing partner with whom he contracts has previously obtained the consent of the other. A third person may and has a right to presume that the partner with whom he contracts has, in the ordinary and natural course of business, the consent of his copartner; for otherwise he would not enter into the contract. The third person would naturally not presume that the partner with whom he enters into the transaction is violating the articles of partnership, but on the contrary is acting in accordance therewith. And this finds support in the legal presumption that the ordinary course of business has been followed (No. 18, section 334, Code of Civil Procedure), and that the law has been obeyed (No. 31, section 334). This last presumption is equally applicable to contracts which have the force of law between the parties. (Litton vs. Hill & Ceron, et al., 67 Phil. 409, 516). (Emphasis supplied.) It is next urged that the widow, even as a partner, had no authority to sell the real estate of the firm. This argument is lamentably superficial because it fails to differentiate between real estate acquired and held asstock-in-trade and real estate held merely as business site (Vivante's "taller o banco social") for

the partnership. Where the partnership business is to deal in merchandise and goods, i.e., movable property, the sale of its real property (immovables) is not within the ordinary powers of a partner, because it is not in line with the normal business of the firm. But where the express and avowed purpose of the partnership is to buy and sell real estate (as in the present case), the immovables thus acquired by the firm from part of its stock-in-trade, and the sale thereof is in pursuance of partnership purposes, hence within the ordinary powers of the partner. This distinction is supported by the opinion of Gay de Montella1 , in the very passage quoted in the appellant's motion for reconsideration: La enajenacion puede entrar en las facultades del gerante, cuando es conforme a los fines sociales. Pero esta facultad de enajenar limitada a las ventas conforme a los fines sociales, viene limitada a los objetos de comercio o a los productos de la fabrica para explotacion de los cuales se ha constituido la Sociedad. Ocurrira una cosa parecida cuando el objeto de la Sociedad fuese la compra y venta de inmuebles, en cuyo caso el gerente estaria facultado para otorgar las ventas que fuere necesario. (Montella) (Emphasis supplied). The same rule obtains in American law. In Rosen vs. Rosen, 212 N.Y. Supp. 405, 406, it was held: a partnership to deal in real estate may be created and either partner has the legal right to sell the firm real estate. In Chester vs. Dickerson, 54 N. Y. 1, 13 Am. Rep. 550: And hence, when the partnership business is to deal in real estate, one partner has ample power, as a general agent of the firm, to enter into an executory contract for the sale of real estate. And in Revelsky vs. Brown, 92 Ala. 522, 9 South 182, 25 Am. St. Rep. 83: If the several partners engaged in the business of buying and selling real estate can not bind the firm by purchases or sales of such property made in the regular course of business, then they are incapable of exercising the essential rights and powers of general partners and their association is not really a partnership at all, but a several agency. Since the sale by the widow was in conformity with the express objective of the partnership, "to engage ... inbuying and selling real estate" (Art. IV, No. 1 Articles of Copartnership), it can not be maintained that the sale was made in excess of her power as general partner. Considerable stress is laid by appellant in the ruling of the Supreme Court of Ohio in McGrath, et al., vs. Cowen, et al., 49 N.E., 338. But the facts of that case are vastly different from the one before us. In the McGrath case, the Court expressly found that: The firm was then, and for some time had been, insolvent, in the sense that its property was insufficient to pay its debts, though it still had good credit, and was actively engaged in the prosecution of its business. On that day, which was Saturday, the plaintiff caused to be prepared, ready for execution, the four chattel mortgages in question, which cover all the tangible property then belonging to the firm,including the counters, shelving, and other

furnishings and fixtures necessary for, and used in carrying on, its business, and signed the same in this form: "In witness whereof, the said Cowen & McGrath, a firm, and Owen McGrath, surviving partner, of said firm, and Owen McCrath, individually, have hereunto set their hands, this 20th day of May, A.D. 1893. Cowen & Mcgrath, by Owen McGrath. Owen McGrath, Surviving partner of Cowen & McGrath. Owen McGrath." At the same time, the plaintiff had prepared, ready for filing, the petition for the dissolution of the partnership and appointment of a receiver which he subsequently filed, as hereinafter stated. On the day the mortgages were signed, they were placed in the hands of the mortgagees, which was the first intimation to them that there was any intention to make them. At the time none of the claims secured by the mortgages were due, except, it may be, a small part of one of them, and none of the creditors to whom the mortgages were made had requested security, or were pressing for the payment of their debts. ... The mortgages appear to be without a sufficient condition of defiance, and contain a stipulation authorizing the mortgagees to take immediate possession of the property, which they did as soon as the mortgages were filed through the attorney who then represented them, as well as the plaintiff; and the stores were at once closed, and possession delivered by them to the receiver appointed upon the filing of the petition. The avowed purposes of the plaintiff, in the course pursued by him, was to terminate the partnership, place its properly beyond the control of the firm, and insure the preference of the mortgagees, all of which was known to them at the time; .... (Cas cit., p. 343, Emphasis supplied). It is natural that form these facts the Supreme Court of Ohio should draw the conclusion that the conveyances were made with intent to terminate the partnership, and that they were not within the powers of McGrath as a partner. But there is no similarity between those acts and the sale by the widow of Tan Sin An. In the McGrath case, the sale included even the fixtures used in the business; in our case, the lands sold were those acquired to be sold. In the McGrath case, none of the creditors were pressing for payment; in our case, the creditors had been unpaid for more than seven years, and their claims had been approved by the probate court for payment. In the McGrath case, the partnership received nothing beyond the discharge of its debts; in the present case, not only were its debts assumed by the buyers, but the latter paid, in addition, P37,000.00 in cash to the widow, to the profit of the partnership. Clearly, the McGrath ruling is not applicable. We will now turn to the question of fraud. No direct evidence of it exists; but appellant point out, as indicia thereof, the allegedly low price paid for the property, and the relationship between the buyers, the creditors of the partnership, and the widow of Tan Sin An. First, as to the price: As already noted, this property was actually sold for a total of P153,726.04, of which P37,000.00 was in cash, and the rest in partnership debts assumed by the purchaser. These debts (62,415.91 to Yutivo, and P54,310.13 to Sing Ye Cuan & Co.) are not questioned; they were approved by the court, and its approval is now final. The claims were, in fact, for the balance on the original purchase price of the land sold (sue first to La Urbana, later to the Banco Hipotecario) plus accrued interests and taxes, redeemed by the two creditors-claimants. To show that the price was inadquate, appellant relies on the testimony of the realtor Mata, who is 1955, six years after the sale in question, asserted that the land was worth P312,000.00. Taking into account the continued rise of real estate values since liberation, and the fact that the sale in question was practically a forced sale because the partnership had no other means to pay its legitimate debts, this evidence certainly does not show such "gross inadequacy" as to justify recission of the sale. If at the time of the sale (1949) the price of P153,726.04 was really low, how is it that appellant was not able to raise the amount, even if the creditor's

representative, Yu Khe Thai, had already warned him four years before (1945) that the creditors wanted their money back, as they were justly entitled to? It is argued that the land could have been mortgaged to raise the sum needed to discharge the debts. But the lands were already mortgaged, and had been mortgaged since 1940, first to La Urbana, and then to the Banco Hipotecario. Was it reasonable to expect that other persons would loan money to the partnership when it was unable even to pay the taxes on the property, and the interest on the principal since 1940? If it had been possible to find lenders willing to take a chance on such a bad financial record, would not Goquiolay have taken advantage of it? But the fact is clear on the record that since liberation until 1949 Goquiolay never lifted a finger to discharge the debts of the partnership. Is he entitled now to cry fraud after the debts were discharged with no help from him. With regard to the relationship between the parties, suffice it to say that the Supreme Court has ruled that relationship alone is not a badge of fraud (Oria Hnos. vs. McMicking, 21 Phil. 243; also Hermandad del Smo. Nombre de Jesus vs. Sanchez, 40 Off. Gaz., 1685). There is no evidence that the original buyers, Washington Sycip and Betty Lee, were without independent means to purchase the property. That the Yutivos should be willing to extend credit to them, and not to appellant, is neither illegal nor immoral; at the very least, these buyers did not have a record of inveterate defaults like the partnership "Tan Sin An & Goquiolay". Appellant seeks to create the impression that he was the victim of a conspiracy between the Yutivo firm and their component members. But no proof is adduced. If he was such a victim, he could have easily defeated the conspirators by raising money and paying off the firm's debts between 1945 and 1949; but he did not; he did not even care to look for a purchaser of the partnership assets. Were it true that the conspiracy to defraud him arose (as he claims) because of his refusal to sell the lands when in 1945 Yu Khe Thai asked him to do so, it is certainly strange that the conspirators should wait 4 years, until 1949, to have the sale effected by the widow of Tan Sin An, and that the sale should have been routed through the probate court taking cognizance of Tan Sin An's estate, all of which increased the risk that the supposed fraud should be detected. Neither was there any anomaly in the filing of the claims of Yutivo and Sing Yee Cuan & Co., (as subrogees of the Banco Hipotecario) in proceedings for the settlement of the estate of Tan Sin An. This for two reasons:First, Tan Sin An and the partnership "Tan Sin An & Goquiolay" were solidary (Joint and several)debtors (Exhibits "N", mortgage to the Banco Hipotecario), and Rule 87, section 6 is the effect that: Where the obligation of the decedent is joint and several with another debtor, the claim shall be filedagainst the decedent as if he were the only debtor, without prejudice to the right of the estate to recover contribution from the other debtor. (Emphasis supplied). Secondly, the solidary obligation was guaranteed by a mortgage on the properties of the partnership and those of Tan Sim An personally, and a mortgage is indivisible, in the sense that each and every parcel under mortgage answers for the totality of the debt (Civ. Code of 1889, Article 1860; New Civil Code, Art. 2089). A final and conclusive consideration: The fraud charged not being one used to obtain a party's consent to a contract (i.e., not being deceit or dolus in contrahendo), if there is fraud at al, it can only be a fraud

of creditorsthat gives rise to a rescission of the offending contract. But by express provision of law (Article 1294, Civil Code of 1889; Article 1383, New Civil Code) "the action for rescission is subsidiary; it can not be instituted except when the party suffering damage has no other legal means to obtain reparation for the same". Since there is no allegation, or evidence, that Goquiolay can not obtain reparation from the widow and heirs of Tan Sin An, the present suit to rescind the sale in question is not maintainable, even if the fraud charged actually did exist. PREMISES CONSIDERED, the motion for reconsideration is denied. Bengzon, C.J., Padilla, Concepcion, Barrera and Dizon, JJ., concur. Regala, J., took no part.

Separate Opinions BAUTISTA ANGELO, J., dissenting: This is an appeal from a decision of the Court of First Instance of Davao dismissing the complaint filed by Antonio C. Goquiolay, et al., seeking to annul the sale made Z. Sycip and Betty Y. Lee on the ground that it was executed without proper authority and under fraudulent circumstances. In a decision rendered on July 26, 1960 we affirmed this decision although on grounds different from those on which the latter is predicted. The case is once more before us on a motion for reconsideration filed by appellants raising both questions of fact and of law. On May 29, 1940, Tan Sin An and Antonio C. Goquiolay executed in Davao City a commercial partnership for a period of ten years with a capital of P30,000.00 of which Goquiolay contributed P18,000.00 representing 60% while Tan Sin An P12,000.00 representing 40%. The business of the partnership was to engage in buying real estate properties for subdivision, resale and lease. The partnership was duly registered, and among the conditions agreed upon in the partnership agreement which are material to this case are: (1) that Tan Sin An would be the exclusive managing partner, and (2) in the event of the death of any of the partners the partnership would continue, the deceased to be represented by his heirs. On May 31, 1940, Goquiolay executed a general power of attorney in favor of Tan Sin An appointing the latter manager of the partnership and conferring upon him the usual powers of management. On May 29, 1940, the partnership acquired three parcels of land known as Lots Nos. 526, 441 and 521 of the cadastral survey of Davao, the only assets of the partnership, with the capital orginally invested, financing the balance of the purchase price with a mortgage in favor of "La Urbana Sociedad Mutua de Construccion Prestamos" in the amount of P25,000.00, payable in ten years. On the same date, Tan Sin An, in his individual capacity, acquired 46 parcels of land executing a mortgage thereon in favor of the same company for the sum of P35,000.00. On September 25, 1940, these two mortgage obligations were consolidated and transferred to the Banco Hipotecario de Filipinas and as a result Tan Sin An, in his individual capacity, and the partnership bound themselves to pay jointly and severally the total amount of P52,282.80, with 8% annual interest thereon within a period of eight years mortgaging in favor of said

entity the 3 parcels of land belonging to the partnership and the 46 parcels of land belonging individually to Tan Sin An. Tan Sin An died on June 26, 1942 and was survived by his widow, defendant Kong Chai Pin, and four children, all of whom are minors of tender age. On March 18, 1944, Kong Chai Pin, was appointed administratrix of the intestate estate of Tan Sin An. And on the same date, Sing, Yee and Cuan Co., Inc. paid to the Banco Hipotecario the remaining unpaid balance of the mortgage obligation of the partnership amounting to P46,116.75 in Japanese currency. Sometimes in 1945, after the liberation of Manila, Yu Khe Thai, president and general manager of Yutivo Sons Hardware Co. and Sing, Yee and Cuan Co., Inc., called for Goquiolay and the two had a conference in the office of the former during which he offered to buy the interest of Goquiolay in the partnership. In 1948, Kong Chai Pin, the widow, sent her counsel, Atty. Dominador Zuo, to ask Goquiolay to execute in her favor a power of attorney. Goquiolay refused both to sell his interest in the partnership as well as to execute the power of attorney. Having failed to get Goquiolay to sell his share in the partnership, Yutivo Sons Hardware Co. and Sing, Yee and Cuan Co., Inc. filed in November, 1946 a claim each in the intestate proceedings of Tan Sin An for the sum of P84,705.48 and P66,529.91, respectively, alleging that they represent obligations of both Tan Sin An and the partnership. After first denying any knowledge of the claims, Kong Chai Pin, as administratrix, admitted later without qualification the two claims in an amended answer she filed on February 28, 1947. The admission was predicted on the ground that she and the creditors were closely related by blood, affinity and business ties. In due course, these two claims were approved by the court. On March 29, 1949, more than two years after the approval of the claims, Kong Chai Pin filed a petition in the probate court to sell all the properties of the partnership as well as some of the conjugal properties left by Tan Sin An for the purpose of paying the claims. Following approval by the court of the petition for authority to sell, Kong Chai Pin, in her capacity as administratrix, and presuming to act as managing partner of the partnership, executed on April 4, 1949 a deed of sale of the properties owned by Tan Sin An and by the partnership in favor of Betty Y. Lee and Washington Z. Sycip in consideration of the payment to Kong Chai Pin of the sum of P37,000.00, and the assumption by the buyers of the claims filed by Yutivo & Sons Hardware Co. and Sing, Yee and Cuan Co., Inc. in whose favor the buyers executed a mortgage on the properties purchased. Betty Y. Lee and Washington Z. Zycip subsequently executed a deed of sale of the same properties in favor of their co-defendant Insular Development Company, Inc. It should be noted that these transactions took place without the knowledge of Goquiolay and it is admitted that Betty Lee and Washington Z. Sycip bought the properties on behalf of the ultimate buyer, the Insular Development Company, Inc., with money given by the latter. Upon learning of the sale of the partnership properties, Goquiolay filed on July 25, 1949 in the intestate proceedings a petition to set aside the order of the court approving the sale. The court granted the petition. While the order was pending appeal in the Supreme Court, Goquiolay filed the present case on January 15, 1953 seeking to nullify the sale as stated in the early part of this decision. In the meantime, the Supreme Court remanded the original case to the probate court for rehearing due to lack of necessary parties. The plaintiffs in their complaint challenged the authority of Kong Chai Pin to sell the partnership properties on the ground that she had no authority to sell because even granting that she became a

partner upon the death of Tan Sin An the power of attorney granted in favor of the latter expired after his death. Defendants, on the other hand, defended the validity of the sale on the theory that she succeeded to all the rights and prerogatives of Tan Sin an as managing partner. The trial court sustained the validity of the sale on the ground that under the provisions of the articles of partnership allowing the heirs of the deceased partner to represent him in the partnership after his death Kong Chai Pin became a managing partner, this being the capacity held by Tan Sin an when he died. In the decision rendered by this Court on July 26, 1960, we affirmed this decision but on different grounds, among which the salient points are: (1) the power of attorney given by Goquiloay to Tan Sin An as manager of the partnership expired after his death; (2) his widow Kong Chai Pin did not inherit the management of the partnership, it being a personal right; (3) as a general rule, the heirs of a deceased general partner come into the partnership in the capacity only of limited partners; (4) Kong Chai Pin, however, became a general partner because she exercised certain alleged acts of management; and (5) the sale being necessary to pay the obligations of the partnership properties without the consent of Goquiolay under the principle of estoppel the buyers having the right to rely on her acts of management and to believe her to be in fact the managing partner. Considering that some of the above findings of fact and conclusions of law are without legal or factual basis, appellants have in due course filed a motion for reconsideration which because of the importance of the issues therein raised has been the subject of mature deliberation. In support of said motion, appellants advanced the following arguments: 1. If the conclusion of the Court is that heirs as a general rule enter the partnership as limited partners only, therefore Kong Chai Pin, who must necessarily have entered the partnership as a limited partneroriginally, could have not chosen to be a general partner by exercising the alleged acts of management, because under Article 148 of the Code of Commerce a limited partner cannot intervene in the management of the partnership, even if given a power of attorney by the general partners. An Act prohibited by law cannot given rise to any right and is void under the express provisions of the Civil Code. 2. The buyers were not strangers to Kong Chai Pin, all of them being members of the Yu (Yutivo) family, the rest, members of the law firm which handles the Yutivo interests and handled the papers of sale. They did not rely on the alleged acts of management they believed (this was the opinion of their lawyers) that Kong Chai Pin succeeded her husband as a managing partner and it was on this theory alone that they submitted the case in the lower court. 3. The alleged acts of management were denied and repudiated by the very witnesses presented by the defendants themselves. The arguments advanced by appellants are in our opinion well-taken and furnish sufficient to reconsider our decision if we want to do justice to Antonio C. Goquiolay. And to justify this conclusion, it is enough that we lay stress on the following points: (1) there is no sufficient factual basis to conclude that Kong

Chai Pin executed acts of management to give her the character of general manager of the partnership, or to serve as basis for estoppel that may benefit the purchasers of the partnership properties; (92) the alleged acts of management, even if proven, could not give Kong Chai Pin the character of general manager for the same contrary to law and well-known authorities; (3) even if Kong Chai Pin acted as general manager she had no authority to sell the partnership properties as to make it legal and valid; and (4) Kong Chai Pin had no necessity to sell the properties to pay the obligation of the partnership and if she did so it was merely to favor the purchasers who were close relatives to the prejudice of Goquiolay. 1. This point is pivotal for if Kong Chai Pin did not execute the acts of management imputed to her our ruling cannot be sustained. In making our aforesaid ruling we apparently gave particular importance to the fact that it was Goquiolay himself who tried to prove the acts of management. Appellants, however, have emphasized the fact, and with reason, the appellees themselves are the ones who denied and refuted the so-called acts of management imputed to Kong Chai Pin. To have a clear view of this factual situation, it becomes necessary that we analyze the evidence of record. Plaintiff Goquiolay, it is intimated, testified on cross-examination that he had a conversation with one Hernando Young in Manila in the year 1945 who informed him that Kong Chai Pin "was attending to the properties and deriving some income therefrom and she had no other means of livelihood except those properties and some rentals derived from the properties." He went on to say by way of remark that she could continue doing this because he wanted to help her. One point that he emphasized was that he was "no interested in agricultural lands." On the other hand, defendants presented Hernando Young, the same person referred to by Goquiolay, who was a close friend of the family of Kong Chai Pin, for the purpose of denying the testimony of Goquiolay. Young testified that in 1945 he was still in Davao, and insisted no less than six times during his testimony that he was not in Manila in 1945, the year when he allegedly gave the information to Goquiolay, stating that he arrived in Manila for the first time in 1947. He testified further that he had visited the partnership properties during the period covered by the alleged information given by him to Goquiolay and that he found them "abandoned and underdeveloped," and that Kong Chai Pin was not deriving any income from them. The other witness for the defendants, Rufino Lim, also testified that he had seen the partnership properties and corroborated the testimony of Hernando Young in all respects: "the properties in Mamay were underdeveloped, the shacks were destroyed in Tigato, and the family of Kong Chai Pin did not receive my income from the partnership properties." He specifically rebutted the testimony of Goquiolay, in his deposition given on June 30, 1956 that Kong Chai Pin and her family were living in the partnership properties, and stated that the "family never actually lived in the properties of the partnership even before the war or after the war." It is unquestionable that Goquiolay was merely repeating an information given to him by a third person, Hernando Young he stressed this point twice. A careful analysis of the substance of Goquiolay's testimony will show that he merely had no objection to allowing Kong Chai Pin to continue attending to the properties in order to give her some means of livelihood, because, according to the information given him by Hernando Young, which he assumed to be true, Kong Chai Pin had no other means of livelihood. But certainly he made it very clear that he did not allow her to manage the partnership when he explained his reason for refusing to sign a general power of attorney for Kong Chai Pin which her counsel, Atty. Zuo, brought with him to his house in 1948. He said:

... Then Mr. Yu Eng Lai told me that he brought with him Atty. Zuo and he asked me if I could execute a general power of attorney for Mrs. Kong Chai Pin. Then I told Atty. Zuo what is the use of executing a general power of attorney for Mrs. Kong Chai Pin when Mrs. Kong Chai Pin had already got that plantation for agricultural purposes, I said for agricultural purposes she can use that plantation ... (T.S.N. p. 9, Hearing on May 5, 1955). It must be noted that in his testimony Goquiolay was categorically stating his opposition to the management of the partnership by Kong Chai Pin and carefully made the distinction that his conformity was for her to attend to the partnership properties in order to give her merely a means of livelihood. It should be stated that the period covered by the testimony refers to the period of occupation when living condition was difficult and precarious. And Atty. Zuo, it should also be stated, did not deny the statement of Goquiolay. It can therefore be seen that the question as to whether Kong Chai Pin exercised certain acts of management of the partnership properties is highly controverted. The most that we can say is that the alleged acts are doubtful more so when they are disputed by the defendants themselves who later became the purchasers of the properties, and yet these alleged acts, if at all, only refer to management of the properties and not to management of the partnership, which are two different things. In resume, we may conclude that the sale of the partnership properties by Kong Chai Pin cannot be upheld on the ground of estoppel, first, because the alleged acts of management have not been clearly proven; second, because the record clearly shows that the defendants, or the buyers, were not misled nor did they rely on the acts of management, but instead they acted solely on the opinion of their counsel, Atty. Quisumbing, to the effect that she succeeded her husband in the partnership as managing partner by operation of law; and third, because the defendants are themselves estopped to invoke a defense which they tried to dispute and repudiate. 2. Assuming arguendo that the acts of management imputed to Kong Chai Pin are true, could such acts give as we have concluded in our decision? Our answer is in the negative because it is contrary to law and precedents. Garrigues, a well-known commentator, is clearly of the opinion that mere acceptance of the inheritance does not maked the heir of a general partner a general partner himself. He emphasized that heir must declare that he is entering the partnership as a general partner unless the deceased partner has made it an express condition in his will that the heir accepts the condition of entering the partnership as a prerequisite of inheritance, in which case acceptance of the inheritance is enough.1 But here Tan Sin An died intestate. Now, could Kong Chai Pin be deemed to have declared her intention to become a general partner by exercising acts of management? We believe not, for, in consonance with our ruling that as a general rule the heirs of a deceased partner succeed as limited partners only by operation of law, it is obvious that the heirs, upon entering the partnership, must make a declaration of his characters, otherwise he should be deemed as having succeeded as limited partner by the mere acceptance of the inheritance. And here Kong Chai Pin did not make such declaration. Being then a limited partner upon the death of Tan Sin An by operation of law, the peremptory prohibition contained in Article 1482 of the Code of Commerce became binding upon her and as a result she could not change her status by violating its provisions not only under the general principle that prohibited acts cannot produce any legal effect, but also because under the provisions of Article 1473 of the same Code she was precluded from acquiring more rights

than those pertaining to her as a limited partner. The alleged acts of management, therefore, did not give Kong Chai Pin the character of general manager to authorized her to bind the partnership. Assuming also arguendo that the alleged acts of management imputed to Kong Chai Pin gave her the character of a general partner, could she sell the partnership properties without authority from the other partners? Our answer is also in the negative in the light of the provisions of the articles of partnership and the pertinent provisions of the Code of Commerce and the Civil Code. Thus, Article 129 of the Code of Commerce says: If the management of the general partnership has not been limited by special agreement to any of the members, all shall have the power to take part in the direction and management of the common business, and the members present shall come to an agreement for all contracts or obligations which may concern the association. And the pertinent portions of the articles of partnership provides: VII. The affairs of the co-partnership shall be managed exclusively by the managing partner or by his authorized agent, and it is expressly stipulated that the managing partner may delegate the entire management of the affairs of the co-partnership by irrevocable power of attorney to any person, firm or corporation he may select, upon such terms as regards compensation as he may deem proper, and vest in such person, firm or corporation full power and authority, as the agent of the co-partnership and in his name, place and stead to do anything for it or on his behalf which he as such managing partner might do or cause to be done. (Page 23, Record on Appeal). It would thus be seen that the powers of the managing partner are not defined either under the provisions of the Code of Commerce or in the articles of partnership, a situation which, under Article 2 of the same Code, renders applicable herein the provisions of the Civil Code. And since, according to well-known authorities, the relationship between a managing partner and the partnership is substantially the same as that of the agent and his principal,4 the extent of the power of Kong Chai Pin must, therefore, be determined under the general principles governing agency. And, on this point, the law says that an agency created in general terms includes only acts of administrations, but with regard to the power to compromise, sell mortgage, and other acts of strict ownership, an express power of attorney is required.5 Here Kong Chai Pin did not have such power when she sold the properties of the partnership. Of course, there is authority to the effect that a managing partner, even without express power of attorney may perform acts affecting ownership if the same are necessary to promote or accomplish a declared object of the partnership, but here the transaction is not for this purpose. It was effected not to promote any avowed object of the partnership.6 Rather, the sale was affected to pay an obligation of the partnership by selling its real properties which Kong Chai Pin could not do without express authority. The authorities supporting this view are overwhelming. La enajenacion puede entrar en las facultades del gerente, cuando es conforme a los fines sociales. Pero esta facultad de enajenar limitada a las ventas conforme a los fines sociales, viene limitada a los objetos de comercio, o a los productos de la fabrica para explotacion de los cauale

se ha constituido la Sociedad. Ocurrira una cosa parecida cuando el objeto de la Sociedad fuese la compra y venta de inmuebles, en cuyo caso el gerente estaria facultado para otorgar las ventas que fuere necesario. Por el contrario el generente no tiene attribuciones para vender las instalaciones del comercio, ni la fabrica, ni las maquinarias, vehiculos de transporte, etc. que forman parte de la explotacion social. En todos estas casos, equalmente que sisse tratase de la venta de una marca o procedimiento mecanico o quimico, etc., siendo actos de disposicion, seria necesario contar con la conformidad expresa de todos los socios. (R. Gay de Montella, id., pp. 223-224; Emphasis supplied). Los poderes de los Administradores no tienen ante el silencio del contrato otros limites que los sealados por el objeto de la Sociedad y, por consiguiente, pueden llevar a cabo todas las operaciones que sirven para aquel ejercicio, incluso cambiando repetidas veces los propios acuerdos segun el interest convenido de la Sociedad. Pueden contratar y despedir a los empleados. tomar en arriendo almacenes y tiendas; expedir cambiales, girarlas, avalarlas, dar en prenda o en hipoteca los bienes de la sociedad y adquirir inmuebles destinados a su explotacion o al empleo, estable de sus capitales. Pero no podran ejecutar los actos que esten en contradiccion con la explotacion que les fue confiada; no podran cambiar el objeto, el domicilio, la razon social; fundir a la Sociedad en otro; ceder la accion, y por tanto, el uso de la firma social a otro, renunciar definitivamente el ejercicio de uno de otro ramo comercio que se les haya confiado y enajenar o pignorar el taller o el banco social, excepto que la venta o pignoracion tengan por el objeto procurar los medios necesarios para la continuacion de la empresa social. (Cesar Vivante, Tratado de Derecho Mercantil, pp. 124-125, Vol. II, 1a. ed.; Emphasis supplied). The act of one partner, to bind the firm, must be necessary for the carrying one of its business. If all that can be said of it was that it was convenient, or that it facilitated the transaction of the business of the firm, that is not sufficient, in the absence of evidence of sanction by other partners. Nor, it, seems, will necessity itself be sufficient if it be an extraordinary necessity. What is necessary for carrying on the business of the firm under ordinary circumstances and in the usual way, is the test. Lindl. Partn. Sec. 126. While, within this rule, one member of a partnership may, in the usual and ordinary course of its business, make a valid sale or pledge, by way of mortgage or otherwise, of all or part of its effects intended for sale, to a bona fide purchaser of mortgagee, without the consent of the other members of the firm, it is not within the scope of his implied authority to make a final disposition of al of its effects, including those employed as the means of carrying on its business, the object and effect of which is to immediately terminate the partnership, and place its property beyond its control. Such a disposition, instead of being within the scope of the partnership business, or in the usual and ordinary way of carrying it on, is necessarily subversive of the object of the partnership, and contrary to the presumed intention of the partnership in its formation. (McGrath, et al. vs. Cowen, et al., 49 N.E., 338, 343; Emphasis supplied). Since Kong Chai Pin sold the partnership properties not in line with the business of the partnership but to pay its obligation without first obtaining the consent of the other partners the sale is invalid in excess of her authority. 4. Finally, the sale under consideration was effected in a suspicious manner as may be gleaned from the following circumstances:

(a) The properties subject of the instant sale which consist of three parcels of land situated in the City of Davao have an area of 200 hectares more or less, or 2,000,000 square meters. These properties were purchased by the partnership for purposes of subdivision. According to realtor Mata, who testified in court, these properties could command at the time he testified a value of not less than P312,000.00, and according to Dalton Chen, manager of the firm which took over the administration, since the date of sale no improvement was ever made thereon precisely because of this litigation. And yet, for said properties, aside from the sum of P37,000.00 which was paid for the properties of the deceased and the partnership, only the paltry sum of P66,529.91 was paid as a consideration therefor, of which the sum of P46,116.75 was even paid in Japanese currency. (b) Considering the area of the properties Kong Chai Pin had no valid reason to sell them if her purpose was only to pay the partnership obligation. She could have negotiated a loan if she wanted to pay it by placing the properties as security, but preferred to sell them even at such low price because of her close relationship with the purchasers and creditors who conveniently organized a partnership to exploit them, as may be seen from the following relationship of their pedigree: KONG CHAI PIN, the administratrix, was a grandaughter of Jose P. Yutivo, founder of the defendant Yutivo Sons Hardware Co. YUTIVO SONS HARDWARE CO. and SING, YEE & CUAN CO., INC., alleged creditors, are owned by the heirs of Jose P. Yutivo (Sing, Yee & Cuan are the three children of Jose). YU KHE THAI is a grandson of the same Jose P. Yutivo, and president of the two alleged creditors. He is the acknowledged head of the Yu families. WASHINGTON Z. SYCIP, one of the original buyers, is married to Ana Yu, a daughter of Yu Khe Thai. BETTY Y. LEE, the other original buyer is also a daughter of Yu Khe Thai. The INSULAR DEVELOPMENT CO., the ultimate buyer, was organized for the specific purpose of buying the partnership properties. Its incorporators were: Ana Yu and Betty Y. Lee, Attys. Quisumbing and Salazar, the lawyers who studied the papers of the sale and have been counsel for the Yutivo interests; Dalton Chen, a brother-in-law of Yu Khe Thai and an executive of Sing, Yee & Cuan Co; Lillian Yu, daughter of Yu Eng Poh, an executive of Yutivo Sons Hardware, and Simeon Daguiwag, a trusted employee of the Yutivos. (c) Lastly, even since Tan Sin An died in 1942 the creditors, who were close relatives of Kong Chai Pin, have already conceived the idea of possessing the lands for purposes of subdivision, excluding Goquilolay from their plan, and this is evident from the following sequence of events;lawphil.net Tan Sin An died in 1942 and intestate proceedings were opened in 1944. In 1946, the creditors of the partnership filed their claim against the partnership in the intestate proceedings. The creditors studied ways and means of liquidating the obligation of the partnership, leading to the formation of the defendant Insular Development Co., composed of members of the Yutivo family and the counsel of record of the defendants, which subsequently bought the properties of the partnership and assumed the obligation of the latter in favor of the creditors of the partnership, Yutivo Sons Hardware and Sing, Yee & Cuan, also of the Yutivo family. The buyers took time to study the commercial potentialities of the partnership properties and their lawyers carefully studied the document and other papers involved in the transaction. All these steps led finally to the sale of the three partnership properties. UPON THE STRENGTH OF THE FOREGOING CONSIDERATIONS, I vote to grant the motion for reconsideration.

Labrador, Paredes, and Makalintal, JJ., concur.

Footnotes 1 Tratado de Derecho Mercantil, Tomo I, Vol. 38, pp. 1211-1212. 2 ... The limited partner may not perform any act in the administration of the interests of the company, even in the capacity of attorney-in-fact of the managing partners. 3 Should any limited partner include his name or allow its inclusion in the firm name, he shall be subject, with respect to person not members, without acquiring more rights than those corresponding to his character as limited partner. (Emphasis supplied). 4 Derecho Mercanti, David Supino, 4a ed., p. 179; Cesar Vivante, Tratado de Derecho Mercantil, pp. 124-125, Vol. II, 1a. ed., R. Gay de Montella, Tratado Practico de Sociedades Mercantiles, pp. 223-224, Tomo I, 3a. ed. 5 Article 1713, Spanish Civil Code. 6 The main business of the partnership is to engage in real estate business in general, particularly in buying and selling real estate. (Page 23, Record on Appeal)

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-14832 January 28, 1961

NG CHO CIO ET AL., plaintiffs-appellants, vs. NG DIONG, defendant-appellant. C. N. HODGES, ET AL., defendants-appellees. BAUTISTA, ANGELO, J.: This action was begun in the Court of First Instance of Iloilo by Ng Cho Cio Ng Sian King and Ng Due King to recover their three-fourths (3/4) pro-indiviso share on seven (7) parcels of land situated in the City of Iloilo which were sold by Ng Diong as manager of the commercial firm NG CHIN BENG HERMANOS in favor of C.N. Hodges. The latter had sold four of those parcels of land to Jose C. Tayengco and the other three parcels to Julian Go, and for that reason these two were included as party defendants. As the original plaintiffs sold their rights, title and interest in said partnership to Ng Be Chuat and Ng Feng Tuan, the latter two were allowed to intervene as plaintiffs. Since Jose C. Tayengco had mortgaged three of the lands which he purchased from C. N. Hodges in favor of the Bank of the Philippine Islands, the complaint was amended so as to include the Bank also as party defendant. On October 16, 1956, after trial had begun, defendant Ng Diong died, whereupon his heirs were order to substitute him parties defendants. Defendants C. N. Hodges, Ng Diong and Jose C. Tayengco answered the complaint separately setting up certain special defenses and counterclaims. In substance, they refuted the allegations set forth in the complaint and prayed for its dismissal. The parties submitted a partial Stipulation of facts on many points covered by the pleadings thus simplifying the trial of the case while at the same time they introduced additional evidence in amplification of the fact stipulated, Thereupon, the trial court, after a thorough evaluation of the evidence, rendered decision dismissing the complaint with costs. Plaintiffs interposed the present appeal on purely questions of law. The pertinent facts may be briefly stated, as follow On May 23, 1925, Ng Diong, Ng Be Chuat, Ng Feng Tuan Ng Be Kian Ng Cho Cio, Ng Sian King and Ng Due King entered into a contract of general copartnership under the name NG CHIN BENG HERMANOS. The partnership was to exist for a period of 10 years from May 23, 1925 and Ng Diong was named as managing partner. On May 10, 1935, the articles of co-partnership were amended by extending its life to 16 years more to be counted from May 23, 1925, or up to May 23, 1941. On January 5, 1938, the partnership obtained from the National Loan and Investment Board a loan in the amount of P30,000.00, and to guarantee its payment it executed in its favor a mortgage on Lots Nos. 236-B, 317-A, 233 and 540 of the cadastral survey of Iloilo. On the same date, the partnership also

obtained from the same entity another loan in the amount of P50,000.00 to secure which it also executed in its favor a mortgage on Lots Nos. 386, 829 and 237 of the same cadastral survey. Sometime in 1938, the partnership was declared insolvent upon petition of its creditors in, Special Proceedings No. 2419 of the Court of First Instance of Iloilo wherein one Crispino Melocoton was elected as assignee. As a consequence, on June 21, 1939, the titles to the seven parcels of land abovementioned were issued in his name as assignee. In due time, the creditors filed their claims in said proceeding which totalled P192,901.12. On August 9, 1940, a majority of the creditors with claims amounting to P139,704.81, and the partners of the firm, acting thru counsel, entered into a composition agreement whereby it was agreed that said creditors would receive 20% of the amount of their claims in full payment thereof. Prior to this agreement, however, defendant Julian Go had already acquired the rights of 24 of the creditors of the insolvent whose total claims amounted to P139,323.10. Said composition agreement was approved by the insolvency court. On January 30, 1941, the Agricultural and Industrial Bank which had succeeded the National Loan and Investment Board assigned its rights and interests in the loans obtained from it by the partnership in the aggregate amount of P80,000.00 in favor of C.N. Hodges, together with the right and interest in the mortgage executed to secure the loans. Since said loans became due and no payment was forthcoming, Hodges asked permission from the insolvency court to file a complaint against the assignee to foreclose he mortgage executed to secure the same in a separate proceeding, and permission having been granted, Hodges filed a complaint for that purpose on May 13, 1941. In his complaint, Hodges prayed that the assignee be ordered to pay him the sum of P75,622.90, with interest at 8% per annum thereon from March 6, 1941, plus P8,000.00 attorney's fees, exclusive of costs and charges. Meanwhile, war broke out and nothing appears to have been done in the insolvency proceedings. The court records were destroyed. However, they were reconstituted later and given due course. On August 15, 1945, the partners of the insolvent firm and Julian Go, who acquired most of the claims of the creditors, filed a petition with the insolvency court praying at the insolvency proceedings be closed or terminated cause the composition agreement the creditors had submitted relative to the settlement of the claims had already been approved on October 10, 1940. And on October 6, 1946, the court, acting favorably on the petition, ordered, closure of the proceedings directing the assignee to turn and reconvey all the properties of the partnership back to the latter as required by law. In accordance with this order of the court, the assignee executed a deed of reconveyance of the properties to the partnership on April 2, 1946 and by virtue thereof, the register of deeds cancelled the titles issued in the name of the assignee and issued new ones in lieu thereof in the name of the partnership. As of said date, April 2, 1946, the indebtedness of the partnership to C. N. Hodges which was the subject of the foreclosure proceedings in a separate case was P103,883.34. In order to pay off the same and raise necessary funds to pay the other obligations of the partnership, it was deemed proper and wise by Ng Diong, who continued to be the manager of the partnership, to sell all its properties mortgaged to Hodges in order that the excess may be applied to the Payment of said other obligations, and to that effect Ng Diong executed on April 2, 1946 a deed of sale thereof in favor of Hodges for the sum of P124,580.00. Out of this price; the sum of P103,883.34 was applied to the payment of the debt of the partnership to Hodges and the balance was paid to the other creditors of the partnership. On the same date, Hodges executed another contract giving the partnership the right to repurchase Lots Nos. 237,

386 and 829 in installments for the sum of P26,000.00 within three years with interest the rate of 1% Per annum, Payable monthly. On May 23, 1947, the partnership had not yet paid its indebtedness to Julian Go in he amount of P24,864.62 under the composition agreement, nor did it have any money to repurchase Lots Nos. 237, 386 and 829 and so Ng Diong, in behalf of the partnership, transferred the right of the latter to repurchase the same from Hodges to Julian Go in full payment of the partnership's indebtedness to him. And having Julian Go exercised the option January 6, 1948, Hodges executed a deed of sale of the properties in his favor, and pursuant thereto the register of deeds issued new titles' in his name covering said lots. On May 29, 1948, Hodges executed another deed of sale covering Lots Nos. 317-A, 236-B, 233 and 540 for the sum of P119,067.79 in favor of Jose C. Tayengco. And on August 31, 1948, Tayengco mortgaged said lots, together with three other lots of his, to the Bank of the Philippine Islands to secure a loan of P126,000.00 to be used in the construction of a commercial building on said lots. Appellants make in their brief six assignments of errors, which, reduced to bare essentials, may be boiled down to the following points: (1) the sale made by Ng Diong in behalf of the partnership NG CHIN BENG HERMANOS of the seven lots belonging to it in favor of C. N. Hodges on April 2, 1946 is null and void because at that time said parcels were still in the custody of the assignee of the insolvency proceedings, or in custodia legis, and, hence, the same is null and void; (2) said sale is also null and void "because of the disparity, irrationality and unreasonableness between the consideration and the real value of the properties when sold"; and (3) the lower court erred in not finding that the two deeds of mortgage executed by he partnership in favor of the National Loan and Investment Board which were later assigned to C. N. Hodges can no longer be enforced because the action to foreclose the same has already prescribed. Anent the first issue, it would be well to state the following facts by way of clarification: It should be recalled that on August 8, 1940 the majority of the creditors of the partnership, as well as the representatives of the latter, submitted to the court taking cognizance of the insolvency proceedings a composition agreement whereby it was agreed that said creditors would receive 20% of the amount of their claims in full payment thereof. This agreement was approved on October 10, 1940 which, in contemplation of law, has the effect of putting an end to the insolvency proceedings. However, no further step was taken thereon because of the outbreak of the war. Later, the record of the case was reconstituted and the parties on August 15, 1945 filed a petition with the court praying for the dismissal and closure of the proceedings in view of the approval of the aforesaidcomposition agreement, and acting favorably thereon, the court on October 6, 1945, issued an order declaring the proceedings terminated and ordering the assignee to return and reconvey the properties the partnership. The actual reconveyance was done by a assignee on April 2, 1946. It would, therefore, appear that for legal and practical purposes the insolvency ended on said date. Since then partnership became, restored to its status quo. It again reacquired its personality as such with Ng Diong as its general manager. From that date on its properties ceased to be in custodia legis. Such being the case, it is obvious that when Ng Diong as manager of the partnership sold the seven parcels of land to C. N. Hodges on April 2, 1946 by virtue of a deed of sale acknowledged before a notary public on April 6, 1946, the properties were already was at liberty to do what it may deem convenient and proper to protect its interest. And acting accordingly, Ng Diong made the sale in the exercise of the power granted to him by the partnership in its articles of co-partnership. We do not, therefore, find anything irregular in this actuation of Ng Diong.

Since at the time of the sale the life of the partnership had already expired, the question may be fixed: Who shall wind up it business affairs? May its manager still execute the sale of its properties to C. N. Hodges as was done by Ng Diong? The answer to this question cannot but be in the affirmative because Ng Diong was still the managing partner of the partnership and he had the necessary authority to liquidate its affairs under its articles of co-partnership. And considering that war had intervened and the affairs of the partnership were placed under receivership up to October 6, 1945, we are of the opinion that Ng Diong could still exercise his power as liquidator when he executed the sale in question in favor of C. N. Hodges. This is sanctioned by Article 228 of the Code of Commerce which was the law in force at the time.1 With regard to the second issue, it is contended that the trial court should have declared the sale of the lots made to C. N. Hodges null and void "because of the disparity, irrationality and unreasonableness between the consideration and real value of the properties when sold." In stressing his point, counsel contends that the lands in question, which are located in a commercial section of the City of Iloilo, were frittered away only for a "pittance of P124,580.00" when, borrowing his words they could have been sold like hot cakes to any resident of the city of regular financial standing upon proper approaches and representations, because at that time those properties were fairly worth one-half of a million pesos." This claim may be true, but the same is unsupported. Appellants have failed to introduce any evidence to show that they could have secured better offers for the properties if given a chance to do so and that they advance now is a mere speculation or conjecture which had no place in our judicial system. Since every claim must be substantiated by sufficient evidence, and this appellants have failed to do, their pretense cannot be entertained. Neither can we give any value to the claim that the action for the foreclosure of the mortgage executed by the partnership in favor of C. N. Hodges has already prescribed not only because the same is immaterial but because it is an issue that appellants are raising for the first time in this appeal. Such issue has never been raised in their pleadings, nor in the trial court. Verily, this claim has no merit. With regard to the appeal taken by the heirs of defendant Ng Diong whose main claim is that the trial court failed to adjudicate to the partnership the properties which were bought by Julian Go from C. N. Hodges, suffice it to say that the same could not be done, firstly, because no such claim was made by them in their pleadings in the trial court, and, secondly, because the evidence shows that said properties were bought by Julian Go by virtue of the option given to him by the partnership for a valuable consideration in full payment of the credits assigned to him by a good number of creditors of said partnership. There is no evidence that he promised to reconvey the same to the partnership. WHEREFORE, the decision appealed from is affirmed, with costs against appellants. Paras, C.J., Bengzon, Labrador, Concepcion, Reyes, J.B.L. Barrera, Gutierrez David, Paredes and Dizon, JJ.,concur. Padilla, J., took no part. Footnotes
1

Testate Estate of Lazaro Mota vs. Serra, 47 Phil. 464; Lichauco v. Lichauco, 33 Phil. 350.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-10040 January 31, 1916

EUGENIA LICHAUCO, ET AL., plaintiffs-appellants, vs. FAUSTINO LICHAUCO, defendant-appellant. Haussermann, Cohn and Fisher for plaintiffs. Gibbs, McDonough and Blanco for defendant. CARSON, J.: This action was brought by two of the partners of an enterprise of which the defendant was manager (gestor), to secure an accounting of its affairs, and the payment to the plaintiffs of their respective shares of capital and profits. The defendant admitted the allegations of the complaint as to the organization of the enterprise and the participation of the plaintiffs therein, but he contended that the plaintiffs could not maintain this action under the terms of the written contract by virtue of which the enterprise was organized. This contention having been overruled, an account of the affairs of the enterprise was submitted, and the parties having been given an opportunity to offer evidence for and against certain dispute items of the account, judgment was rendered for the balance shown to be due the plaintiffs, after allowing some of these disputed items and disallowing the rest. To this judgment, both plaintiffs and defendant excepted, and the record is now before us on their respective bills of exceptions. In October, 1901, a notarial instrument was executed in Manila, by the terms of which a partnership was duly organized for the purpose of carrying on a rice-cleaning business at Dagupan, and for the purchase and sale of "palay" and rice. The articles of association, which were not recorded in the mercantile registry, contain, among others, the following provisions: 2. The association will be named F. Lichauco Hermanos and will be domiciled in the center of its operations, that is, in the pueblo of Dagupan, Province of Pangasinan. 3. The association cannot be dissolved except by the consent and agreement of two-thirds of its partners and in the event of the death of any of the latter, the heirs of the deceased, if they be minors or otherwise incapacitated, shall be represented in the association by their legal representatives or if two-thirds of the surviving partners agree thereto, the participation of the deceased partner may be liquidated. 4. The management and direction of the association shall be in charged of Don Faustino Lichauco y Santos, who shall be domiciled in this city of Manila, with ample powers to direct and manage the business; to carry out all manner of purchases and sales of "palay," rice, chattels,

machinery and whatsoever may be necessary and proper for the business of the association; to make all contracts of every kind related to said business, either orally, in private documents or in public instruments, as he deems fit; to appoint subordinates and other employees such as may be necessary; and finally to perform whatever acts and things he may deem suitable to the interest of the association; and to appear before the courts of justice and other authorities and public offices in such matters as may concern the association and to appoint agents for those matters to which he cannot attend personally. The articles disclose that the capital invested in the enterprise was fixed at P100,000, of which amount P60,000 was contributed by the defendant and his brothers in the form of machinery in a mill at Dagupan and the good will of the milling business formerly conducted at the place, the balance of the capital being contributed by the plaintiffs and others in cash, in the following proportions: Eugenia Lichauco, P13,000; Catalino Arevalo, P8,000; Mariano Nable Jose, P5,000; Tomas Roux, P4,000; Julita Lichauco, P10,000. The business thus organized was carried on until May, 1904, when it was found to be unprofitable and discontinued by the defendant manager (gestor); and thereafter, the machinery of the rice mil was dismantled by his orders, and offered for sale. No accounting ever was made to his associates by the defendant until this action was instituted in October, 1912, although it appears that in the year 1905, Mariano Limjap, one of the participants in the venture, demanded a rendition of accounts; and that Eugenia Lichauco, one of the plaintiffs in this action, made repeated unsuccessful demands for the return of her share of the capital invested in the enterprise. And yet it further appears that during all that time the defendant manager of the defunct enterprise had in his possession not less than P20,000, the cash balance on hand, over and above all claims of indebtedness after suspending operations in 1904; and that since that time he received or should have received substantial sums of money from the sale of the machinery of the dismantled mill. There is evidence in the record tending to show that the defendant informed some of his associates, about the year 1906 or 1907, that the whole enterprise was bankrupt; and it appears that some months prior to the institution of this action, he rendered upon demand of counsel, a so-called account showing a balance to the credit of the enterprise of only P643.64; although at the trial, some six months afterwards, he expressly admitted the existence of a cash balance of some P23,131.53, and the amount by the trial judge as due by him on account of the venture was P29,549.99. The defendant explained that the account rendered to counsel for the plaintiffs showing a balance of P634.64 was mailed by one of his employees without his knowledge, and that it was a stupid blunder which he greatly regretted; and it would seem that his statement as to the bankruptcy of the enterprise were not intended to be understood as an assertion that there was no balance due the partners, but merely that the enterprise had not paid, and that the losses of operation had exceeded the profits. Giving the defendant the benefit of the doubt, we are inclined to accept these explanations of these incidents, as it is hardly possible that he could have hoped to escape indefinitely the necessity of accounting for his management of the enterprise, and thus permanently retain in his own possession the substantial balance due to his associates. But it is to be observed that, viewed for many standpoint, these statements, made and rendered by the defendant as to the affairs of the association, taken together with the other evidence in the record, leave no room for doubt that from the time he concluded the operations of the business in 1904 until the date of the institution of this action in 1912 he made no attempt to account to his associates or to turn over to them the amount due them on a proper accounting.

The assignments of error made by counsel for the defendant, as appellant, are as follows: Error No. 1. The trial court erred in rendering judgment in favor of the plaintiffs and against the defendant for any sum, without first decreeing a dissolution of the association and final liquidation of its assets in accordance with paragraph 10 of the articles of association, and because such judgment is not within the issues joined. Error No. 2. The trial court erred in charging the defendant with P5,500, the price of certain boilers and machinery sold to one Marciano Rivera by Crisanto Lichauco, which amount never came into the possession of defendant. Error No. 3. The trial court erred in disallowing the credit of P60.36, taken by defendant for that amount expended in an attempt to make good the sale and delivery to Marciano Rivera of the boilers and machinery mentioned in the second assignment of error. Error No. 4. The court erred in charging the defendant with the P1,820, covered by stipulation of December 10, 1913, for the reason that the defendant's liability under that stipulation can only accrue on the final dissolution and liquidation of the association. Error No. 5. The court erred in rendering judgment against the defendant for the costs of the action. The assignments of error made by refusing to condemn the defendant to the payment of interest at the legal rate from May 30, 1904, to date of payment. Error No. 1 The court erred in refusing to condemn the defendant to the payment of interest at the legal rate of 6 per cent upon the credit balance of the joint venture from May 30, 1904, to date of payment. Error No. 2. The court erred in refusing to allow interest at the legal rate of 6 per cent upon the sum of P1,147.44 from May 30, 1904, to date of payment, said credit balance of the joint venture was unduly diminished by error in the conversion of gold currency. Error No. 3. The court erred in refusing to allow the joint venture account the sum of P17, 746, being the value of 3,736 cavanes of rice at P4.75 per cavan, for which the defendant has wholly failed to account. Error No. 4. The court erred in declining to allow the joint venture account the sum of P8,943.98 as interest upon said last-mentioned sum at the legal rate. Error No. 5. The court erred in declining to allow the joint venture account the sum of P564.34, as interest at the legal rate upon the sum of P5,500, for which the defendant has failed and refused to account. Error No. 6. The court erred in declining to credit the joint venture account with the sum of P2,498.46 as the amount due said account from Mariano Nable Jose, together with interest thereon at the legal rate, amounting to P1,259.22.

We shall first examine the contentions of counsel for the defendant in support of his principal assignment of error, as a ruling in this regard is necessary to the proper disposition of all the other assignments of error by both plaintiffs and defendant. Counsel for defendant says in his brief: It is our contention, and we believe it to be unanswerable, that the dissolution and liquidation, either in whole or in part, of the association is absolutely prohibited by paragraph 10 of the articles of association, except by and with the conformity and agreement of two-thirds of the partners, and that as a consequence thereof the court, without allegations or proof of compliance with that paragraph and without making the other partners parties to the action, had no power to decree a distribution either in whole or in part of the capital or assets of the association. It certainly cannot be seriously contended that part of the capital and assets of this association can be lawfully returned to and distributed between the plaintiffs who constitute one-fifth of the total number of partners, as required by paragraph 10 of the articles of association. It is elementary that no lawful liquidation and distribution of capital and assets of any company or association can ever take place except upon dissolution thereof. These contentions of counsels for the defendant take no account of the provisions of both the Civil and Commercial Codes for the dissolution and liquidation of the different classes of partnerships and mercantile associations upon the occurrence of certain contingencies not within the control of the partners. The provisions of paragraph 10 of the articles of partnership prohibiting the dissolution of the association under review, except by the consent and agreement of two-thirds of its partners, denied the right to a less number of the partners to effect a dissolution of the partnership through judicial intervention or otherwise; but in no wise limited or restricted the rights of the individual partners in the event the dissolution of the association was effected, not by any act of theirs, but by the express mandate of statutory law. It would be absurd and unreasonable to hold that such an association could never be dissolved and liquidated without the consent and agreement of two-thirds of its partners notwithstanding that it had lost all its capital, or had become bankrupt, or that the enterprise for which it had been organized had been concluded or utterly abandoned. Chapter 3 of Title VIII [Book IV,] of the Civil Code prescribes the means by which partnership (sociedades) as defined in that code, may be terminated. The first article of that chapter is as follows: 1700. Partnership is extinguished: (1) When the term for which it was constituted expires. (2) When the thing is lost, or the business for which it was constituted ends. (3) By the natural death, civil interdiction, or insolvency of any of the partners, and in the case provided for in article 1699. (4) By the will of any of the partners, subject to the provisions of articles 1705 and 1707.

Partnerships, to which article 1670 refers, are excepted from the provisions of Nos. 3 and 4 of this article, in the cases in which they should exist, according to the Code of Commerce. 1670. Civil partnerships, on account of the objects for which they are destined, may adopt all the forms accepted by the Code of Commerce. In this case, the provisions of the same shall be applicable, in so far as they are not in conflict with those of the present Code. Articles 221 and 222 of the Code of Commerce are as follows: 221. Associations of any kind whatsoever shall be completely dissolved for the following reasons: (1) The termination of the period fixed in the articles of association of the conclusion of the enterprise which constitutes its purpose. (2) The entire loss of the capital. (3) The failure of the association. 222. General and limited copartnerships shall furthermore be totally dissolved for the following reasons: (1) The death of one of the general partners if the articles of copartnership do not contain an express agreement that the heirs of deceased partner are to continue in the copartnership, or an agreement to the effect that said copartnership will continue between the surviving partners. (2) The insanity of a managing partner or any other cause which renders him incapable of administering his property. (3) The failure of any of the general partners. It cannot be doubted that under these provisions of law the association of which the defendant was nominated manager (gestor) was totally dissolved in the year 1904, when the rice mill for the operation of which it was organized was dismantled, the machinery offered for sale and the whole enterprise concluded and abandoned. Upon the dissolution of the association in 1904 it became the duty of the defendant to liquidate its affairs and account to his associates for their respective shares in the capital invested this not merely from the very nature of his relation to the enterprise and of his duties to those associated with him as partners, but also by the express mandate of the law. The association having been dissolved by the termination and abandonment of the enterprise for which it was organized, he owed this duty to liquidate and account to all and to each of his associates, and upon his failure to perform that duty, all or any of them had a clear legal right to compel him to fulfill it. Each of his associates had a perfect right to demand for himself a full, complete and satisfactory accounting, and in the event that he conceived himself aggrieved in this regard, to institute the appropriate judicial proceedings to secure relief. Doubtless, in order to avoid a multiplicity of actions, the defendant in such an action could require all the associates to be made parties, but the right of an individual member of the association to recover

his share in the enterprise and to assert his individual claim for redress, wholly independent of the action or attitudes of his associates, could be in no wise affected thereby. The other associates would be proper, but not necessary, parties to an action of this kind; and when, as in the case at bar, the defendant proceeds to trial without objection on the express ground that all the associates in the enterprise have not been made parties to the action, he cannot thereafter be heard to raise such an objection for the purpose of challenging any judgment which may be rendered therein. Although the enterprise was organized in the year 1901 for the purpose of conducting mercantile operations, including the buying and selling of "palay" and rice, the articles of partnership or association were not registered in the mercantile registry in accordance with the provisions of articles 17 and 119 of the Commercial Code. It was therefore a mere unregistered commercial partnership, and the association never became in the legal sense a juridical person, nor did it attain the dignity, rights or privileges accorded the different classes of compaias mercantiles (mercantile partnerships), discussed in Title 1 of Book 2 of the Commercial Code. Still, under the provisions of the above-cited article 1670 of the Civil Code, if it be found that the association is clothed with the forms of any of the commercial association or partnerships recognized in the Commercial Code, the provisions of that code, in so far as they are not in conflict with those of the Civil Code, may be relied upon in an attempt to define the legal relations of the association and its members. Though the unregistered articles of partnership gave the association a form of organization closely assimilated to that of a regular "compaia en comandita," as prescribed in the Commercial Code, except that the name designated in the articles did not include the words "y compaia" (and company) and the additional words "sociedad en comandita," it appears to have been organized and conducted in substantially the manner and form prescribed for "cuentas en participacion" (joint accounts) in articles 239-243 of that Code. The plaintiffs alleged in their complaint and the defendant admitted in his answer that the contract was one of a "sociedad de cuentas en participacion" (joint account partnership) of which the defendant was gestor(manager). In his brief on appeal, however, counsel for defendant intimates that under article 241 of the Commercial Code, the adoption in the articles of partnership of a firm name deprived the parties of the rights and privileges secured to those interested in cuentas en participacion under the provisions of the Commercial Code. But whatever effect the inclusion or omission of a firm name in the articles of partnership may have had as to third persons dealing with the partnership, we are of opinion that as between the associates themselves, their mutual rights, duties and obligations may properly be determined upon the authority of article 1670 of the Civil Code by the provisions of the Commercial Code touching partnerships, the form of which in all other respects, the partners have adopted in their articles of partnership. The duty of the defendant to liquidate the affairs of the enterprise and to account to his associates promptly upon the dissolution of the association in the year 1904 is expressly prescribed in the Commercial Code, whether we regard the association, so far as it affects the mutual rights and obligations of the partners, as clothed with the forms of a "sociedad de cuentas en participacion" (joint account partnership) or a "sociedad en comindata." Article 243 of the Code of Commerce prescribes with reference to "cuentas en participacion" (joint accounts) that: 243. The liquidation shall be effected by the manager, and after the transactions have been concluded he shall render a proper account of its results.

Articles 229 and 230 of the same Code are as follows: 229. In general or limited copartnerships, should there be no opposition on the part of any of the partners, the persons who managed the common funds shall continue in charge of the liquidation; but should all the partners not agree thereto a general meeting shall be called without delay, and the decision adopted at the same shall be enforced with regard to the appointment of liquidators from among the members of the association or not, as well as in all that refers to the form and proceedings of the liquidation and the management of the common funds. 230. Under the penalty of removal the liquidators shall (1) Draw up and communicate to the members, within the period of twenty days, an inventory of the common property, with a balance of the association in liquidation according to its books. (2) Communicate in the same manner to the members every month the condition of the liquidation. We conclude that an express statutory obligation imposed upon the defendant an imperative obligation to proceed without delay to the liquidation of the association in the year 1904 and the further duty to account to his associates for the result of that liquidation. While he appears to have gone forward with the liquidation far enough to collect all the cash resources of the association into his own hands, how utterly failed neglected to account therefor to his associates or to make any attempt so to do, and we are of opinion that the plaintiffs were clearly entitled to bring this action to compel an accounting, and the payment of their respective shares of the capital invested, together with damages resulting from the failure of the defendant to perform the duty expressly imposed upon him by statute. The damages arising from the failure to account consisted of the loss of the use of the money to which they would have been entitled upon a proper accounting, from the date at which it should have been turned over by the defendant until it is actually paid by him, that is to say, interest on that amount at the rate of six per centum per annum until paid. What has been said disposes adversely of the contentions of the defendant in support of his assignments of errors Nos. 1 and 5; and sustains the contentions of the plaintiffs in their assignments of errors Nos. 1 and 2, to the extent that interest at the rate of six per centum per annum should have been allowed upon the credit balance of the enterprise from May 30, 1904, the date when it should have been distributed among his associates by the defendant had he performed his statutory duty in that regard. This balance (including the item mentioned in plaintiff's assignment of error No. 2) we fix at P23, 131.53, adopting as a basis for our finding in this regard, the findings and conclusions of the trial judge, and disregarding the possibility that had defendant accounted promptly to his associates, interest might not have been chargeable on some of the smaller items in included in the account until some little time after the date just mentioned. As to the other assignments of error it must suffice to say that we have carefully examined the record and have arrived at the following conclusions: With relation to the item of account referred to in defendant's assignment of error No. 2 and plaintiff's assignment No. 5, we hold that the defendant's account was properly charged by the trial judge with the

sum of P5,500, the purchase price of certain machinery sold by him and for which, under all the circumstances, he must account, together with interest at the rate of six per centum per annum from January 8, 1912, the date of sale to Marciano Rivera. With relation to the items mentioned in plaintiff's assignments of errors Nos. 3 and 4, we hold that the trial judge properly declines to charge the defendant's account with the amounts mentioned therein, the evidence of record not being sufficient to establish his liability therefor as manager or gestor of the enterprise. With relation to the matter referred to in plaintiff's assignment of error number 6 and defendant's assignment No. 4, we are of opinion that the trial judge properly disposed of the issues between the parties in this regard, as they were submitted to him and as they are disclosed by the record brought here on appeal. We find no merit in defendant's assignment of error numbered 3. Twenty days hereafter let judgment be entered reversing the judgment of the lower court, without special condemnation of the costs in this instance, and directing the return of the record to the trial court, wherein judgment will be entered in accordance herewith, and ten days thereafter let the record be remanded in confirmity therewith. So ordered. Arellano, C.J., Torres and Trent, JJ., concur. Per MORELAND, J.: Owing to the advisability of publishing this case as soon as possible I refrain from giving my views at this time, reserving the right to do so later.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-45464 April 28, 1939

JOSUE SONCUYA, plaintiff-appellant, vs. CARMEN DE LUNA, defendant-appellee. Josue Soncuya in his own behalf. Conrado V. Sanchez and Jesus de Veyra for appellee. VILLA-REAL, J.: On September 11, 1936, plaintiff Josue Soncuya filed with the Court of First Instance of Manila and amended complaint against Carmen de Luna in her own name and as co-administratrix of the intestate estate, of Librada Avelino, in which, upon the facts therein alleged, he prayed that defendant be sentenced to pay him the sum of P700,432 as damages and costs. To the aforesaid amended complaint defendant Carmen de Luna interposed a demurrer based on the following grounds: (1) That the complaint does not contain facts sufficient to constitute a cause of action; and (2) that the complaint is ambiguous, unintelligible and vague. Trial on the demurrer having been held and the parties heard, the court found the same well-founded and sustained it, ordering the plaintiff to amend his complaint within a period of ten days from receipt of notice of the order. Plaintiff having manifested that he would prefer not to amend his amended complaint, the attorney for the defendant, Carmen de Luna, filed a motion praying that the amended complaint be dismissed with costs against the plaintiff. Said motion was granted by The Court of First Instance of Manila which ordered the dismissal of the aforesaid amended complaint, with costs against the plaintiff. From this order of dismissal, the appellant took an appeal, assigning twenty alleged errors committed by the lower court in its order referred to. The demurrer interposed by defendant to the amended complaint filed by plaintiff having been sustained on the grounds that the facts alleged in said complaint are not sufficient to constitute a cause of action and that the complaint is ambiguous, unintelligible and vague, the only questions which may be raised and considered in the present appeal are those which refer to said grounds. In the amended complaint it is prayed that defendant Carmen de Luna be sentenced to pay plaintiff damages in the sum of P700,432 as a result of the administration, said to be fraudulent, of he partnership, "Centro Escolar de Seoritas", of which plaintiff, defendant and the deceased Librada Avelino were members. For the purpose of adjudicating to plaintiff damages which he alleges to have

suffered as a partner by reason of the supposed fraudulent management of he partnership referred to, it is first necessary that a liquidation of the business thereof be made to the end that the profits and losses may be known and the causes of the latter and the responsibility of the defendant as well as the damages which each partner may have suffered, may be determined. It is not alleged in the complaint that such a liquidation has been effected nor is it prayed that it be made. Consequently, there is no reason or cause for plaintiff to institute the action for damages which he claims from the managing partner Carmen de Luna (Po Yeng Cheo vs. Lim Ka Yam, 44 Phil., 172). Having reached the conclusion that the facts alleged in the complaint are not sufficient to constitute a cause of action on the part of plaintiff as member of the partnership "Centro Escolar de Seoritas" to collect damages from defendant as managing partner thereof, without a previous liquidation, we do not deem it necessary to discuss the remaining question of whether or not the complaint is ambiguous, unintelligible and vague. In view of the foregoing considerations, we are of the opinion and so hold that for a partner to be able to claim from another partner who manages the general copartnership, damages allegedly suffered by him by reason of the fraudulent administration of the latter, a previous liquidation of said partnership is necessary. Wherefore, finding no error in the order appealed from the same is affirmed in all its parts, with costs against the appellant. So ordered. Avancea, C. J., Imperial, Diaz, Laurel, Concepcion, and Moran, JJ., concur.

Republic of the Philippines SUPREME COURT Manila FIRST DIVISION G.R. No. L-27343 February 28, 1979 MANUEL G. SINGSONG, JOSE BELZUNCE, AGUSTIN E. TONSAY, JOSE L. ESPINOS, BACOLOD SOUTHERN LUMBER YARD, and OPPEN, ESTEBAN, INC., plaintiffs-appellees, vs. ISABELA SAWMILL, MARGARITA G. SALDAJENO and her husband CECILIO SALDAJENO LEON GARIBAY, TIMOTEO TUBUNGBANUA, and THE PROVINCIAL SHERIFF OF NEGROS OCCIDENTAL, defendants, MARGARITA G. SALDAJENO and her husband CECILIO SALDAJENO, defendants-appellants.

FERNANDEZ, J.: This is an appeal to the Court of Appeals from the judgment of the Court of First Instance of Negros Occidental in Civil Cage No. 5343, entitled "Manuel G. Singson, et all vs. Isabela Sawmill, et al.,", the dispositive portion of which reads: IN VIEW OF THE FOREGOING CONSIDERATIONS, it is hereby held. (1) that the contract, Appendix "F", of the Partial Stipulation of Facts, Exh. "A", has not created a chattel mortgage lien on the machineries and other chattels mentioned therein, all of which are property of the defendant partnership "Isabela Sawmill", (2) that the plaintiffs, as creditors of the defendant partnership, have a preferred right over the assets of the said partnership and over the proceeds of their sale at public auction, superior to the right of the defendant Margarita G. Saldajeno, as creditor of the partners Leon Garibay and Timoteo Tubungbanua; (3) that the defendant Isabela Sawmill' is indebted to the plaintiff Oppen, Esteban, Inc. in the amount of P1,288.89, with legal interest thereon from the filing of the complaint on June 5, 1959; (4) that the same defendant is indebted to the plaintiff Manuel G. Singsong in the total amount of P5,723.50, with interest thereon at the rate of 1 % per month from May 6, 1959, (the date of the statements of account, Exhs. "L" and "M"), and 25% of the total indebtedness at the time of payment, for attorneys' fees, both interest and attorneys fees being stipulated in Exhs. "I" to "17", inclusive; (5) that the same defendant is indebted to the plaintiff Agustin E. Tonsay in the amount of P933.73, with legal interest thereon from the filing of the complaint on June 5, 1959; (6) that the same defendant is indebted to the plaintiff Jose L. Espinos in the amount of P1,579.44, with legal interest thereon from the filing of the complaint on June 5, 1959; (7) that the same defendant is indebted to the plaintiff Bacolod Southern Lumber Yard in the amount of Pl,048.78, with legal interest thereon from the filing of the complaint on June 5, 1959; (8) that the same defendant is indebted to the plaintiff Jose Belzunce in the amount of P2,052.10, with legal interest thereon from the filing of the complaint on June 5. 1959; (9) that the defendant Margarita G. Saldajeno, having purchased at public auction the assets of the defendant partnership over which the

plaintiffs have a preferred right, and having sold said assets for P 45,000.00, is bound to pay to each of the plaintiffs the respective amounts for which the defendant partnership is held indebted to, them, as above indicated and she is hereby ordered to pay the said amounts, plus attorneys fees equivalent to 25% of the judgment in favor of the plaintiff Manuel G. Singson, as stipulated in Exhs. "I" "to I-17", inclusive, and 20% of the respective judgments in favor of the other plaintiffs, pursuant to. Art. 2208, pars. (5) and (11), of the Civil Code of the Philippines; (10) The defendants Leon Garibay and Timoteo Tibungbanua are hereby ordered to pay to the plaintiffs the respective amounts adjudged in their favor in the event that said plaintiffs cannot recover them from the defendant Margarita G. Saldajeno and the surety on the bond that she has filed for the lifting of the injunction ordered by this court upon the commencement of this case. The cross-claim cf the defendant Margarita G. Saldajeno against the defendants Leon Garibay arid Timoteo Tubungbanua is hereby discussed Margarita G. Saldajeno shall pay the costs. SO ORDERED. 1 In a resolution promulgated on February 3, 1967, the Court of Appeals certified the records of this case to the Supreme Court "considering that the resolution of this appeal involves purely questions or question of law over which this Court has no jurisdiction ... 2 On June 5. 1959, Manuel G. Singsong, Jose Belzunce, Agustin E. Tonsay, Jose L. Espinos, Bacolod Southern Lumber Yard, and Oppen, Esteban, Inc. filed in the Court of first Instance of Negros Occidental, Branch I, against "Isabela Sawmill", Margarita G. Saldajeno and her husband Cecilio Saldajeno, Leon Garibay, Timoteo Tubungbanua and the Provincial Sheriff of Negros Occidental a complaint the prayer of which reads: WHEREFORE, the plaintiffs respectfully pray: (1) That a writ of preliminary injunction be issued restraining the defendant Provincial Sheriff of Negros Occidental from proceeding with the sales at public auction that he advertised in two notices issued by him on May 18, 1959 in connection with Civil Case No. 5223 of this Honorable Court, until further orders of this Court; and to make said injunction permanent after hearing on the merits: (2) That after hearing, the defendant partnership be ordered; to pay to the plaintiff Manuel G. Singson the sum of P3,723.50 plus 1% monthly interest thereon and 25% attorney's fees, and costs; to pay to the plaintiff JoseBelzunce the sum of P2,052.10, plus 6% annual interest thereon and 25% for attorney's fees, and costs;to pay to the plaintiff Agustin E. Tonsay the sum of P993.73 plus 6% annual interest thereon and 25% attorney's fees, and costs; to pay to the plaintiff Bacolod Southern Lumber Yard the sum of P1,048.78, plus 6% annual interest thereon and 25% attorney's fees, and costs; and to pay to the plaintiff Oppen, Esteban, Inc. the sum of P1,350.89, plus 6% annual interest thereon and 25% attorney's fees and costs:

(3) That the so-called Chattel Mortgage executed by the defendant Leon Garibay and Timoteo Tubungbanua in favor of the defendant Margarita G. Saldajeno on May 26, 1958 be declared null and void being in fraud of creditors of the defendant partnership and without valuable consideration insofar as the said defendant is concerned: (4) That the Honorable Court order the sale of public auction of the assets of the defendnat partnership in case the latter fails to pay the judgment that the plaintiffs may recover in the action, with instructions that the proceeds of the sale b e applied in payment of said judgment before any part of saod proceeds is paid to the defendant Margarita G. Saldajeno; (5) That the defendant Leon Garibay, Timoteo Tubungbanua, and Margarita G. Saldajeno be declared jointly liable to the plaintifs for whatever deficiency may remain unpaid after the proceeds of the sale of the assets of the defendnt partnership are supplied in payment of the judgment that said plaintiffs may recover in this action; (6) The plaintiffs further pray for all other remedies to which the Honorable Court will find them entitled to, with costs to the defendants. Bacolod City, June 4, 1959. 3 The action was docketed as Civil Case No. 5343 of said court. In their amended answer, the defendants Margarita G. Saldajeno and her husband, Cecilio Saldajeno, alleged the following special and affirmative defenses: xxx xxx xxx 2. That the defendant Isabela Sawmill has been dissolved by virtue of an action entitled "In the matter of: Dissolution of Isabela Sawmill as partnership, etc. Margarita G. Saldajeno et al. vs. Isabela Sawmill, et al., Civil Case No. 4787, Court of First Instance of Negros Occidental; 3. That as a result of the said dissolution and the decision of the Court of First Instance of Negros Occidental in the aforesaid case, the other defendants herein Messrs. Leon Garibay and Timoteo Tubungbanua became the successors-in-interest to the said defunct partnership and have bound themselves to answere for any and all obligations of the defunct partnership to its creditors and third persons; 4. That to secure the performance of the obligations of the other defendants Leon Garibay and Timoteo Tubungbanua to the answering defendant herein, the former have constituted a chattel mortgage over the properties mentioned in the annexes to that instrument entitled "Assignment of Rights with Chattel Mortgage" entered into on May 26, 1968 and duly registered in the Register of Deeds of Negros Occidental on the same date:

5. That all the plaintiffs herein, with the exceptionof the plaintiff Oppen, Esteban, Inc. are creditors of Messrs. Leon Garibay and Timoteo Tubungbanua and not of the defunct Isabela Sawmill and as such they have no cause of action against answering defendant herein and the defendant Isabela Sawmill; 6. That all the plaintiffs herein, except for the plaintiff Oppen, Esteban, Inc. granted cash advances, gasoline, crude oil, motor oil, grease, rice and nipa to the defendants Leon Garibay and Timoteo Tubungbanua with the knowledge and notice that the Isabela Sawmill as a former partnership of defendants Margarita G. Isabela Sawmill as a former partnership of defendants Margarita G. Saldajeno, Leon Garibay and Timoteo Tubungbanua, has already been dissolved; 7. That this Honorable Court has no jurisdictionover the claims of the plaintiffs Oppen, Esteban, Inc., Agustin R. Tonsay, Jose L. Espinos, and the Bacolod Southern Lumber Yard, it appearing that the amounts sought to be recovered by them in this action is less than P2,000.00 each, exclusive of interests; 8. That in so far as the claims of these alleged creditors plaintiffs are concerned, there is a misjoinder of parties because this is not a class suit, and therefore this Honorable Court cannot take jurisdictionof the claims for payment; 9. That the claims of plaintiffs-creditors, except Oppen, Esteban, Inc. go beyond the limit mentioned inthe statute of frauds, Art. 1403 of the Civil Code, and are therefor unenforceable, even assuming that there were such credits and claims; 10. That this Honorable Court has no jurisdiction in this case for it is well settled in law and in jurisprudence that a court of first instance has no power or jurisdiction to annul judgments or decrees of a coordinate court because other function devolves upon the proper appellate court; (Lacuna, et al. vs. Ofilada, et al., G.R. No. L-13548, September 30, 1959; Cabigao vs. del Rosario, 44 Phil. 182; PNB vs. Javellana, 49 O.G. No. 1, p.124), as it appears from the complaint in this case to annul the decision of this same court, but of another branch (Branch II, Judge Querubin presiding). 4 Said defendants interposed a cross-claim against the defendsants Leon Garibay and Timoteo Tubungbanua praying "that in the event that judgment be rendered ordering defendant cross claimant to pay to the plaintiffs the amount claimed in the latter's complaint, that the cross claimant whatever amount is paid by the latter to the plaintiff in accordance to the said judgment. ... 5 After trial, judgment was rendered in favor of the plaintiffs and against the defendants. The defendants, Margarita G. Saldajeno and her husband Cecilio Saldajeno, appealed to the Court of Appeals assigning the following errors: I THE COURT A QUO ERRED IN ASSUMING JURISDICTION OVER THE CASE.

II THE COURT A QUO ERRED IN HOLDING THAT THE ISSUE WITH REFERENCE TO THE WITHDRAWAL OF DEFENDANT-APPELLANT MARGARITA G. SALDAJENO FROM THE PARTNERSHIP "SABELA SAWMILL" WAS WHETHER OR NOT SUCH WITHDRAWAL CAUSED THE "COMPLETE DISAPPEARANCE" OR "EXTINCTION" OF SAID PARTNERSHIP. III THE COURT A QUO ERRED IN OT HOLDING THAT THE WITHDRAWAL OF DEFENDANTAPPELLANT MARGARITA G. SALDAJENO AS A PARTNER THEREIN DISSOLVED THE PARTNERSHIP "ISABELA SAWMILL" (FORMED ON JAN. 30, 1951 AMONG LEON GARIBAY, TIMOTEO TUBUNGBANUA AND SAID MARGARITA G. SALDAJENO). IV THE COURT A QUO ERRED IN ISSUING THE WRIT OF PRELIMINARY INJUNCTION. V THE COURT A QUO ERRED IN HOLDING THAT THE CHATTEL MORTGAGE DATED MAY 26, 1958, WHICH CONSTITUTED THE JUDGMENT IN CIVIL CASE NO. 4797 AND WHICH WAS FORECLOSED IN CIVIL CASE NO. 5223 (BOTH OF THE COURT OF FIRST INSTANCE OF NEGROS OCCIDENTAL) WAS NULL AND VOID. VI THE COURT A QUO ERRED IN HOLDING THAT THE CHATTLES ACQUIRED BY DEFENDANTAPPELLANT MARGARITA G. SALDAJENO IN THE FORECLOSURE SALE IN CIVIL CASE NO. 5223 CONSTITUTED 'ALL THE ASSETS OF THE DEFENDNAT PARTNERSHIP. VII THE COURT A QUO ERRED IN HOLDING THAT DEFENDANT-APPELLANT MARGARITA G. SALDAJENO BECAME PRIMARILY LIABLE TO THE PLAINTFFS-APPELLEES FOR HAVING ACQUIRED THE MORTGAGED CHATTLES IN THE FORECLOSURE SALE CONDUCTED IN CONNECTION WITH CIVIL CASE NO. 5223. VIII THE COURT A QUO ERRED IN HOLDING DEFENDANT-APPELLANT MARGARITA G. SALDAJENO LIABLE FOR THE OBLIGATIONS OF MESSRS. LEON GARIBAY AND TIMOTEO TUBUNGBANUA, INCURRED BY THE LATTER AS PARTNERS IN THE NEW 'ISABELA SAWMILL', AFTER THE DISSOLUTION OF THE OLD PARTNERSHIP IN WHICH SAID MARGARITA G. SALDAJENO WAS A PARTNER. IX

THE COURT A QUO ERRED IN HOLDING DEFENDANT-APPELLANT MARGARITA G. SALDAJENO LIABLE TO THE PLAINTIFFS-APPELLEES FOR ATTORNEY'S FEES. X THE COURT A QUO ERRED IN NOT DISMISSING THE COMPLAINT OF THE PLAINTIFFSAPPELLEES. XI THE COURT A QUO ERRED IN DISMISSING THE CROSS-CLAIM OF DEFENDANTAPPELLANT MARGARITA G. SALDAJENO AGAINST CROSS-DEFENDANTS LEON GARIBAY AND TIMOTEO TUBUNGBANUA. 6 The facts, as found by the trial court, are: At the commencement of the hearing of the case on the merits the plaintiffs and the defendant Cecilio and Margarita g. Saldajeno submittee a Partial Stipulation of Facts that was marked as Exh. "A". Said stipulation reads as folows: 1. That on January 30, 1951 the defendants Leon Garibay, Margarita G. Saldejeno, and Timoteo Tubungbanua entered into a Contract of Partnership under the firm name "Isabela Sawmill", a copy of which is hereto attached Appendix "A". 2. That on February 3, 1956 the plaintiff Oppen, Esteban, Inc. sold a Motor Truck and two Tractors to the partnership Isabela Sawmill for the sum of P20,500.00. In order to pay the said purcahse price, the said partnership agreed to make arrangements with the International Harvester Company at Bacolod City so that the latter would sell farm machinery to Oppen, Esteban, Inc. with the understanding that the price was to be paid by the partnership. A copy of the corresponding contract of sle is attached hereto as Appendix "B". 3. That through the method of payment stipulated in the contract marked as Appendix "B" herein, the International Harvester Company has been paid a total of P19,211.11, leaving an unpaid balance of P1,288.89 as shown in the statements hereto attached as Appendices "C", "C-1", and "C-2". 4. That on April 25, 1958 Civil Case No. 4797 was filed by the spouses Cecilio Saldajeno and Margarita G. Saldajeno against the Isabela Sawmill, Leon Garibay, and Timoteo Tubungbanua, a copy of which Complaint is attached as Appendix 'D'. 5. That on April 27, 1958 the defendants LeonGaribay, Timoteo Tubungbanua and Margarita G. Saldajeno entered into a "Memorandum

Agreement", a copy of which is hereto attached as Appendix 'E' in Civil Case 4797 of the Court of First Instance of Negros Occidental. 6. That on May 26, 1958 the defendants Leon Garibay, Timoteo Tubungbanua and Margarita G. Saldajeno executed a document entitled "Assignment of Rights with Chattel Mortgage", a copy of which documents and its Annexes "A" to "A-5" forming a part of the record of the above mentioned Civil Case No. 4797, which deed was referred to in the Decision of the Court ofFirst Instance of Negros Occidental in Civil Case No. 4797 dated May 29, 1958, a copy of which is hereto attached as Appendix "F" and "F-1" respectively. 7. That thereafter the defendants Leon Garibay and Timoteo Tubungbanua did not divide the assets and properties of the "Isabela Sawmill" between them, but they continued the business of said partnership under the same firm name "Isabela Sawmill". 8. That on May 18, 1959 the Provincial Sheriff of Negros Occidental published two (2) notices that he would sell at public auction on June 5, 1959 at Isabela, Negros Occidental certain trucks, tractors, machinery, officeequipment and other things that were involved in Civil Case No. 5223 of the Court of First Instance of Negros Occidental, entitled "Margarita G. Saldajeno vs. Leon Garibay, et al." See Appendices "G" and "G-1". 9. That on October 15, 1969 the Provincial Sheriff of Negros Occidental executed a Certificate ofSale in favor of the defendant Margarita G. Saldajeno, as a result of the sale conducted by him on October 14 and 15, 1959 for the enforcement of the judgment rendered in Civil Case No. 5223 of the Court of First Instance of Negros Occidental, a certified copy of which certificte of sale is hereto attached as Appendix "H". 10. That on October 20, 1959 the defendant Margarita G. Saldajeno executed a deed of sale in favor of the Pan Oriental Lumber Company transfering to the latter for the sum of P45,000.00 the trucks, tractors, machinery, and other things that she had purchashed at a public auction referred to in the foregoing paragraph, a certified true copy of which Deed of Sale is hereto attached as Appendix "I". 11. The plaintiffs and the defendants Cecilio Saldajeno and Margarita G. Saldajeno reserve the right to present additional evidence at the hearing of this case. Forming parts of the above copied stipulation are documents that were marked as Appendices "A", "B", "C", "C-1", "C-2", "D", "E", "F", "F-1", "G", "G-1", "H", and "I".

The plaintiffs and the defendants Cecilio and Margarita G. Saldajeno presented additional evidence, mostly documentary, while the cross-defendants did not present any evidence. The case hardly involves quetions of fact at all, but only questions of law. The fact that the defendnat 'Isabela Sawmill' is indebted to theplaintiff Oppen, Esteban, Inc. in the amount of P1,288.89 as the unpaid balance of an obligation of P20,500.00 contracted on February 3, 10956 is expressly admitted in paragraph 2 and 3 of the Stipulation, Exh. "A" and its Appendices "B", "C", "C-1", and "C-2". The plaintiff Agustin E. Tonssay proved by his own testimony and his Exhs. "B" to"G" that from October 6, 1958 to November 8, 1958 he advanced a total of P4,200.00 to the defendant 'Isabela Sawmill'. Agaist the said advances said defendant delivered to Tonsay P3,266.27 worth of lumber, leavng an unpaid balance of P933.73, which balance was confirmed on May 15, 1959 by the defendant Leon Garibay, as Manager of the defendant partnership. The plaintiff Manuel G. Singsong proved by his own testimony and by his Exhs. "J" to "L" that from May 25, 1988 to January 13, 1959 he sold on credit to the defendnat "Isabela Sawmill" rice and bran, on account of which business transaction there remains an unpaid balance of P3,580.50. The same plaintiff also proved that the partnership ownes him the sum of P143.00 for nipa shingles bought from him on credit and unpaid for. The plaintiff Jose L. Espinos proved through the testimony of his witness Cayetano Palmares and his Exhs. "N" to "O-3" that he owns the "Guia Lumber Yard", that on October 11, 1958 said lumber yard advanced the sum of P2,500.00 to the defendant "Isabela Sawmill", that against the said cash advance, the defendant partnership delivered to Guia Lumber Yard P920.56 worth of lumber, leaving an outstanding balance of P1,579.44. The plaintiff Bacolod Southern Lumber Yard proved through the testimony of the witness Cayetano Palmares an its Exhs. "P" to "Q-1" that on October 11, 1958 said plaintiff advanced the sum of P1,500.00 to the defendsant 'Isabela Sawmill', that against the said cash advance, the defendant partnership delivered to the said plaintiff on November 19, 1958 P377.72 worth of lumber, and P73.54 worth of lumber on January 27, 1959, leaving an outstanding balance of P1,048.78. The plaintiff Jose Balzunce proved through the testimony of Leon Garibay whom he called as his witness, and through the Exhs. "R" to "E" that from September 14, 1958 to November 27, 1958 he sold to the defedant "Isabela Sawmill" gasoline, motor fuel, and lubricating oils, and that on account of said transactions, the defendant partnersip ownes him an unpaid balance of P2,052.10. Appendix "H" of the stipulation Exh. "A" shows that on October 13 and 14, 1959 the Provincial Sheriff sold to the defendant Margrita G. Saldajeno for P38,040.00 the assets of the defendsant "Isabela Sawmill" which the defendants Leon G. Garibay and Timoteo Tubungbanua had mortgaged to her, and said purchase price was applied to the

judgment that she has obtained against he said mortgagors in Civil Case No. 5223 of this Court. Appendix "I" of the same stipulation Exh. "A" shows that on October 20, 1959 the defendant Margarita G. Saldajeno sold to the PAN ORIENTAL LUMBER COMPANY for P45,000.00 part of the said properties that she had bought at public aucton one week before. xxx xxx xxx 7 It is contended by the appellants that the Court of First Instance of Negros Occidental had no jurisdiction over Civil Case No. 5343 because the plaintiffs Oppen, Esteban, Inc., Agustin R. Tonsay, Jose L. Espinos and the Bacolod Southern Lumber Yard sought to collect sums of moeny, the biggest amount of which was less than P2,000.00 and, therefore, within the jurisdiction of the municipal court. This contention is devoid of merit because all the plaintiffs also asked for the nullity of the assignment of right with chattel mortgage entered into by and between Margarita G. Saldajeno and her former partners Leon Garibay and Timoteo Tubungbanua. This cause of action is not capable of pecuniary estimation and falls under the jurisdiction of the Court of First Instnace. Where the basic issue is something more than the right to recover a sum of money and where the money claim is purely incidental to or a consequence of the principal relief sought, the action is as a case where the subject of the litigation is not capable of pecuniary estimation and is cognizable exclusively by the Court of First Instance. The jurisdiction of all courts in the Philippines, in so far as the authority thereof depends upon the nature of litigation, is defined in the amended Judiciary Act, pursuant to which courts of first instance shall have exclusive original jurisdiction over any case the subject matter of which is not capable of pecuniary estimation. An action for the annulment of a judgment and an order of a court of justice belongs to th category. 8 In determining whether an action is one the subject matter of which is not capable of pecuniary estimation this Court has adopted the criterion of first ascertaining the nature of the principal action or remedy sought. If it is primarily for the recovery of a sum of money, the cliam is considered capable of pecuniary estimation, and whether jurisdiciton is in the municipal courts or in the courts of first instance would depend on the amount of the claim. However, where the basic issue is something other than the right to recover a sum of money, where the money claim is purely incidental to, or a consequence of, the principal relief sought, this Court has considered such actions as cases where the subject ogf the litigation may not be estimated in terms of money, and are cognizable exclusively by courts of first instance. In Andres Lapitan vs. SCANDIA, Inc., et al., 9 this Court held: Actions for specific performance of contracts have been expressly prounounced to be exclusively cognizable by courts of first instance: De Jesus vs. Judge Garcia, L-26816, February 28, 1967;Manufacturers' Distributors, Inc. vs. Yu Siu Liong, L-21285, April 29, 1966. And no cogent reason appears, and none is here advanced by the parties, why an actin for rescission (or resolution) should be differently treated, a "rescission" being a

counterpart, so to speak, of "specific performance'. In both cases, the court would certainly have to undertake an investigation into facts that would justify one act of the other. No award for damages may be had in an action for resicssion without first conducting an inquiry into matters which would justify the setting aside of a contract, in the same manner that courts of first instance would have to make findings of fact and law in actions not capable of pecuniary estimnation espressly held to be so by this Court, arising from issues like those arised in Arroz v. Alojado, et al., L-22153, March 31, 1967 (the legality or illegality of the conveyance sought for and the determination of the validity of the money deposit made); De Ursua v. Pelayo, L-13285, April 18, 1950 (validity of a judgment); Bunayog v. Tunas, L-12707, December 23, 1959 (validity of a mortgage); Baito v. Sarmiento, L-13105, August 25, 1960 (the relations of the parties, the right to support created by the relation, etc., in actions for support);De Rivera, et al. v. Halili, L-15159, September 30, 1963 (the validity or nullity of documents upon which claims are predicated). Issues of the same nature may be raised by a party against whom an action for rescission has been brought, or by the plaintiff himself. It is, therefore, difficult to see why a prayer for damages in an action for rescission should be taken as the basis for concluding such action for resiccison should be taken as the basis for concluding such action as one cpable of pecuniary estimation - a prayer which must be included in the main action if plaintiff is to be compensated for what he may have suffered as a result of the breach committed by defendant, and not later on precluded from recovering damages by the rule against splitting a cause of action and discouraging multiplicitly of suits. The foregoing doctrine was reiterated in The Good Development Corporation vs. Tutaan, 10 where this Court held: On the issue of which court has jurisdiction, the case of SENO vs. Pastolante, et al., is in point. It was ruled therein that although the purposes of an action is to recover an amount plus interest which comes within the original jurisidction of the Justice of the Peace Court, yet when said action involves the foreclosure of a chattel mortgage covering personal properties valued at more than P2,000, (now P10,000.00) the action should be instituted before the Court of First Instance. In the instanct, case, the action is to recover the amount of P1,520.00 plus interest and costs, and involves the foreclosure of a chattel mortgage of personal properties valued at P15,340.00, so that it is clearly within the competence of the respondent court to try and resolve. In the light of the foregoing recent rulings, the Court of First Instance of Negros Occidental did no err in exercising jurisidction over Civil Case No. 5343. The appellants also contend that the chattel mortgage may no longer be annulled because it had been judicially approved in Civil Case No. 4797 of the Court of First Instance of Negros Occidental and said chattel mortgage had been ordered foreclosed in Civil Case No. 5223 of the same court. On the question of whether a court may nullify a final judgment of another court of co-equal, concurrent and coordinate jusridiction, this Court originally ruled that:

A court has no power to interfere with the judgments or decrees of a court of concurrent or coordinate jurisdiction having equal power to grant the relief sought by the injunction. The various branches of the Court of First Instance of Manila are in a sense coordinate courts and cannot be allowed to interfere with each others' judgments or decrees. 11 The foregoing doctrine was reiterated in a 1953 case 12 where this Court said: The rule which prohibits a Judge from intertering with the actuations of the Judge of another branch of the same court is not infringed when the Judge who modifies or annuls the order isued by the other Judge acts in the same case and belongs to the same court (Eleazar vs. Zandueta, 48 Phil. 193. But the rule is infringed when the Judge of a branch of the court issues a writ of preliminary injunction in a case to enjoint the sheriff from carrying out an order by execution issued in another case by the Judge of another branch of the same court. (Cabigao and Izquierdo vs. Del Rosario et al., 44 Phil. 182). This ruling was maintained in 1967. In Mas vs. Dumaraog, 13 the judgment sought to be annulled was rendered by the Court of First Instance of Iloilo and the action for annullment was filed with the Court of First Instance of Antique, both courts belonging to the same Judicial District. This Court held that: The power to open, modify or vacant a judgment is not only possessed by but restricted to the court in which the judgment was rendered. The reason of this Court was: Pursuant to the policy of judicial stability, the judgment of a court of competent jurisdiction may not be interfered with by any court concurrrent jurisdiction. Again, in 1967 this Court ruled that the jurisdiction to annul a judgement of a branch of the court of First Instance belongs solely to the very same branch which rendered the judgement. 14 Two years later, the same doctrine was laid down in the Sterling Investment case. 15 In December 1971, however, this court re-examined and reversed its earlier doctrine on the matter. In Dupla v. Court of Appeals, 16 this Tribunal, speaking through Mr. Justice Villamor declared: ... the underlying philosophy expressed in the Dumara-og case, the policy of judicial stability, to the end that the judgment of a court of competent jurisdiction may not be interfered with by any court of concurrent jurisdiction may not be interfered with by any court of concurrent jurisdiciton, this Court feels that this is as good an occasion as any to re-examine the doctrine laid down ... In an action to annul the judgment of a court, the plaintiff's cause of action springs from the alleged nullity of the judgment based on one ground or another, particularly fraud, which fact affords the plaintiff a right to judicial interference in his behalf. In such a suit the cause of action is entirely different from that in the actgion which grave rise to the

judgment sought to be annulled, for a direct attack against a final and executory judgment is not a incidental to, but is the main object of the proceeding. The cause of action in the two cases being distinct and separate from each other, there is no plausible reason why the venue of the action to annul the judgment should necessarily follow the venue of the previous action ... The present doctrine which postulate that one court or one branch of a court may not annul the judgment of another court or branch, not only opens the door to a violation of Section 2 of Rule 4, (of the Rules of Court) but also limit the opportunity for the application of said rule. Our conclusion must therefore be that a court of first instance or a branch thereof has the authority and jurisdiction to take cognizance of, and to act in, suit to annul final and executory judgment or order rendered by another court of first instance or by another branch of the same court... In February 1974 this Court reiterated the ruling in the Dulap case. 17 In the light of the latest ruling of the Supreme Court, there is no doubt that one branch of the Court of First Instance of Negros Occidental can take cognizance of an action to nullify a final judgment of the other two branches of the same court. It is true that the dissolution of a partnership is caused by any partner ceasing to be associated in the carrying on of the business. 18 However, on dissolution, the partnershop is not terminated but continuous until the winding up to the business. 19 The remaining partners did not terminate the business of the partnership "Isabela Sawmill". Instead of winding up the business of the partnership, they continued the business still in the name of said partnership. It is expressly stipulated in the memorandum-agreement that the remaining partners had constituted themselves as the partnership entity, the "Isabela Sawmill". 20 There was no liquidation of the assets of the partnership. The remaining partners, Leon Garibay and Timoteo Tubungbanua, continued doing the business of the partnership in the name of "Isabela Sawmill". They used the properties of said partnership. The properties mortgaged to Margarita G. Saldajeno by the remaining partners, Leon Garibay and Timoteo Tubungbanua, belonged to the partnership "Isabela Sawmill." The appellant, Margarita G. Saldajeno, was correctly held liable by the trial court because she purchased at public auction the properties of the partnership which were mortgaged to her. It does not appear that the withdrawal of Margarita G. Saldajeno from the partnership was published in the newspapers. The appellees and the public in general had a right to expect that whatever, credit they extended to Leon Garibay and Timoteo Tubungbanua doing the business in the name of the partnership "Isabela Sawmill" could be enforced against the proeprties of said partnership. The judicial foreclosure of the chattel mortgage executed in favor of Margarita G. Saldajeno did not relieve her from liability to the creditors of the partnership.

The appellant, margrita G. Saldajeno, cannot complain. She is partly to blame for not insisting on the liquidaiton of the assets of the partnership. She even agreed to let Leon Garibay and Timoteo Tubungbanua continue doing the business of the partnership "Isabela Sawmill" by entering into the memorandum-agreement with them. Although it may be presumed that Margarita G. Saldajeno had action in good faith, the appellees aslo acted in good faith in extending credit to the partnership. Where one of two innocent persons must suffer, that person who gave occasion for the damages to be caused must bear the consequences. Had Margarita G. Saldajeno not entered into the memorandum-agreement allowing Leon Garibay and Timoteo Tubungbanua to continue doing the business of the aprtnership, the applees would not have been misled into thinking that they were still dealing with the partnership "Isabela Sawmill". Under the facts, it is of no moment that technically speaking the partnership "Isabela Sawmill" was dissolved by the withdrawal therefrom of Margarita G. Saldajeno. The partnership was not terminated and it continued doping business through the two remaining partners. The contention of the appellant that the appleees cannot bring an action to annul the chattel mortgage of the propertiesof the partnership executed by Leon Garibay and Timoteo Tubungbanua in favor of Margarita G. Saldajeno has no merit. As a rule, a contract cannot be assailed by one who is not a party thereto. However, when a contract prejudices the rights of a third person, he may file an action to annul the contract. This Court has held that a person, who is not a party obliged principally or subsidiarily under a contract, may exercised an action for nullity of the contract if he is prejudiced in his rights with respect to one of the contracting parties, and can show detriment which would positively result to him from the contract in which he has no intervention. 21 The plaintiffs-appellees were prejudiced in their rights by the execution of the chattel mortgage over the properties of the partnership "Isabela Sawmill" in favopr of Margarita G. Saldajeno by the remaining partners, Leon Garibay and Timoteo Tubungbanua. Hence, said appelees have a right to file the action to nullify the chattel mortgage in question. The portion of the decision appealed from ordering the appellants to pay attorney's fees to the plaintiffs-appellees cannot be sustained. There is no showing that the appellants displayed a wanton disregard of the rights of the plaintiffs. Indeed, the appellants believed in good faith, albeit erroneously, that they are not liable to pay the claims. The defendants-appellants have a right to be reimbursed whatever amounts they shall pay the appellees by their co-defendants Leon Garibay and Timoteo Tubungbanua. In the memorandum-agreement, Leon Garibay and Timoteo Tubungbaun undertook to release Margarita G. Saldajeno from any obligation of "Isabela Sawmill" to third persons. 22 WHEREFORE, the decision appealed from is hereby affirmed with the elimination of the portion ordering appellants to pay attorney's fees and with the modification that the defendsants, Leon Garibay and Timoteo Tubungbanua, should reimburse the defendants-appellants, Margarita G. Saldajeno and her husband Cecilio Saldajeno, whatever they shall pay to the plaintiffs-appellees, without pronouncement as to costs.

SO ORDERED. Teehankee (Chairman), Makasiar, Guerrero, De Castro and Melencio-Herrera, JJ., concur. Footnotes
1 Record on Appeal, pp. 202-205, Rollo, pp. 122-124. 2 Resolution, Court of Appeals. Written by Mr. Justice Antonio Canizares and Mr. Justice Nicasio A. Yatco, Rollo, p. 321. 3 Record on Appeal, Rollo, pp. 25-26. 4 Record on Appeal, Rollo, pp. 55-56. 5 Rollo, p, 58. 6 Brief for defendats-appellants, Rollo, pp. 161-162. 7 Record on Appeal, pp. 182-189, Rollo, pp. 112-116. 8 Pedro Dulap, et al., vs. Hon Court of appeals, et al., G.R. No. L-28306, Dec. 18, 1971, 42 SCRA 537, 545-546. 9 24 SCRA 479, 482-483. 10 73 SCRA 189, 191. 11 Cabigao and Izquierdo vs. Del Rosario, et al., 44 Phil. 182. 12 Philippine National Bank vs. Javellana, 92 Phil. 525. 13 Mas vs. Dumarag-og, G.R. No. L-16252, Sept. 29, 1964, 12 SCRA 34. 14 J.M.. Tuazon & Co. vs. Torres, etc., et al., G.R. No. L-24717, Dec. 4, 1967, 21 SCRA 1169. 15 Sterling Investment Corp. et al. vs. Ruiz, etc., et al., G.R. No. L-30694, Oct. 31, 1969, 30 SCRA 318. 16 Pedro Dulap & Colores Amparo vs. Court of Appeals and Asian Surety & Insurance Co., L-28306, Dec. 18, 1971, 42 SCRA 537. 17 Gianan vs. Hon. Imperial, et al., L-37963, Feb. 28, 1974, 55 SCRA 755, 760. 18 Article 1828, Civil Code of the Philippines. 19 Article 1829, Civil Code of the Philippnes. 20 Record on Appeal, pp. 120-122, Rollo, pp. 82-83. 21 Teves vs. People's Homesite & Housing Corporation, L-21498, 23 SCRA 1141, 1147, 1148; De Santos vs. City of Manila, 45 SCRA 409, 416. 22 Rollo, p. 82.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-18707 December 9, 1922 PO YENG CHEO, plaintiff-appellee, vs. LIM KA YAM, defendant-appellant. F. R. Feria and Romualdez Bros. for appellant. Quintin Llorente and Carlos C. Viana for appellee.

STREET, J.: By the amended complaint in this action, the present plaintiff, Po Yeng Cheo, alleged sole owner of a business formerly conducted in the City of Manila under the style of Kwong Cheong, as managing partner in said business and to recover from him its properties and assets. The defendant having died during the pendency of the cause in the court below and the death suggested of record, his administrator, one Lim Yock Tock, was required to appear and make defense. In a decision dated July 1, 1921, the Honorable C. A. Imperial, presiding in the court below, found that the plaintiff was entitled to an accounting from Lim Ka Yam, the original defendant, as manager of the business already reffered to, and he accordingly required Lim Yock Tock, as administrator, to present a liquidation of said business within a stated time. This order bore no substantial fruit, for the reason that Lim Yock Tock personally knew nothing about the aforesaid business (which had ceased operation more than ten years previously) and was apparently unable to find any books or documents that could shed any real light on its transaction. However, he did submit to the court a paper written by Lim Ka Yam in life purporting to give, with vague and uncertain details, a history of the formation of the Kwong Cheong Tay and some account of its disruption and cessation from business in 1910. To this narrative was appended a statement of assets and liabilities, purporting to show that after the business was liquidate, it was actually debtor to Lim Ka Yam to the extent of several thousand pesos. Appreciating the worthlessness of this so-called statement, and all parties apparently realizing that nothing more was likely to be discovered by further insisting on an accounting, the court proceeded, on December 27, 1921, to render final judgment in favor of the plaintiff. The decision made on this occasion takes as its basis the fact stated by the court in its earlier decision of July 1, 1921, which may be briefly set fourth as follows:lawphil.net The plaintiff, Po Yeng Cheo, is the sole heir of one Po Gui Yao, deceased, and as such Po Yeng Cheo inherited the interest left by Po Gui Yao in a business conducted in Manila under the style of Kwong Cheong Tay. This business had been in existence in Manila for many years prior to 1903, as a mercantile partnership, with a capitalization of P160,000, engaged in the import and export trade; and after the

death of Po Gui Yao the following seven persons were interested therein as partners in the amounts set opposite their respective names, to wit: Po Yeng Cheo, P60,000; Chua Chi Yek, P50,000; Lim Ka Yam, P10,000; Lee Kom Chuen, P10,000; Ley Wing Kwong, P10,000; Chan Liong Chao, P10,000; Lee Ho Yuen, P10,000. The manager of Kwong Cheong Tay, for many years prior of its complete cessation from business in 1910, was Lim Ka Yam, the original defendant herein. Among the properties pertaining to Kwong Cheong Tay and consisting part of its assets were ten shares of a total par value of P10,000 in an enterprise conducted under the name of Yut Siong Chyip Konski and certain shares to the among of P1,000 in the Manila Electric Railroad and Light Company, of Manila. In the year 1910 (exact date unstated) Kwong Cheong Tay ceased to do business, owing principally to the fact that the plaintiff ceased at that time to transmit merchandise from Hongkong, where he then resided. Lim Ka Yam appears at no time to have submitted to the partners any formal liquidation of the business, though repeated demands to that effect have been made upon him by the plaintiff. In view of the facts above stated, the trial judge rendered judgment in favor of the plaintiff, Po Yeng Cheo, to recover of the defendant Lim Yock Tock, as administrator of Lim Ka Yam, the sum of sixty thousand pesos (P60,000), constituting the interest of the plaintiff in the capital of Kwong Cheong Tay, plus the plaintiff's proportional interest in shares of the Yut Siong Chyip Konski and Manila Electric Railroad and Light Company, estimated at P11,000, together with the costs. From this judgment the defendant appealed. In beginning our comment on the case, it is to be observed that this court finds itself strictly circumscribed so far as our power of review is concerned, to the facts found by the trial judge, for the plaintiff did not appeal from the decision of the court below in so far as it was unfavorable to him, and the defendant, as appellant, has not caused a great part of the oral testimony to be brought up. It results, as stated, that we must accept the facts as found by the trial judge; and our review must be limited to the error, or errors, if any, which may be apparent upon the face of the appealed decision, in relation with the pleadings of record. Proceeding then to consider the appealed decision in relation with the facts therein stated and other facts appearing in the orders and proceedings in the cause, it is quite apparent that the judgment cannot be sustained. In the first place, it was erroneous in any event to give judgment in favor of the plaintiff to the extent of his share of the capital of Kwong Cheong Tay. The managing partner of a mercantile enterprise is not a debtor to the shareholders for the capital embarked by them in the business; and he can only be made liable for the capital when, upon liquidation of the business, there are found to be assets in his hands applicable to capital account. That the sum of one hundred and sixty thousand pesos (P160,000) was embarked in this business many years ago reveals nothing as to the condition of the capital account at the time the concern ceased to do business; and even supposing--as the court possibly did--that the capital was intact in 1908, this would not prove it was intact in 1910 when the business ceased to be a going concern; for in that precise interval of time the capital may have been diminished or dissipated from causes in no wise chargeable to the negligence or misfeasance of the manager. Again, so far as appears from the appealed decision, the only property pertaining to Kwong Cheong Tay at the time this action was brought consisted of shares in the two concerns already mentioned of the total par value of P11,000. Of course, if these shares had been sold and converted into money, the proceeds, if not needed to pay debts, would have been distributable among the various persons in

interest, that is, among the various shareholders, in their respective proportions. But under the circumstances revealed in this case, it was erroneous to give judgment in favor of the plaintiff for his aliquot part of the par value of said shares. It is elementary that one partner, suing alone, cannot recover of the managing partner the value of such partner's individual interest; and a liquidation of the business is an essential prerequisite. It is true that in Lichauco vs. Lichauco (33 Phil., 350), this court permitted one partner to recover of the manager the plaintiff's aliquot part of the proceeds of the business, then long since closed; but in that case the affairs of the defunct concern had been actually liquidate by the manager to the extent that he had apparently converted all its properties into money and had pocketed the same--which was admitted;--and nothing remained to be done except to compel him to pay over the money to the persons in interest. In the present case, the shares referred to-constituting the only assets of Kwong Cheong Tay--have not been converted into ready money and doubtless still remain in the name of Kwong Cheong Tay as owner. Under these circumstances it is impossible to sustain a judgment in favor of the plaintiff for his aliquot part of the par value of said shares, which would be equivalent to allowing one of several coowners to recover from another, without process of division, a part of an undivided property. Another condition will be noted as present in this case which in our opinion is fatal to the maintenance of the appealed judgment. This is that, after the death of the original defendant, Lim Ka Yam, the trial court allowed the action to proceed against Lim Yock Tock, as his administrator, and entered judgment for a sum of money against said administrator as the accounting party,--notwithstanding the insistence of the attorneys for the latter that the action should be discontinued in the form in which it was then being prosecuted. The error of the trial court in so doing can be readily demonstrated from more than one point of view. In the first place, it is well settled that when a member of a mercantile partnership dies, the duty of liquidating its affair devolves upon the surviving member, or members, of the firm, not upon the legal representative of the deceased partner. (Wahl vs. Donaldson Sim & Co., 5 Phil., 11; Sugo and Shibata vs. Green, 6 Phil., 744) And the same rule must be equally applicable to a civil partnership clothed with the form of a commercial association (art. 1670, Civil Code; Lichauco vs. Lichauco, 33 Phil., 350) Upon the death of Lim Ka Yam it therefore became the duty of his surviving associates to take the proper steps to settle the affairs of the firm, and any claim against him, or his estate, for a sum of money due to the partnership by reason of any misappropriation of its funds by him, or for damages resulting from his wrongful acts as manager, should be prosecuted against his estate in administration in the manner pointed out in sections 686 to 701, inclusive, of the Code of Civil Procedure. Moreover, when it appears, as here, that the property pertaining to Kwong Cheong Tay, like the shares in the Yut Siong Chyip Konski and the Manila Electric Railroad and Light Company, are in the possession of the deceased partner, the proper step for the surviving associates to take would be to make application to the court having charge to the administration to require the administrator to surrender such property. But, in the second place, as already indicated, the proceedings in this cause, considered in the character of an action for an accounting, were futile; and the court, abandoning entirely the effort to obtain an accounting, gave judgment against the administrator upon the supposed liability of his intestate to respond for the plaintiff's proportionate share of the capital and assets. But of course the action was not maintainable in this aspect after the death of the defendant; and the motion to discontinue the action as against the administrator should have been granted. The judgment must be reversed, and the defendant will be absolved from the complaint; but it will be understood that this order is without prejudice to any proceeding which may be undertaken by the

proper person or persons in interest to settle the affairs of Kwong Cheong Tay and in connection therewith to recover from the administrator of Lim Ka Yam the shares in the two concerns mentioned above. No special pronouncement will be made as to costs of either. So ordered. Araullo, C. J., Johnson, Malcolm, Avancea, and Villamor, JJ., concur. Ostrand, J., concurs in the result. Johns, and Romualdez, JJ., took no part in the decision of this case.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-14606 April 28, 1960

LAGUNA TRANSPORTATION CO., INC., petitioner-appellant, vs. SOCIAL SECURITY SYSTEM, respondent-appellee. Yatco & Yatco for appellant. Solicitor General Edilberto Barot, Solicitor Camilo Quiason and Crispin Baizas for appellee. BARRERA, J.: On January 24, 1958, petitioner Laguna Transportation Co., Inc. filed with the Court of First Instance of Laguna petition praying that an order be issued by the court declaring that it is not bound to register as a member of respondent Social Security System and, therefore, not obliged to pay to the latter the contributions required under the Social Security Act.1 To this petition, respondent filed its answer on February 11, 1958 praying for its dismissal due to petitioner's failure to exhaust administrative remedies, and for a declaration that petitioner is covered by said Act, since the latter's business has been in operation for at least 2 years prior to September 1, 1957. On February 11, 1958, respondent filed a motion for preliminary hearing on its defense that petitioner failed to exhaust administrative remedies. When the case was called for preliminary hearing, it was postponed by agreement of the parties. Subsequently, it was set for trial. On the date of the trial, the parties agreed to present, in lieu of any other evidence, a stipulation of facts, which they did on May 27, 1958, as follows: 1. That petitioner is a domestic corporation duly organized and existing under the laws of the Philippines, with principal place of business at Bian, Laguna; 2. That respondent is an agency created under Republic Act No. 1161, as amended by Republic Act No. 1792, with the principal place of business at the new GSIS Bldg., corner Arroceros and Concepcion Streets, Manila, where it may be served with summons; 3. That respondent has served notice upon the petitioner requiring it to register as member of the System and to remit the premiums due from all the employees of the petitioner and the contribution of the latter to the System beginning the month of September, 1957; 4. That sometime in 1949, the Bian Transportation Co., a corporation duly registered with the Securities and Exchange Commission, sold part of the lines and equipment it operates to Gonzalo Mercado, Artemio Mercado, Florentino Mata and Dominador Vera Cruz;

5. That after the sale, the said vendees formed an unregistered partnership under the name of Laguna Transportation Company which continued to operate the lines and equipment bought from the Bian Transportation Company, in addition to new lines which it was able to secure from the Public Service Commission; 6. That the original partners forming the Laguna Transportation Company, with the addition of two new members, organized a corporation known as the Laguna Transportation Company, Inc., which was registered with the Securities and Exchange Commission on June 20, 1956, and which corporation is the plaintiff now in this case; 7. That the incorporators of the Laguna Transportation Company, Inc., and their corresponding shares are as follows: Name Dominador Cruz Maura Mendoza Gonzalo Mercado Artemio Mercado Florentino Mata Sabina Borja No. of Shares 333 shares 333 shares 66 shares 94 shares 110 shares 64 shares Amount Subscribed P33,300.00 33,300.00 6,600.00 9,400.00 11,000.00 6,400.00 1,750.00 1,000 shares P100,000.00 P27,481.55 Amount Paid P9,160.81 9,160.81 1,822.49 2,565.90 3,021.54

8. That the corporation continued the same transportation business of the unregistered partnership; 9. That the plaintiff filed on August 30, 1957 an Employee's Data Record . . . and a supplemental Information Sheet . . .; 10. That prior to November 11, 1957, plaintiff requested for exemption from coverage by the System on the ground that it started operation only on June 20, 1956, when it was registered with the Securities and Exchange Commission but on November 11, 1957, the Social Security System notified plaintiff that it was covered; 11. On November 14, 1957, plaintiff through counsel sent a letter to the Social Security System contesting the claim of the System that plaintiff was covered, . . . 12. On November 27, 1957, Carlos Sanchez, Manager of the Production Department of the respondent System for and in behalf of the Acting Administrator, informed plaintiff that plaintiff's business has been in actual operation for at least two years, . . .

On the basis of the foregoing stipulation of facts, the court, on August 15, 1958, rendered a decision the dispositive part of which reads: Wherefore, the Court is of the opinion and so declares that the petitioner was an employer engaged in business as common carrier which had been in operation for at least two years prior to the enactment of Republic Act No. 1161, as amended by Republic Act 1792 and by virtue thereof, it was subject to compulsory coverage under said law. . . . From this decision, petitioner appealed directly to us, raising purely questions of law. Petitioner claims that the lower court erred in holding that it is an employer engaged in business as a common carrier which had been in operation for at least 2 years prior to the enactment of the Social Security Act and, therefore, subject to compulsory coverage thereunder. Section 9 of the Social Security Act, in part, provides: SEC. 9 Compulsory Coverage. Coverage in the System shall be compulsory upon all employees between the ages of sixteen and sixty years, inclusive, if they have been for at least six months in the service of an employer who is a member of the System. Provided, That the Commission may not compel any employer to become a member of the System unless he shall have been in operation for at least two years . . . . (Italics supplied.). It is not disputed that the Laguna Transportation Company, an unregistered partnership composed of Gonzalo Mercado, Artemio Mercado, Florentina Mata, and Dominador Vera Cruz, commenced the operation of its business as a common carrier on April 1, 1949. These 4 original partners, with 2 others (Maura Mendoza and Sabina Borja) later converted the partnership into a corporate entity, by registering its articles of incorporation with the Securities and Exchange Commission on June 20, 1956. The firm name "Laguna Transportation Company" was not altered, except with the addition of the word "Inc." to indicate that petitioner was duly incorporated under existing laws. The corporation continued the same transportation business of the unregistered partnership, using the same lines and equipment. There was, in effect, only a change in the form of the organization of the entity engaged in the business of transportation of passengers. Hence, said entity as an employer engaged in business, was already in operation for at least 3 years prior to the enactment of the Social Security Act on June 18, 1954 and for at least two years prior to the passage of the amendatory act on June 21, 1957. Petitioner argues that, since it was registered as a corporation with the Securities and Exchange Commission only on June 20, 1956, it must be considered to have been in operation only on said date. While it is true that a corporation once formed is conferred a juridical personality separate and district from the persons composing it, it is but a legal fiction introduced for purposes of convenience and to subserve the ends of justice. The concept cannot be extended to a point beyond its reasons and policy, and when invoked in support of an end subversive of this policy, will be disregarded by the courts. (13 Am. Jur. 160.) If any general rule can be laid down, in the present state of authority, it is that a corporation will be looked upon as a legal entity as a general rule, and until sufficient reason to the contrary appears; but, when the motion of legal entity is used to defeat public convenience, justify wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons. (1 Fletcher Cyclopedia Corporations [Perm. Ed.] 135-136; U.S. Milwaukee Refrigeration Transit Co., 142 Fed. 247, cited in Koppel Philippines, Inc. vs. Yatco, 43 Off. Gaz., 4604.)

To adopt petitioner's argument would defeat, rather than promote, the ends for which the Social Security Act was enacted. An employer could easily circumvent the statute by simply changing his form of organization every other year, and then claim exemption from contribution to the System as required, on the theory that, as a new entity, it has not been in operation for a period of at least 2 years. the door to fraudulent circumvention of the statute would, thereby, be opened. Moreover, petitioner admitted that as an employer engaged in the business of a common carrier, its operation commenced on April 1, 1949 while it was a partnership and continued by the corporation upon its formation on June 20, 1956. Unlike in the conveyance made by the Bian Transportation Company to the partners Gonzalo Mercado, Artemio Mercado, Florentino Mata, and Dominador Vera Cruz, no mention whatsoever is made either in the pleadings or in the stipulation of facts that the lines and equipment of the unregistered partnership had been sold and transferred to the corporation, petitioner herein. This omission, to our mind, clearly indicates that there was, in fact, no transfer of interest, but a mere change in the form of the organization of the employer engaged in the transportation business, i.e., from an unregistered partnership to that of a corporation. As a rule, courts will look to the substance and not to the form.(Colonial Trust Co. vs. Montolo Eric Works, 172 Fed. 310; Metropolitan Holding Co. vs. Snyder, 79 F. 2d 263, 103 A.L.R. 612; Arnold vs. Willits, et al., 44 Phil., 634; 1 Fletcher Cyclopedia Corporations [Perm. Ed.] 139-140.) Finally, the weight of authority supports the view that where a corporation was formed by, and consisted of members of a partnership whose business and property was conveyed and transferred to the corporation for the purpose of continuing its business, in payment for which corporate capital stock was issued, such corporation is presumed to have assumed partnership debts, and is prima facie liable therefor. (Stowell vs. Garden City News Corps., 57 P. 2d 12; Chicago Smelting & Refining Corp. vs. Sullivan, 246 IU, App. 538; Ball vs. Bross., 83 June 19, N.Y. Supp. 692.) The reason for the rule is that the members of the partnership may be said to have simply put on a new coat, or taken on a corporate cloak, and the corporation is a mere continuation of the partnership. (8 Fletcher Cyclopedia Corporations [Perm. Ed.] 402-411.) Wherefore, finding no error in the judgment of the court a quo, the same is hereby affirmed, with costs against petitioner-appellant. So ordered. Paras, C. J., Bengzon, Montemayor, Bautista Angelo, Labrador, Concepcion and Gutierrez, David, JJ., concur.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-6304 December 29, 1953

SERGIO V. SISON, plaintiff-appellant, vs. HELEN J. MCQUAID, defendant-appellee. Manansala and Manansala for appellant. J.C. Orendain for appllee.

REYES, J.: On March 28, 1951, plaintiff brought an action in the Court of First Instance of Manila against defendant, alleging that during the year 1938 the latter borrowed from him various sums of money, aggregating P2,210, to enable her to pay her obligation to the Bureau of Forestry and to add to her capital in her lumber business, receipt of the amounts advanced being acknowledged in a document, Exhibit A, executed by her on November 10, 1938 and attached to the complaint; that as defendant was not able to pay the loan in 1938, as she had promised, she proposed to take in plaintiff as a partner in her lumber business, plaintiff to contribute to the partnership the said sum of P2,210 due him from defendant in addition to his personal services; that plaintiff agreed to defendant's proposal and, as a result, there was formed between them, under the provisions of the Civil Code, a partnership in which they were to share alike in the income or profits of the business, each to get one-half thereof; that in accordance with said contract, plaintiff, together with defendant, rendered services to the partnership without compensation from June 15, 1938 to December, 1941; that before the last World War, the partnership sold to the United States Army 230,000 board feet of lumber for P13,800, for the collection of which sum defendant, as manager of the partnership, filed the corresponding claim with the said army after the war; that the claim was "finally" approved and the full amount paid the complaint does not say when but defendant has persistently refused to deliver one-half of it, or P6,900, to plaintiff notwithstanding repeated demands, investing the whole sum of P13,800 for her own benefit. Plaintiff, therefore, prays for judgment declaring the existence of the alleged partnership and requiring the defendant to pay him the said sum of P6,900, in addition to damages and costs. Notified of the action, defendant filed a motion to dismiss on the grounds that plaintiff's action had already prescribed, that plaintiff's claim was not provable under the Statute of Frauds, and that the complaint stated no cause of action. Sustaining the first ground, the court dismissed the case, whereupon, plaintiff appealed to the Court of Appeals; but that court has certified the case here on the ground that the appeal involved only questions of law. It is not clear from the allegations of the complaint just when plaintiff's cause of action accrued. Consequently, it cannot be determined with certainty whether that action has already prescribed or not.

Such being the case, the defense of prescription can not be sustained on a mere motion to dismiss based on what appears on the face of the complaint. But though the reason given for the order of dismissal be untenable, we find that the said order should be upheld on the ground that the complaint states no cause of action, which is also one of the grounds on which defendant's motion to dismiss was based. Plaintiff seeks to recover from defendant one-half of the purchase price of lumber sold by the partnership to the United States Army. But his complaint does not show why he should be entitled to the sum he claims. It does not allege that there has been a liquidation of the partnership business and the said sum has been found to be due him as his share of the profits. The proceeds from the sale of a certain amount of lumber cannot be considered profits until costs and expenses have been deducted. Moreover, the profits of the business cannot be determined by taking into account the result of one particular transaction instead of all the transactions had. Hence, the need for a general liquidation before a member of a partnership may claim a specific sum as his share of the profits. In view of the foregoing, the order of dismissal is affirmed, but on the ground that the complaint states no cause of action and without prejudice to the filing of an action for accounting or liquidation should that be what plaintiff really wants. Without costs in this instance.1awphil.net Paras, C.J., Pablo, Bengzon, Padilla, Tuason, Jugo, Bautista Angelo and Labrador, JJ., concur.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-24243 January 15, 1926

ILDEFONSO DE LA ROSA, administrator of the intestate estate of the deceased Go-Lio, plaintiffappellant, vs. ENRIQUE ORTEGA GO-COTAY, defendant-appellant. Crispin Oben for palintiff-appellant. Paredes, Buencamino and Yulo for defendant-appellant. VILLA-REAL, J.: During the Spanish regime the Chinamen Go-Lio and Vicente Go-Sengco formed a society for the purchase and sale of articles of commerce, and for this purpose they opened a store in the town of San Isidro, Nueva Ecija. Later Go-Lio went to China. Vicenyte Go-Sengco died and his son Enrique Ortega GoCotay took charge of the businesses. Go-Lio died in China in October, 1916, leaving a widow and three children, one of whom came to the Philippines and filed a petition for the appointment of Ildefonso de la Rosa as administrator of the intestate estate of his deceased father, which petition was granted by the Court of First Instance of Nueva Ecija. Ildefonso de la Rosa, in his capacity as administrator of the intestate estate of the deceased Go-Lio, requested Enrique Go-Cotay to wind up the business and to deliver to him the portion corresponding to the deceased Go-Lio. Enrique Ortega Go-Cotay denied the petition, alleging that the business was his exclusively. In view of this denial, Ildefonso de la Rosa, as administratorm, on July 2, 1918, filed with the Court of First Instance of Nueva Ecija a complaint against Enrique Ortega Co-Cotay in which he prayed that the defendant be sentenced to deliver to the plaintiff one-half of all the property of the partnership formed by Go-lIo and Vicente Go-Sengco, with costs against the defendant, and that the said plaintiff be appointed receiver for the property of the said partnership. Defendant, in answering the complaint, denied each and every allegation thereof, and as a special defense alleged that more than ten years had elapsed before the filing of the complaint, and prayed that he be absolved therefrom, with costs against the plaintiff. On August 3, 1918, the Court of First Instance of Nueva Ecija appointed Justo Cabo-Chan, Francisco T. Tantengco and Go-Tiao, as commissioners to make an inventory, liquidate and determine the one-half belonging to the plaintiff of all the property of the store in question. On August 9, 1918, in order to prevent Justo Cabo-Chan from assuming the office of receiver, pursuant to the order of the court dated August 3, 1918, the defendant filed a bond in the sum of P10,000.

Under the date of November 15, 1920, the said commissioners submitted to the court their report, showing the net profits of the business between the period from 1913 to 1917, which amounted to the total sum of P25,038.70 and consisted of the following items: Profits for the year 1913........................ Profits for the year 1914........................ Profits for the year 1915........................ Profits for the year 1916........................ Profits for the year 1917........................ P2,979.00 3,046.94 4,103.07 4,735.00 10,174.69

Total........................................................... 25.038.70 In view of the appeal taken by defendant the parties on December 7, 1921, entered into an agreement whereby they agreed to suspend the liquidation ordered by the court until the appeal to the Supreme Court was decided, and whereby the defenadnt was authorized to continue in the possession of the property in litigation, upon the giving of a bond in the amount of P25,000, and cancelling the former bond for P10,000. This court in deciding case R. G. No. 18919, on October 5, 1922, 1 held that the appeal was premature and ordered that the record be remanded to the court of origin with instruction to enter a final order in accordance with the liquidation made by the commissioners. The record having been remanded and two of the commissioners having filed their resignations, the copurt below appointed again Justo Cabo-Chan suggested by the defendant and Cua POco suggested by the plaintiff, as commissioners, who submitted two reports, one prepared by commissioners Tantengco and Cua Poco, and the other by commissioners Justo Cabo-Chan. The former stated in their report that they had examined the books for the years 1919 to 1922, for the reason, they said, that they appeared "to have been prepared by some person in a careful way at a certain time." The later commissioner examined all books and stated in his report that the business had suffered a net loss amounting to the sum of P89,099.22. After trial and the parties having introduced all their evidence, the lower court, by order of December 13, 1924, disapproved the report of the commissioners Tantengco and Cua Poco, but approved, with slight modifications, the report of commissioner Cabo-Chan, holding that the result of the liquidation showed liabilities to the amiount of P89,690.45 in view of which plaintiff had nothing to recover from defendant, as there was no profit to divide. From this decision the plaintiff has appealed in due time and form making the following assignment of errors: (1) The lower court erred in holding that the books were authentic, and in not holding that they were false books exhibited by the defendant about alleged operations in the years 1918 et seq. which show enormous debts and imaginary losses of the business; (2) the lower court erred in giving full credit to the testimony of commissioner Justo Cabo-Chan; (3) the lower court erred in holding that the partnership had incurred debts and suffered losses, as shown in the report of Justo Cabo-Cahn from 1918 on; (4) the lower court erred in not holding that the share of the plaintiff, as his capital and profits

until the end of 1917, is equivalent to the sum of twenty-seven thousand seven hundred fifty-five pesos and forty-seven centavos (P27,755.47). Philippine currency, plus an annual quota of at least two thousand five hundred three pesos and eighty-seven centavos (P2,503.87), Philippime currency, as his portion of the profits since the beginning of 1918 until the delivery to the palintiff of his share in the partnership; (5) the court below erred in not ordering the prosecuting attorney to commence an investigation as to the falsified books of accounts that the defendant had exhibited for proper criminal proceeding. From the evidence it appears that the partnership capital was P4,779.39, and the net profits until the year 1915 amounted to P5,551.40. Because some books of account had been destroyed by white ants (anay), the liquidation of the business of the partnership for the period from 1906 to 1912 could not be made. But knowing the net profit for the period between 1904 and 1905, which is P5,551.40, and findng the average of the profits for each of these years, which is P2,775.70; and knowing the net profit for the year 1913, which is P2,979, we can find the average between the net profit for 1905, namely, P2,979. Said average is the sum of P2,877.35, which may be considered as the average of the net annual profits for the period between 1906 an 1912, which in seven years make a total of P20,141.45. The assets of the partnership, as well as the value of its property, could not be determined when making the liquidation because there was no inventory and for this reason it was not possible to determine the capital of the partnership. The plaintiff, however, seems to be agreeable to considering the initial partnership capital as the capital at the time of the winding up of the business. August 3, 1918, defendant assumed complete responsibility for the business by objecting to the appointment of a receiver as prayed for by plaintiff, and giving a bond therefor. Until that date his acts were those of a managing partner, binding against the partnership; but thereafter his acts were those of a receiver whose authority is contained in section 175 of the Code of Civil Procedure. A receiver has no right to carry on and conduct a business unless he is authorized or directed by the court to do some, and such authority is not derived from an order of appointment to take and preserve the property (34 Cyc., 283; 23 R. C. L., 73). It does not appear that the defendant as a receiver was authorized by the court to continue the business of the partnership in liquidation. This being so, he is personally liable for the losses that the business amy have sustained. (34 Cyc., 296.) The partnership must not, therefore, be liable for the acts of the defendant in connection with the management of the business until August 3, 1918, the date when he ceased to be a member and manager in order to become receiver. As to the first semester of 1918, during which time the defendant had seen managing the business of the partnership as a member and manager, taking into account that the profits had been on the increase, said profits having reached the amount of P10,174.69 in the year 1917, it would not be an exaggeration to estimate that the profits for 1918 would have been at least the same as the profits of 1917; so that for the first half of 1918, the profit would be P5,087.34. In conclusion we have the following profits of the business of this partnership now in liquidation, to wit: Capital of partnership........................... Profits until 1905.................................. P4,779.39 5,551.40

Profits 1906-1912................................ Profits 1913-1917................................ Profits first semester 1918...............

20,141.45 25,038.70 5,087.34

Total....................................................... 60,598.28 One-half of this total, that is, P30,299.14 pertains to the plaintiff as administrator of the intestate estate of Go-Lio. In view of the foregoing, we are of the opinion that the case must be, as is hereby, decided by the reversing the judgment appealed from, and sentencing the defendant to pay the plaintiff the sum of P30,299.14 with legal interest at the rate of 6 per cent per annum from July 1, 1918, until fully paid, with costs. So ordered. Avancea, C. J., Johnson, Street, Malcolm, Villamor, Ostrand, Johns, and Romualdez, JJ., concur.

Footnotes
1

De la Rosa vs. Ortega Go-Cotay, not reported.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-17526 June 30, 1962

GREGORIO MAGDUSA, ET AL., petitioners, vs. GERUNDIO ALBARAN, ET AL., respondents. Montenegro, Madayag, Viola and Hernandez, Olimpio R. Epis, David C. Ocangas and Bonifacio M. Belderol for petitioners. Lozano, Soria, Muana, Ruiz and Morales for respondents. REYES, J.B.L., J.: Appeal from a decision of the Court of Appeals (G.R. No. 24248-R) reversing a judgment of the Court of First Instance of Bohol and ordering appellant Gregorio Magdusa to pay to appellees, by way of refund of their shares as partners, the following amounts: Gerundio Albaran, P8,979.10; Pascual Albaran, P5,394.78; Zosimo Albaran, P1,979.28; and Telesforo Bebero, P3,020.27; plus legal interests from the filing of the complaint, and costs. The Court of Appeals found that appellant and appellees, together with various other persons, had verbally formed a partnership de facto, for the sale of general merchandise in Surigao, Surigao, to which appellant contributed P2,000 as capital, and the others contributed their labor, under the condition that out of the net profits of the business 25% would be added to the original capital, and the remaining 75% would be divided among the members in proportion to the length of service of each. Sometime in 1953 and 1954, the appellees expressed their desire to withdraw from the partnership, and appellant thereupon made a computation to determine the value of the partners' shares to that date. The results of the computation were embodied in the document Exhibit "C", drawn in the handwriting of appellant. Appellees thereafter made demands upon appellant for payment, but appellant having refused, they filed the initial complaint in the court below. Appellant defended by denying any partnership with appellees, whom he claimed to be mere employees of his. The Court of First Instance of Bohol refused to give credence to Exhibit "C", and dismissed the complaint on the ground that the other were indispensable parties but hid not been impleaded. Upon appeal, the Court of Appeals reversed, with the result noted at the start of this opinion. Gregorio Magdusa then petitioned for a review of the decision, and we gave it due course.1wph1.t The main argument of appellant is that the appellees' action can not be entertained, because in the distribution of all or part of a partnership's assets, all the partners have no interest and are indispensable parties without whose intervention no decree of distribution can be validly entered. This argument was considered and answered by the Court of Appeals in the following words:

We now come to the last issue involved. While finding that some amounts are due the plaintiffs, the lower court withheld an award in their favor, reasoning that a judgment ordering the defendant to pay might affect the rights of other partners who were not made parties in this case. The reason cited by the lower court does not constitute a legal impediment to a judgment for the plaintiffs in this case. This is not an action for a dissolution of a partnership and winding up of its affairs or liquidation of its assets in which the interest of other partners who are not brought into the case may be affected. The action of the plaintiffs is one for the recovery of a sum of money with Gregorio Magdusa as the principal defendant. The partnership, with Gregorio Magdusa as managing partner, was brought into the case as an alternative defendant only. Plaintiffs' action was based on the allegation, substantiated in evidence, that Gregorio Magdusa, having taken delivery of their shares, failed and refused and still fails and refuses to pay them their claims. The liability, therefore, is personal to Gregorio Magdusa, and the judgment should be against his sole interest, not against the partnership's although the judgment creditors may satisfy the judgment against the interest of Gregorio Magdusa in the partnership subject to the condition imposed by Article 1814 of the Civil Code. We do not find the preceding reasoning tenable. A partner's share can not be returned without first dissolving and liquidating the partnership (Po Yeng Cheo vs. Lim Ka Yam, 44 Phil. 177), for the return is dependent on the discharge of the creditors, whose claims enjoy preference over those of the partners; and it is self-evident that all members of the partnership are interested in his assets and business, and are entitled to be heard in the matter of the firm's liquidation and the distribution of its property. The liquidation Exhibit "C" is not signed by the other members of the partnership besides appellees and appellant; it does not appear that they have approved, authorized, or ratified the same, and, therefore, it is not binding upon them. At the very least, they are entitled to be heard upon its correctness. In addition, unless a proper accounting and liquidation of the partnership affairs is first had, the capital shares of the appellees, as retiring partners, can not be repaid, for the firm's outside creditors have preference over the assets of the enterprise (Civ. Code, Art. 1839), and the firm's property can not be diminished to their prejudice. Finally, the appellant can not be held liable in his personal capacity for the payment of partners' shares for he does not hold them except as manager of, or trustee for, the partnership. It is the latter that must refund their shares to the retiring partners. Since not all the members of the partnership have been impleaded, no judgment for refund can be rendered, and the action should have been dismissed. IN VIEW OF THE FOREGOING, the decision of the Court of Appeals is reversed and the action ordered dismissed, without prejudice to a proper proceeding for the dissolution and liquidation of the common enterprise. Costs against appellees. Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Barrera, Paredes, Dizon, Regala and Makalintal, JJ., concur.

Republic of the Philippines SUPREME COURT Manila SECOND DIVISION

G.R. No. L-40098 August 29, 1975 ANTONIO LIM TANHU, DY OCHAY, ALFONSO LEONARDO NG SUA and CO OYO, petitioners, vs. HON. JOSE R. RAMOLETE as Presiding Judge, Branch III, CFI, Cebu and TAN PUT, respondents. Zosa, Zosa, Castillo, Alcudia & Koh for petitioners. Fidel Manalo and Florido & Associates for respondents.

BARREDO, J.: Petition for (1) certiorari to annul and set aside certain actuations of respondent Court of First Instance of Cebu Branch III in its Civil Case No. 12328, an action for accounting of properties and money totalling allegedly about P15 million pesos filed with a common cause of action against six defendants, in which after declaring four of the said defendants herein petitioners, in default and while the trial as against the two defendants not declared in default was in progress, said court granted plaintiff's motion to dismiss the case in so far as the non-defaulted defendants were concerned and thereafter proceeded to hear ex-parte the rest of the plaintiffs evidence and subsequently rendered judgment by default against the defaulted defendants, with the particularities that notice of the motion to dismiss was not duly served on any of the defendants, who had alleged a compulsory counterclaim against plaintiff in their joint answer, and the judgment so rendered granted reliefs not prayed for in the complaint, and (2) prohibition to enjoin further proceedings relative to the motion for immediate execution of the said judgment. Originally, this litigation was a complaint filed on February 9, 1971 by respondent Tan Put only against the spouses-petitioners Antonio Lim Tanhu and Dy Ochay. Subsequently, in an amended complaint dated September 26, 1972, their son Lim Teck Chuan and the other spouses-petitioners Alfonso Leonardo Ng Sua and Co Oyo and their son Eng Chong Leonardo were included as defendants. In said amended complaint, respondent Tan alleged that she "is the widow of Tee Hoon Lim Po Chuan, who was a partner in the commercial partnership, Glory Commercial Company ... with Antonio Lim Tanhu and Alfonso Ng Sua that "defendant Antonio Lim Tanhu, Alfonso Leonardo Ng Sua, Lim Teck Chuan, and Eng Chong Leonardo, through fraud and machination, took actual and active management of the partnership and although Tee Hoon Lim Po Chuan was the manager of Glory Commercial Company, defendants managed to use the funds of the partnership to purchase lands and building's in the cities of Cebu, Lapulapu, Mandaue, and the municipalities of Talisay and Minglanilla, some of which were hidden, but the description of those already discovered were as follows: (list of properties) ...;" and that:

13. (A)fter the death of Tee Hoon Lim Po Chuan, the defendants, without liquidation continued the business of Glory Commercial Company by purportedly organizing a corporation known as the Glory Commercial Company, Incorporated, with paid up capital in the sum of P125,000.00, which money and other assets of the said Glory Commercial Company, Incorporated are actually the assets of the defunct Glory Commercial Company partnership, of which the plaintiff has a share equivalent to one third (/ 3) thereof; 14. (P)laintiff, on several occasions after the death of her husband, has asked defendants of the above-mentioned properties and for the liquidation of the business of the defunct partnership, including investments on real estate in Hong Kong, but defendants kept on promising to liquidate said properties and just told plaintiff to 15. (S)ometime in the month of November, 1967, defendants, Antonio Lim Tanhu, by means of fraud deceit and misrepresentations did then and there, induce and convince the plaintiff to execute a quitclaim of all her rights and interests, in the assets of the partnership of Glory Commercial Company, which is null and void, executed through fraud and without any legal effect. The original of said quitclaim is in the possession of the adverse party defendant Antonio Lim Tanhu. 16. (A)s a matter of fact, after the execution of said quitclaim, defendant Antonio Lim Tanhu offered to pay the plaintiff the amount P65,000.00 within a period of one (1) month, for which plaintiff was made to sign a receipt for the amount of P65,000.00 although no such amount was given and plaintiff was not even given a copy of said document; 17. (T)hereafter, in the year 1968-69, the defendants who had earlier promised to liquidate the aforesaid properties and assets in favor among others of plaintiff and until the middle of the year 1970 when the plaintiff formally demanded from the defendants the accounting of real and personal properties of the Glory Commercial Company, defendants refused and stated that they would not give the share of the plaintiff. (Pp. 36-37, Record.) She prayed as follows: WHEREFORE, it is most respectfully prayed that judgment be rendered: a) Ordering the defendants to render an accounting of the real and personal properties of the Glory Commercial Company including those registered in the names of the defendants and other persons, which properties are located in the Philippines and in Hong Kong; b) Ordering the defendants to deliver to the plaintiff after accounting, one third (/ 3) of the total value of all the properties which is approximately P5,000,000.00 representing the just share of the plaintiff;

c) Ordering the defendants to pay the attorney of the plaintiff the sum of Two Hundred Fifty Thousand Pesos (P250,000.00) by way of attorney's fees and damages in the sum of One Million Pesos (P1,000,000.00). This Honorable Court is prayed for other remedies and reliefs consistent with law and equity and order the defendants to pay the costs. (Page 38, Record.) The admission of said amended complaint was opposed by defendants upon the ground that there were material modifications of the causes of action previously alleged, but respondent judge nevertheless allowed the amendment reasoning that: The present action is for accounting of real and personal properties as well as for the recovery of the same with damages. An objective consideration of pars. 13 and 15 of the amended complaint pointed out by the defendants to sustain their opposition will show that the allegations of facts therein are merely to amplify material averments constituting the cause of action in the original complaint. It likewise include necessary and indispensable defendants without whom no final determination can be had in the action and in order that complete relief is to be accorded as between those already parties. Considering that the amendments sought to be introduced do not change the main causes of action in the original complaint and the reliefs demanded and to allow amendments is the rule, and to refuse them the exception and in order that the real question between the parties may be properly and justly threshed out in a single proceeding to avoid multiplicity of actions. (Page 40, Record.) In a single answer with counterclaim, over the signature of their common counsel, defendants denied specifically not only the allegation that respondent Tan is the widow of Tee Hoon because, according to them, his legitimate wife was Ang Siok Tin still living and with whom he had four (4) legitimate children, a twin born in 1942, and two others born in 1949 and 1965, all presently residing in Hongkong, but also all the allegations of fraud and conversion quoted above, the truth being, according to them, that proper liquidation had been regularly made of the business of the partnership and Tee Hoon used to receive his just share until his death, as a result of which the partnership was dissolved and what corresponded to him were all given to his wife and children. To quote the pertinent portions of said answer: AND BY WAY OF SPECIAL AND AFFIRMATIVE DEFENSES, defendants hereby incorporate all facts averred and alleged in the answer, and further most respectfully declare: 1. That in the event that plaintiff is filing the present complaint as an heir of Tee Hoon Lim Po Chuan, then, she has no legal capacity to sue as such, considering that the legitimate wife, namely: Ang Siok Tin, together with their children are still alive. Under Sec. 1, (d), Rule 16 of the Revised Rules of Court, lack of legal capacity to sue is one of

the grounds for a motion to dismiss and so defendants prays that a preliminary hearing be conducted as provided for in Sec. 5, of the same rule; 2. That in the alternative case or event that plaintiff is filing the present case under Art. 144 of the Civil Code, then, her claim or demand has been paid, waived abandoned or otherwise extinguished as evidenced by the 'quitclaim' Annex 'A' hereof, the ground cited is another ground for a motion to dismiss (Sec. 1, (h), Rule 16) and hence defendants pray that a preliminary hearing be made in connection therewith pursuant to Section 5 of the aforementioned rule; 3. That Tee Hoon Lim Po Chuan was legally married to Ang Siok Tin and were blessed with the following children, to wit: Ching Siong Lim and Ching Hing Lim (twins) born on February 16, 1942; Lim Shing Ping born on March 3, 1949 and Lim Eng Lu born on June 25, 1965 and presently residing in Hongkong; 4. That even before the death of Tee Hoon Lim Po Chuan, the plaintiff was no longer his common law wife and even though she was not entitled to anything left by Tee Hoon Lim Po Chuan, yet, out of the kindness and generosity on the part of the defendants, particularly Antonio Lain Tanhu, who, was inspiring to be monk and in fact he is now a monk, plaintiff was given a substantial amount evidenced by the 'quitclaim' (Annex 'A'); 5. That the defendants have acquired properties out of their own personal fund and certainly not from the funds belonging to the partnership, just as Tee Hoon Lim Po Chuan had acquired properties out of his personal fund and which are now in the possession of the widow and neither the defendants nor the partnership have anything to do about said properties; 6. That it would have been impossible to buy properties from funds belonging to the partnership without the other partners knowing about it considering that the amount taken allegedly is quite big and with such big amount withdrawn the partnership would have been insolvent; 7. That plaintiff and Tee Hoon Lim Po Chuan were not blessed with children who would have been lawfully entitled to succeed to the properties left by the latter together with the widow and legitimate children; 8. That despite the fact that plaintiff knew that she was no longer entitled to anything of the shares of the late Tee Hoon Lim Po Chuan, yet, this suit was filed against the defendant who have to interpose the following COUNTERCLAIM A. That the defendants hereby reproduced, by way of reference, all the allegations and foregoing averments as part of this counterclaim; . B. That plaintiff knew and was aware she was merely the common-law wife of Tee Hoon Lim Po Chuan and that the lawful and legal is still living, together with the legitimate

children, and yet she deliberately suppressed this fact, thus showing her bad faith and is therefore liable for exemplary damages in an amount which the Honorable Court may determine in the exercise of its sound judicial discretion. In the event that plaintiff is married to Tee Hoon Lim Po Chuan, then, her marriage is bigamous and should suffer the consequences thereof; C. That plaintiff was aware and had knowledge about the 'quitclaim', even though she was not entitled to it, and yet she falsely claimed that defendants refused even to see her and for filing this unfounded, baseless, futile and puerile complaint, defendants suffered mental anguish and torture conservatively estimated to be not less than P3,000.00; D. That in order to defend their rights in court, defendants were constrained to engage the services of the undersigned counsel, obligating themselves to pay P500,000.00 as attorney's fees; E. That by way of litigation expenses during the time that this case will be before this Honorable Court and until the same will be finally terminated and adjudicated, defendants will have to spend at least P5,000.00. (Pp. 44-47. Record.) After unsuccessfully trying to show that this counterclaim is merely permissive and should be dismissed for non-payment of the corresponding filing fee, and after being overruled by the court, in due time, plaintiff answered the same, denying its material allegations. On February 3, 1973, however, the date set for the pre-trial, both of the two defendants-spouses the Lim Tanhus and Ng Suas, did not appear, for which reason, upon motion of plaintiff dated February 16, 1973, in an order of March 12, 1973, they were all "declared in DEFAULT as of February 3, 1973 when they failed to appear at the pre-trial." They sought to hive this order lifted thru a motion for reconsideration, but the effort failed when the court denied it. Thereafter, the trial started, but at the stage thereof where the first witness of the plaintiff by the name of Antonio Nuez who testified that he is her adopted son, was up for re-cross-examination, said plaintiff unexpectedly filed on October 19, 1974 the following simple and unreasoned MOTION TO DROP DEFENDANTS LIM TECK CHUAN AND ENG CHONG LEONARDO COMES now plaintiff, through her undersigned counsel, unto the Honorable Court most respectfully moves to drop from the complaint the defendants Lim Teck Chuan and Eng Chong Leonardo and to consider the case dismissed insofar as said defendants Lim Teck Chuan and Eng Chong Leonardo are concerned. WHEREFORE, it is most respectfully prayed of the Honorable Court to drop from the complaint the defendants Lim Teck Chuan and Eng Chong Leonardo and to dismiss the case against them without pronouncement as to costs. (Page 50, Record.) which she set for hearing on December 21, 1974. According to petitioners, none of the defendants declared in default were notified of said motion, in violation of Section 9 of

Rule 13, since they had asked for the lifting of the order of default, albeit unsuccessfully, and as regards the defendants not declared in default, the setting of the hearing of said motion on October 21, 1974 infringed the three-day requirement of Section 4 of Rule 15, inasmuch as Atty. Adelino Sitoy of Lim Teck Chuan was served with a copy of the motion personally only on October 19, 1974, while Atty. Benjamin Alcudia of Eng Chong Leonardo was served by registered mail sent only on the same date. Evidently without even verifying the notices of service, just as simply as plaintiff had couched her motion, and also without any legal grounds stated, respondent court granted the prayer of the above motion thus: ORDER Acting on the motion of the plaintiff praying for the dismissal of the complaint as against defendants Lim Teck Chuan and Eng Chong Leonardo. The same is hereby GRANTED. The complaint as against defendant Lim Teck Chuan and Eng Chong Leonardo is hereby ordered DISMISSED without pronouncement as to costs. Simultaneously, the following order was also issued: Considering that defendants Antonio Lim Tanhu and his spouse Dy Ochay as well as defendants Alfonso Ng Sua and his spouse Co Oyo have been declared in default for failure to appear during the pre-trial and as to the other defendants the complaint had already been ordered dismissed as against them. Let the hearing of the plaintiff's evidence ex-parte be set on November 20, 1974, at 8:30 A.M. before the Branch Clerk of Court who is deputized for the purpose, to swear in witnesses and to submit her report within ten (10) days thereafter. Notify the plaintiff. SO ORDERED. Cebu City, Philippines, October 21, 1974. (Page 52, Record.) But, in connection with this last order, the scheduled ex-parte reception of evidence did not take place on November 20, 1974, for on October 28, 1974, upon verbal motion of plaintiff, the court issued the following self-explanatory order: . Acting favorably on the motion of the plaintiff dated October 18, 1974, the Court deputized the Branch Clerk of Court to receive the evidence of the plaintiff ex-parte to be made on November 20, 1974. However, on October 28, 1974, the plaintiff, together with her witnesses, appeared in court and asked, thru counsel, that she be allowed to present her evidence. Considering the time and expenses incurred by the plaintiff in bringing her witnesses to the court, the Branch Clerk of Court is hereby authorized to receive immediately the evidence of the plaintiffex-parte.

SO ORDERED. Cebu City, Philippines, October 28, 1974. (Page 53. Record.) Upon learning of these orders on October 23, 1973, the defendant Lim Teck Cheng, thru counsel, Atty. Sitoy, filed a motion for reconsideration thereof, and on November 1, 1974, defendant Eng Chong Leonardo, thru counsel Atty. Alcudia, filed also his own motion for reconsideration and clarification of the same orders. These motions were denied in an order dated December 6, 1974 but received by the movants only on December 23, 1974. Meanwhile, respondent court rendered the impugned decision on December 20, 1974. It does not appear when the parties were served copies of this decision. Subsequently, on January 6, 1975, all the defendants, thru counsel, filed a motion to quash the order of October 28, 1974. Without waiting however for the resolution thereof, on January 13, 1974, Lim Teck Chuan and Eng Chong Leonardo went to the Court of Appeals with a petition for certiorari seeking the annulment of the above-mentioned orders of October 21, 1974 and October 28, 1974 and decision of December 20, 1974. By resolution of January 24, 1975, the Court of Appeals dismissed said petition, holding that its filing was premature, considering that the motion to quash the order of October 28, 1974 was still unresolved by the trial court. This holding was reiterated in the subsequent resolution of February 5, 1975 denying the motion for reconsideration of the previous dismissal. On the other hand, on January 20, 1975, the other defendants, petitioners herein, filed their notice of appeal, appeal bond and motion for extension to file their record on appeal, which was granted, the extension to expire after fifteen (15) days from January 26 and 27, 1975, for defendants Lim Tanhu and Ng Suas, respectively. But on February 7, 1975, before the perfection of their appeal, petitioners filed the present petition with this Court. And with the evident intent to make their procedural position clear, counsel for defendants, Atty. Manuel Zosa, filed with respondent court a manifestation dated February 14, 1975 stating that "when the non-defaulted defendants Eng Chong Leonardo and Lim Teck Chuan filed their petition in the Court of Appeals, they in effect abandoned their motion to quash the order of October 28, 1974," and that similarly "when Antonio Lim Tanhu, Dy Ochay, Alfonso Leonardo Ng Sua and Co Oyo, filed their petition for certiorari and prohibition ... in the Supreme Court, they likewise abandoned their motion to quash." This manifestation was acted upon by respondent court together with plaintiffs motion for execution pending appeal in its order of the same date February 14, 1975 this wise: ORDER When these incidents, the motion to quash the order of October 28, 1974 and the motion for execution pending appeal were called for hearing today, counsel for the defendants-movants submitted their manifestation inviting the attention of this Court that by their filing for certiorari and prohibition with preliminary injunction in the Court of Appeals which was dismissed and later the defaulted defendants filed with the Supreme Court certiorari with prohibition they in effect abandoned their motion to quash. IN VIEW HEREOF, the motion to quash is ordered ABANDONED. The resolution of the motion for execution pending appeal shall be resolved after the petition for certiorari and prohibition shall have been resolved by the Supreme Court.

SO ORDERED. Cebu City, Philippines, February 14, 1975. (Page 216, Record.) Upon these premises, it is the position of petitioners that respondent court acted illegally, in violation of the rules or with grave abuse of discretion in acting on respondent's motion to dismiss of October 18, 1974 without previously ascertaining whether or not due notice thereof had been served on the adverse parties, as, in fact, no such notice was timely served on the non-defaulted defendants Lim Teck Chuan and Eng Chong Leonardo and no notice at all was ever sent to the other defendants, herein petitioners, and more so, in actually ordering the dismissal of the case by its order of October 21, 1974 and at the same time setting the case for further hearing as against the defaulted defendants, herein petitioners, actually hearing the same ex-parte and thereafter rendering the decision of December 20, 1974 granting respondent Tan even reliefs not prayed for in the complaint. According to the petitioners, to begin with, there was compulsory counterclaim in the common answer of the defendants the nature of which is such that it cannot be decided in an independent action and as to which the attention of respondent court was duly called in the motions for reconsideration. Besides, and more importantly, under Section 4 of Rule 18, respondent court had no authority to divide the case before it by dismissing the same as against the non-defaulted defendants and thereafter proceeding to hear it ex-parte and subsequently rendering judgment against the defaulted defendants, considering that in their view, under the said provision of the rules, when a common cause of action is alleged against several defendants, the default of any of them is a mere formality by which those defaulted are not allowed to take part in the proceedings, but otherwise, all the defendants, defaulted and not defaulted, are supposed to have but a common fate, win or lose. In other words, petitioners posit that in such a situation, there can only be one common judgment for or against all the defendant, the non-defaulted and the defaulted. Thus, petitioners contend that the order of dismissal of October 21, 1974 should be considered also as the final judgment insofar as they are concerned, or, in the alternative, it should be set aside together with all the proceedings and decision held and rendered subsequent thereto, and that the trial be resumed as of said date, with the defendants Lim Teck Chuan and Eng Chong Leonardo being allowed to defend the case for all the defendants. On the other hand, private respondent maintains the contrary view that inasmuch as petitioners had been properly declared in default, they have no personality nor interest to question the dismissal of the case as against their non-defaulted co-defendants and should suffer the consequences of their own default. Respondent further contends, and this is the only position discussed in the memorandum submitted by her counsel, that since petitioners have already made or at least started to make their appeal, as they are in fact entitled to appeal, this special civil action has no reason for being. Additionally, she invokes the point of prematurity upheld by the Court of Appeals in regard to the above-mentioned petition therein of the non-defaulted defendants Lim Teck Chuan and Eng Chong Leonardo. Finally, she argues that in any event, the errors attributed to respondent court are errors of judgment and may be reviewed only in an appeal. After careful scrutiny of all the above-related proceedings, in the court below and mature deliberation, the Court has arrived at the conclusion that petitioners should be granted relief, if only to stress emphatically once more that the rules of procedure may not be misused and abused as instruments for the denial of substantial justice. A review of the record of this case immediately discloses that here is another demonstrative instance of how some members of the bar, availing of their proficiency in invoking the letter of the rules without regard to their real spirit and intent, succeed in inducing courts to act contrary to the dictates of justice and equity, and, in some instances, to wittingly or unwittingly

abet unfair advantage by ironically camouflaging their actuations as earnest efforts to satisfy the public clamor for speedy disposition of litigations, forgetting all the while that the plain injunction of Section 2 of Rule 1 is that the "rules shall be liberally construed in order to promote their object and to assist the parties in obtaining not only 'speedy' but more imperatively, "just ... and inexpensive determination of every action and proceeding." We cannot simply pass over the impression that the procedural maneuvers and tactics revealed in the records of the case at bar were deliberately planned with the calculated end in view of depriving petitioners and their co-defendants below of every opportunity to properly defend themselves against a claim of more than substantial character, considering the millions of pesos worth of properties involved as found by respondent judge himself in the impugned decision, a claim that appears, in the light of the allegations of the answer and the documents already brought to the attention of the court at the pre-trial, to be rather dubious. What is most regrettable is that apparently, all of these alarming circumstances have escaped respondent judge who did not seem to have hesitated in acting favorably on the motions of the plaintiff conducive to the deplorable objective just mentioned, and which motions, at the very least, appeared to be 'of highly controversial' merit, considering that their obvious tendency and immediate result would be to convert the proceedings into a one-sided affair, a situation that should be readily condemnable and intolerable to any court of justice. Indeed, a seeming disposition on the part of respondent court to lean more on the contentions of private respondent may be discerned from the manner it resolved the attempts of defendants Dy Ochay and Antonio Lim Tanhu to have the earlier order of default against them lifted. Notwithstanding that Dy Ochay's motion of October 8, 1971, co-signed by her with their counsel, Atty. Jovencio Enjambre (Annex 2 of respondent answer herein) was over the jurat of the notary public before whom she took her oath, in the order of November 2, 1971, (Annex 3 id.) it was held that "the oath appearing at the bottom of the motion is not the one contemplated by the abovequoted pertinent provision (See. 3, Rule 18) of the rules. It is not even a verification. (See. 6, Rule 7.) What the rule requires as interpreted by the Supreme Court is that the motion must have to be accompanied by an affidavit of merits that the defendant has a meritorious defense, thereby ignoring the very simple legal point that the ruling of the Supreme Court in Ong Peng vs. Custodio, 1 SCRA 781, relied upon by His Honor, under which a separate affidavit of merit is required refers obviously to instances where the motion is not over oath of the party concerned, considering that what the cited provision literally requires is no more than a "motion under oath." Stated otherwise, when a motion to lift an order of default contains the reasons for the failure to answer as well as the facts constituting the prospective defense of the defendant and it is sworn to by said defendant, neither a formal verification nor a separate affidavit of merit is necessary. What is worse, the same order further held that the motion to lift the order of default "is an admission that there was a valid service of summons" and that said motion could not amount to a challenge against the jurisdiction of the court over the person of the defendant. Such a rationalization is patently specious and reveals an evident failure to grasp the import of the legal concepts involved. A motion to lift an order of default on the ground that service of summons has not been made in accordance with the rules is in order and is in essence verily an attack against the jurisdiction of the court over the person of the defendant, no less than if it were worded in a manner specifically embodying such a direct challenge. And then, in the order of February 14, 1972 (Annex 6, id.) lifting at last the order of default as against defendant Lim Tanhu, His Honor posited that said defendant "has a defense (quitclaim) which renders the claim of the plaintiff contentious." We have read defendants' motion for reconsideration of November 25, 1971 (Annex 5,id.), but We cannot find in it any reference to a "quitclaim". Rather, the allegation of a quitclaim is in the amended complaint (Pars. 15-16, Annex B of the petition herein) in

which plaintiff maintains that her signature thereto was secured through fraud and deceit. In truth, the motion for reconsideration just mentioned, Annex 5, merely reiterated the allegation in Dy Ochay's earlier motion of October 8, 1971, Annex 2, to set aside the order of default, that plaintiff Tan could be but the common law wife only of Tee Hoon, since his legitimate wife was still alive, which allegation, His Honor held in the order of November 2, 1971, Annex 3, to be "not good and meritorious defense". To top it all, whereas, as already stated, the order of February 19, 1972, Annex 6, lifted the default against Lim Tanhu because of the additional consideration that "he has a defense (quitclaim) which renders the claim of the plaintiff contentious," the default of Dy Ochay was maintained notwithstanding that exactly the same "contentions" defense as that of her husband was invoked by her. Such tenuous, if not altogether erroneous reasonings and manifest inconsistency in the legal postures in the orders in question can hardly convince Us that the matters here in issue were accorded due and proper consideration by respondent court. In fact, under the circumstances herein obtaining, it seems appropriate to stress that, having in view the rather substantial value of the subject matter involved together with the obviously contentious character of plaintiff's claim, which is discernible even on the face of the complaint itself, utmost care should have been taken to avoid the slightest suspicion of improper motivations on the part of anyone concerned. Upon the considerations hereunder to follow, the Court expresses its grave concern that much has to be done to dispel the impression that herein petitioners and their co-defendants are being railroaded out of their rights and properties without due process of law, on the strength of procedural technicalities adroitly planned by counsel and seemingly unnoticed and undetected by respondent court, whose orders, gauged by their tenor and the citations of supposedly pertinent provisions and jurisprudence made therein, cannot be said to have proceeded from utter lack of juridical knowledgeability and competence. 1 The first thing that has struck the Court upon reviewing the record is the seeming alacrity with which the motion to dismiss the case against non-defaulted defendants Lim Teck Chuan and Eng Chong Leonardo was disposed of, which definitely ought not to have been the case. The trial was proceeding with the testimony of the first witness of plaintiff and he was still under re-cross-examination. Undoubtedly, the motion to dismiss at that stage and in the light of the declaration of default against the rest of the defendants was a well calculated surprise move, obviously designed to secure utmost advantage of the situation, regardless of its apparent unfairness. To say that it must have been entirely unexpected by all the defendants, defaulted and non-defaulted , is merely to rightly assume that the parties in a judicial proceeding can never be the victims of any procedural waylaying as long as lawyers and judges are imbued with the requisite sense of equity and justice. But the situation here was aggravated by the indisputable fact that the adverse parties who were entitled to be notified of such unanticipated dismissal motion did not get due notice thereof. Certainly, the non-defaulted defendants had the right to the three-day prior notice required by Section 4 of Rule 15. How could they have had such indispensable notice when the motion was set for hearing on Monday, October 21, 1974, whereas the counsel for Lim Teck Chuan, Atty. Sitoy was personally served with the notice only on Saturday, October 19, 1974 and the counsel for Eng Chong Leonardo, Atty. Alcudia, was notified by registered mail which was posted only that same Saturday, October 19, 1974? According to Chief Justice Moran, "three days at least must intervene between the date of service of notice and the date set for the hearing, otherwise the court may not validly act on the motion." (Comments on the Rules of Court by Moran, Vol. 1, 1970 ed. p. 474.) Such is the correct construction of

Section 4 of Rule 15. And in the instant case, there can be no question that the notices to the nondefaulted defendants were short of the requirement of said provision. We can understand the over-anxiety of counsel for plaintiff, but what is incomprehensible is the seeming inattention of respondent judge to the explicit mandate of the pertinent rule, not to speak of the imperatives of fairness, considering he should have realized the far-reaching implications, specially from the point of view he subsequently adopted, albeit erroneously, of his favorably acting on it. Actually, he was aware of said consequences, for simultaneously with his order of dismissal, he immediately set the case for the ex-parte hearing of the evidence against the defaulted defendants, which, incidentally, from the tenor of his order which We have quoted above, appears to have been done by him motu propio As a matter of fact, plaintiff's motion also quoted above did not pray for it. Withal, respondent court's twin actions of October 21, 1974 further ignores or is inconsistent with a number of known juridical principles concerning defaults, which We will here take occasion to reiterate and further elucidate on, if only to avoid a repetition of the unfortunate errors committed in this case. Perhaps some of these principles have not been amply projected and elaborated before, and such paucity of elucidation could be the reason why respondent judge must have acted as he did. Still, the Court cannot but express its vehement condemnation of any judicial actuation that unduly deprives any party of the right to be heard without clear and specific warrant under the terms of existing rules or binding jurisprudence. Extreme care must be the instant reaction of every judge when confronted with a situation involving risks that the proceedings may not be fair and square to all the parties concerned. Indeed, a keen sense of fairness, equity and justice that constantly looks for consistency between the letter of the adjective rules and these basic principles must be possessed by every judge, If substance is to prevail, as it must, over form in our courts. Literal observance of the rules, when it is conducive to unfair and undue advantage on the part of any litigant before it, is unworthy of any court of justice and equity. Withal, only those rules and procedure informed, with and founded on public policy deserve obedience in accord with their unequivocal language or words.. Before proceeding to the discussion of the default aspects of this case, however, it should not be amiss to advert first to the patent incorrectness, apparent on the face of the record, of the aforementioned order of dismissal of October 21, 1974 of the case below as regards non-defaulted defendants Lim and Leonardo. While it is true that said defendants are not petitioners herein, the Court deems it necessary for a full view of the outrageous procedural strategy conceived by respondent's counsel and sanctioned by respondent court to also make reference to the very evident fact that in ordering said dismissal respondent court disregarded completely the existence of defendant's counterclaim which it had itself earlier held if indirectly, to be compulsory in nature when it refused to dismiss the same on the ground alleged by respondent Tan that he docketing fees for the filing thereof had not been paid by defendants. Indeed, that said counterclaim is compulsory needs no extended elaboration. As may be noted in the allegations hereof aforequoted, it arose out of or is necessarily connected with the occurrence that is the subject matter of the plaintiff's claim, (Section 4, Rule 9) namely, plaintiff's allegedly being the widow of the deceased Tee Hoon entitled, as such, to demand accounting of and to receive the share of her alleged late husband as partner of defendants Antonio Lim Tanhu and Alfonso Leonardo Ng Sua in Glory Commercial Company, the truth of which allegations all the defendants have denied. Defendants maintain in their counterclaim that plaintiff knew of the falsity of said allegations even before she filed her complaint, for she had in fact admitted her common-law relationship with said deceased in a document she had jointly executed with him by way of agreement to terminate their illegitimate relationship, for which she received P40,000 from the deceased, and with respect to her pretended

share in the capital and profits in the partnership, it is also defendants' posture that she had already quitclaimed, with the assistance of able counsel, whatever rights if any she had thereto in November, 1967, for the sum of P25,000 duly receipted by her, which quitclaim was, however, executed, according to respondent herself in her amended complaint, through fraud. And having filed her complaint knowing, according to defendants, as she ought to have known, that the material allegations thereof are false and baseless, she has caused them to suffer damages. Undoubtedly, with such allegations, defendants' counterclaim is compulsory, not only because the same evidence to sustain it will also refute the cause or causes of action alleged in plaintiff's complaint, (Moran, supra p. 352) but also because from its very nature, it is obvious that the same cannot "remain pending for independent adjudication by the court." (Section 2, Rule 17.) The provision of the rules just cited specifically enjoins that "(i)f a counterclaim has been pleaded by a defendant prior to the service upon him of the plaintiff's motion to dismiss, the action shall not be dismissed against the defendant's objection unless the counterclaim can remain pending for independent adjudication by the court." Defendants Lim and Leonardo had no opportunity to object to the motion to dismiss before the order granting the same was issued, for the simple reason that they were not opportunity notified of the motion therefor, but the record shows clearly that at least defendant Lim immediately brought the matter of their compulsory counterclaim to the attention of the trial court in his motion for reconsideration of October 23, 1974, even as the counsel for the other defendant, Leonardo, predicated his motion on other grounds. In its order of December 6, 1974, however, respondent court not only upheld the plaintiffs supposed absolute right to choose her adversaries but also held that the counterclaim is not compulsory, thereby virtually making unexplained and inexplicable 180-degree turnabout in that respect. There is another equally fundamental consideration why the motion to dismiss should not have been granted. As the plaintiff's complaint has been framed, all the six defendants are charged with having actually taken part in a conspiracy to misappropriate, conceal and convert to their own benefit the profits, properties and all other assets of the partnership Glory Commercial Company, to the extent that they have allegedly organized a corporation, Glory Commercial Company, Inc. with what they had illegally gotten from the partnership. Upon such allegations, no judgment finding the existence of the alleged conspiracy or holding the capital of the corporation to be the money of the partnership is legally possible without the presence of all the defendants. The non-defaulted defendants are alleged to be stockholders of the corporation and any decision depriving the same of all its assets cannot but prejudice the interests of said defendants. Accordingly, upon these premises, and even prescinding from the other reasons to be discussed anon it is clear that all the six defendants below, defaulted and nondefaulted, are indispensable parties. Respondents could do no less than grant that they are so on page 23 of their answer. Such being the case, the questioned order of dismissal is exactly the opposite of what ought to have been done. Whenever it appears to the court in the course of a proceeding that an indispensable party has not been joined, it is the duty of the court to stop the trial and to order the inclusion of such party. (The Revised Rules of Court, Annotated & Commented by Senator Vicente J. Francisco, Vol. 1, p. 271, 1973 ed. See also Cortez vs. Avila, 101 Phil. 705.) Such an order is unavoidable, for the "general rule with reference to the making of parties in a civil action requires the joinder of all necessary parties wherever possible, and the joinder of all indispensable parties under any and all conditions, the presence of those latter being a sine qua non of the exercise of judicial power." (Borlasa vs. Polistico, 47 Phil. 345, at p. 347.) It is precisely " when an indispensable party is not before the court (that) the action should be dismissed." (People v. Rodriguez, 106 Phil. 325, at p. 327.) The absence of an indispensable party renders all subsequent actuations of the court null and void, for want of authority to act, not only as to the absent parties but even as to those present. In short, what respondent court did

here was exactly the reverse of what the law ordains it eliminated those who by law should precisely be joined. As may he noted from the order of respondent court quoted earlier, which resolved the motions for reconsideration of the dismissal order filed by the non-defaulted defendants, His Honor rationalized his position thus: It is the rule that it is the absolute prerogative of the plaintiff to choose, the theory upon which he predicates his right of action, or the parties he desires to sue, without dictation or imposition by the court or the adverse party. If he makes a mistake in the choice of his right of action, or in that of the parties against whom he seeks to enforce it, that is his own concern as he alone suffers therefrom. The plaintiff cannot be compelled to choose his defendants, He may not, at his own expense, be forced to implead anyone who, under the adverse party's theory, is to answer for defendant's liability. Neither may the Court compel him to furnish the means by which defendant may avoid or mitigate their liability. (Vao vs. Alo, 95 Phil. 495-496.) This being the rule this court cannot compel the plaintiff to continue prosecuting her cause of action against the defendants-movants if in the course of the trial she believes she can enforce it against the remaining defendants subject only to the limitation provided in Section 2, Rule 17 of the Rules of Court. ... (Pages 6263, Record.) Noticeably, His Honor has employed the same equivocal terminology as in plaintiff's motion of October 18, 1974 by referring to the action he had taken as being "dismissal of the complaint against them or their being dropped therefrom", without perceiving that the reason for the evidently intentional ambiguity is transparent. The apparent idea is to rely on the theory that under Section 11 of Rule 3, parties may be dropped by the court upon motion of any party at any stage of the action, hence "it is the absolute right prerogative of the plaintiff to choosethe parties he desires to sue, without dictation or imposition by the court or the adverse party." In other words, the ambivalent pose is suggested that plaintiff's motion of October 18, 1974 was not predicated on Section 2 of Rule 17 but more on Section 11 of Rule 3. But the truth is that nothing can be more incorrect. To start with, the latter rule does not comprehend whimsical and irrational dropping or adding of parties in a complaint. What it really contemplates is erroneous or mistaken non-joinder and misjoinder of parties. No one is free to join anybody in a complaint in court only to drop him unceremoniously later at the pleasure of the plaintiff. The rule presupposes that the original inclusion had been made in the honest conviction that it was proper and the subsequent dropping is requested because it has turned out that such inclusion was a mistake. And this is the reason why the rule ordains that the dropping be "on such terms as are just" just to all the other parties. In the case at bar, there is nothing in the record to legally justify the dropping of the non-defaulted defendants, Lim and Leonardo. The motion of October 18, 1974 cites none. From all appearances, plaintiff just decided to ask for it, without any relevant explanation at all. Usually, the court in granting such a motion inquires for the reasons and in the appropriate instances directs the granting of some form of compensation for the trouble undergone by the defendant in answering the complaint, preparing for or proceeding partially to trial, hiring counsel and making corresponding expenses in the premises. Nothing of these, appears in the order in question. Most importantly, His Honor ought to have considered that the outright dropping of the non-defaulted defendants Lim and Leonardo, over their objection at that, would certainly be unjust not only to the petitioners, their own parents, who would in consequence be entirely defenseless, but also to Lim and Leonardo themselves who would naturally correspondingly suffer from the eventual judgment against

their parents. Respondent court paid no heed at all to the mandate that such dropping must be on such terms as are just" meaning to all concerned with its legal and factual effects. Thus, it is quite plain that respondent court erred in issuing its order of dismissal of October 21, 1974 as well as its order of December 6, 1974 denying reconsideration of such dismissal. As We make this ruling, We are not oblivious of the circumstance that defendants Lim and Leonardo are not parties herein. But such consideration is inconsequential. The fate of the case of petitioners is inseparably tied up with said order of dismissal, if only because the order of ex-parte hearing of October 21, 1974 which directly affects and prejudices said petitioners is predicated thereon. Necessarily, therefore, We have to pass on the legality of said order, if We are to decide the case of herein petitioners properly and fairly. The attitude of the non-defaulted defendants of no longer pursuing further their questioning of the dismissal is from another point of view understandable. On the one hand, why should they insist on being defendants when plaintiff herself has already release from her claims? On the other hand, as far as their respective parents-co-defendants are concerned, they must have realized that they (their parents) could even be benefited by such dismissal because they could question whether or not plaintiff can still prosecute her case against them after she had secured the order of dismissal in question. And it is in connection with this last point that the true and correct concept of default becomes relevant. At this juncture, it may also be stated that the decision of the Court of Appeals of January 24, 1975 in G. R. No. SP-03066 dismissing the petition for certiorari of non-defaulted defendants Lim and Leonardo impugning the order of dismissal of October 21, 1974, has no bearing at all in this case, not only because that dismissal was premised by the appellate court on its holding that the said petition was premature inasmuch as the trial court had not yet resolved the motion of the defendants of October 28, 1974 praying that said disputed order be quashed, but principally because herein petitioners were not parties in that proceeding and cannot, therefore, be bound by its result. In particular, We deem it warranted to draw the attention of private respondent's counsel to his allegations in paragraphs XI to XIV of his answer, which relate to said decision of the Court of Appeals and which have the clear tendency to make it appear to the Court that the appeals court had upheld the legality and validity of the actuations of the trial court being questioned, when as a matter of indisputable fact, the dismissal of the petition was based solely and exclusively on its being premature without in any manner delving into its merits. The Court must and does admonish counsel that such manner of pleading, being deceptive and lacking in candor, has no place in any court, much less in the Supreme Court, and if We are adopting a passive attitude in the premises, it is due only to the fact that this is counsel's first offense. But similar conduct on his part in the future will definitely be dealt with more severely. Parties and counsel would be well advised to avoid such attempts to befuddle the issues as invariably then will be exposed for what they are, certainly unethical and degrading to the dignity of the law profession. Moreover, almost always they only betray the inherent weakness of the cause of the party resorting to them. 2 Coming now to the matter itself of default, it is quite apparent that the impugned orders must have proceeded from inadequate apprehension of the fundamental precepts governing such procedure under the Rules of Court. It is time indeed that the concept of this procedural device were fully understood by the bench and bar, instead of being merely taken for granted as being that of a simple expedient of not allowing the offending party to take part in the proceedings, so that after his adversary shall have presented his evidence, judgment may be rendered in favor of such opponent, with hardly any chance of said judgment being reversed or modified.

The Rules of Court contain a separate rule on the subject of default, Rule 18. But said rule is concerned solely with default resulting from failure of the defendant or defendants to answer within the reglementary period. Referring to the simplest form of default, that is, where there is only one defendant in the action and he fails to answer on time, Section 1 of the rule provides that upon "proof of such failure, (the court shall) declare the defendant in default. Thereupon the court shall proceed to receive the plaintiff's evidence and render judgment granting him such relief as the complaint and the facts proven may warrant." This last clause is clarified by Section 5 which says that "a judgment entered against a party in default shall not exceed the amount or be different in kind from that prayed for." Unequivocal, in the literal sense, as these provisions are, they do not readily convey the full import of what they contemplate. To begin with, contrary to the immediate notion that can be drawn from their language, these provisions are not to be understood as meaning that default or the failure of the defendant to answer should be "interpreted as an admission by the said defendant that the plaintiff's cause of action find support in the law or that plaintiff is entitled to the relief prayed for." (Moran, supra, p. 535 citing Macondary & Co. v. Eustaquio, 64 Phil. 466, citing with approval Chaffin v. McFadden, 41 Ark. 42; Johnson v. Pierce, 12 Ark. 599; Mayden v. Johnson, 59 Ga. 105; People v. Rust, 292 111. 328; Ken v. Leopold 21 111. A. 163; Chicago, etc. Electric R. Co. v. Krempel 116 111. A. 253.) Being declared in default does not constitute a waiver of rights except that of being heard and of presenting evidence in the trial court. According to Section 2, "except as provided in Section 9 of Rule 13, a party declared in default shall not be entitled to notice of subsequent proceedings, nor to take part in the trial." That provision referred to reads: "No service of papers other than substantially amended pleadings and final orders or judgments shall be necessary on a party in default unless he files a motion to set aside the order of default, in which event he shall be entitled to notice of all further proceedings regardless of whether the order of default is set aside or not." And pursuant to Section 2 of Rule 41, "a party who has been declared in default may likewise appeal from the judgment rendered against him as contrary to the evidence or to the law, even if no petition for relief to set aside the order of default has been presented by him in accordance with Rule 38.". In other words, a defaulted defendant is not actually thrown out of court. While in a sense it may be said that by defaulting he leaves himself at the mercy of the court, the rules see to it that any judgment against him must be in accordance with law. The evidence to support the plaintiff's cause is, of course, presented in his absence, but the court is not supposed to admit that which is basically incompetent. Although the defendant would not be in a position to object, elementary justice requires that, only legal evidence should be considered against him. If the evidence presented should not be sufficient to justify a judgment for the plaintiff, the complaint must be dismissed. And if an unfavorable judgment should be justifiable, it cannot exceed in amount or be different in kind from what is prayed for in the complaint. Incidentally, these considerations argue against the present widespread practice of trial judges, as was done by His Honor in this case, of delegating to their clerks of court the reception of the plaintiff's evidence when the defendant is in default. Such a Practice is wrong in principle and orientation. It has no basis in any rule. When a defendant allows himself to be declared in default, he relies on the faith that the court would take care that his rights are not unduly prejudiced. He has a right to presume that the law and the rules will still be observed. The proceedings are held in his forced absence, and it is but fair that the plaintiff should not be allowed to take advantage of the situation to win by foul or illegal means or with inherently incompetent evidence. Thus, in such instances, there is need for more attention from the court, which only the judge himself can provide. The clerk of court would not be in a position much less have the authority to act in the premises in the manner demanded by the rules of fair

play and as contemplated in the law, considering his comparably limited area of discretion and his presumably inferior preparation for the functions of a judge. Besides, the default of the defendant is no excuse for the court to renounce the opportunity to closely observe the demeanor and conduct of the witnesses of the plaintiff, the better to appreciate their truthfulness and credibility. We therefore declare as a matter of judicial policy that there being no imperative reason for judges to do otherwise, the practice should be discontinued. Another matter of practice worthy of mention at this point is that it is preferable to leave enough opportunity open for possible lifting of the order of default before proceeding with the reception of the plaintiff's evidence and the rendition of the decision. "A judgment by default may amount to a positive and considerable injustice to the defendant; and the possibility of such serious consequences necessitates a careful and liberal examination of the grounds upon which the defendant may seek to set it aside." (Moran, supra p. 534, citing Coombs vs. Santos, 24 Phil. 446; 449-450.) The expression, therefore, in Section 1 of Rule 18 aforequoted which says that "thereupon the court shall proceed to receive the plaintiff's evidence etc." is not to be taken literally. The gain in time and dispatch should the court immediately try the case on the very day of or shortly after the declaration of default is far outweighed by the inconvenience and complications involved in having to undo everything already done in the event the defendant should justify his omission to answer on time. The foregoing observations, as may be noted, refer to instances where the only defendant or all the defendants, there being several, are declared in default. There are additional rules embodying more considerations of justice and equity in cases where there are several defendants against whom a common cause of action is averred and not all of them answer opportunely or are in default, particularly in reference to the power of the court to render judgment in such situations. Thus, in addition to the limitation of Section 5 that the judgment by default should not be more in amount nor different in kind from the reliefs specifically sought by plaintiff in his complaint, Section 4 restricts the authority of the court in rendering judgment in the situations just mentioned as follows: Sec. 4. Judgment when some defendants answer, and other make difficult. When a complaint states a common cause of action against several defendant some of whom answer, and the others fail to do so, the court shall try the case against all upon the answer thus filed and render judgment upon the evidence presented. The same proceeding applies when a common cause of action is pleaded in a counterclaim, crossclaim and third-party claim. Very aptly does Chief Justice Moran elucidate on this provision and the controlling jurisprudence explanatory thereof this wise: Where a complaint states a common cause of action against several defendants and some appear to defend the case on the merits while others make default, the defense interposed by those who appear to litigate the case inures to the benefit of those who fail to appear, and if the court finds that a good defense has been made, all of the defendants must be absolved. In other words, the answer filed by one or some of the defendants inures to the benefit of all the others, even those who have not seasonably filed their answer. (Bueno v. Ortiz, L-22978, June 27, 1968, 23 SCRA 1151.) The proper mode of proceeding where a complaint states a common cause of action against several defendants, and one of them makes default, is simply to enter a formal default order against him, and proceed with the cause upon the answers of the others. The defaulting

defendant merely loses his standing in court, he not being entitled to the service of notice in the cause, nor to appear in the suit in any way. He cannot adduce evidence; nor can he be heard at the final hearing, (Lim Toco v. Go Fay, 80 Phil. 166.) although he may appeal the judgment rendered against him on the merits. (Rule 41, sec. 2.) If the case is finally decided in the plaintiff's favor, a final decree is then entered against all the defendants; but if the suit should be decided against the plaintiff, the action will be dismissed as to all the defendants alike. (Velez v. Ramas, 40 Phil. 787-792; Frow v. de la Vega, 15 Wal. 552,21 L. Ed. 60.) In other words the judgment will affect the defaulting defendants either favorably or adversely. (Castro v. Pea, 80 Phil. 488.) Defaulting defendant may ask execution if judgment is in his favor. (Castro v. Pea, supra.) (Moran, Rules of Court, Vol. 1, pp. 538-539.) In Castro vs. Pea, 80 Phil. 488, one of the numerous cases cited by Moran, this Court elaborated on the construction of the same rule when it sanctioned the execution, upon motion and for the benefit of the defendant in default, of a judgment which was adverse to the plaintiff. The Court held: As above stated, Emilia Matanguihan, by her counsel, also was a movant in the petition for execution Annex 1. Did she have a right to be such, having been declared in default? In Frow vs. De la Vega, supra, cited as authority in Velez vs. Ramas, supra, the Supreme Court of the United States adopted as ground for its own decision the following ruling of the New York Court of Errors in Clason vs. Morris, 10 Jons., 524: It would be unreasonable to hold that because one defendant had made default, the plaintiff should have a decree even against him, where the court is satisfied from the proofs offered by the other, that in fact the plaintiff is not entitled to a decree. (21 Law, ed., 61.) The reason is simple: justice has to be consistent. The complaint stating a common cause of action against several defendants, the complainant's rights or lack of them in the controversy have to be the same, and not different, as against all the defendant's although one or some make default and the other or others appear, join issue, and enter into trial. For instance, in the case of Clason vs. Morris above cited, the New York Court of Errors in effect held that in such a case if the plaintiff is not entitled to a decree, he will not be entitled to it, not only as against the defendant appearing and resisting his action but also as against the one who made default. In the case at bar, the cause of action in the plaintiff's complaint was common against the Mayor of Manila, Emilia Matanguihan, and the other defendants in Civil Case No. 1318 of the lower court. The Court of First Instance in its judgment found and held upon the evidence adduced by the plaintiff and the defendant mayor that as between said plaintiff and defendant Matanguihan the latter was the one legally entitled to occupy the stalls; and it decreed, among other things, that said plaintiff immediately vacate them. Paraphrasing the New York Court of Errors, it would be unreasonable to hold now that because Matanguihan had made default, the said plaintiff should be declared, as against her, legally entitled to the occupancy of the stalls, or to remain therein, although the Court of First Instance was so firmly satisfied, from the proofs offered by the other defendant, that the same plaintiff was not entitled to such occupancy that it peremptorily ordered her to vacate

the stalls. If in the cases of Clason vs. Morris, supra, Frow vs. De la Vega, supra, andVelez vs. Ramas, supra the decrees entered inured to the benefit of the defaulting defendants, there is no reason why that entered in said case No. 1318 should not be held also to have inured to the benefit of the defaulting defendant Matanguihan and the doctrine in said three cases plainly implies that there is nothing in the law governing default which would prohibit the court from rendering judgment favorable to the defaulting defendant in such cases. If it inured to her benefit, it stands to reason that she had a right to claim that benefit, for it would not be a benefit if the supposed beneficiary were barred from claiming it; and if the benefit necessitated the execution of the decree, she must be possessed of the right to ask for the execution thereof as she did when she, by counsel, participated in the petition for execution Annex 1. Section 7 of Rule 35 would seem to afford a solid support to the above considerations. It provides that when a complaint states a common cause of action against several defendants, some of whom answer, and the others make default, 'the court shall try the case against all upon the answer thus filed and render judgment upon the evidence presented by the parties in court'. It is obvious that under this provision the case is tried jointly not only against the defendants answering but also against those defaulting, and the trial is held upon the answer filed by the former; and the judgment, if adverse, will prejudice the defaulting defendants no less than those who answer. In other words, the defaulting defendants are held bound by the answer filed by their co-defendants and by the judgment which the court may render against all of them. By the same token, and by all rules of equity and fair play, if the judgment should happen to be favorable, totally or partially, to the answering defendants, it must correspondingly benefit the defaulting ones, for it would not be just to let the judgment produce effects as to the defaulting defendants only when adverse to them and not when favorable. In Bueno vs. Ortiz, 23 SCRA 1151, the Court applied the provision under discussion in the following words: In answer to the charge that respondent Judge had committed a grave abuse of discretion in rendering a default judgment against the PC, respondents allege that, not having filed its answer within the reglementary period, the PC was in default, so that it was proper for Patanao to forthwith present his evidence and for respondent Judge to render said judgment. It should be noted, however, that in entering the area in question and seeking to prevent Patanao from continuing his logging operations therein, the PC was merely executing an order of the Director of Forestry and acting as his agent. Patanao's cause of action against the other respondents in Case No. 190, namely, the Director of Forestry, the District Forester of Agusan, the Forest Officer of Bayugan, Agusan, and the Secretary of Agriculture and Natural Resources. Pursuant to Rule 18, Section 4, of the Rules of Court, 'when a complaint states a common cause of action against several defendants some of whom answer and the others fail to do so, the court shall try the case against all upon the answer thus filed (by some) and render judgment upon the evidence presented.' In other words, the answer filed by one or some of the defendants inures to the benefit of all the others, even those who have not seasonably filed their answer.

Indeed, since the petition in Case No. 190 sets forth a common cause of action against all of the respondents therein, a decision in favor of one of them would necessarily favor the others. In fact, the main issue, in said case, is whether Patanao has a timber license to undertake logging operations in the disputed area. It is not possible to decide such issue in the negative, insofar as the Director of Forestry, and to settle it otherwise, as regards the PC, which is merely acting as agent of the Director of Forestry, and is, therefore, his alter ego, with respect to the disputed forest area. Stated differently, in all instances where a common cause of action is alleged against several defendants, some of whom answer and the others do not, the latter or those in default acquire a vested right not only to own the defense interposed in the answer of their co- defendant or co-defendants not in default but also to expect a result of the litigation totally common with them in kind and in amount whether favorable or unfavorable. The substantive unity of the plaintiff's cause against all the defendants is carried through to its adjective phase as ineluctably demanded by the homogeneity and indivisibility of justice itself. Indeed, since the singleness of the cause of action also inevitably implies that all the defendants are indispensable parties, the court's power to act is integral and cannot be split such that it cannot relieve any of them and at the same time render judgment against the rest. Considering the tenor of the section in question, it is to be assumed that when any defendant allows himself to be declared in default knowing that his defendant has already answered, he does so trusting in the assurance implicit in the rule that his default is in essence a mere formality that deprives him of no more than the right to take part in the trial and that the court would deem anything done by or for the answering defendant as done by or for him. The presumption is that otherwise he would not -have seen to that he would not be in default. Of course, he has to suffer the consequences of whatever the answering defendant may do or fail to do, regardless of possible adverse consequences, but if the complaint has to be dismissed in so far as the answering defendant is concerned it becomes his inalienable right that the same be dismissed also as to him. It does not matter that the dismissal is upon the evidence presented by the plaintiff or upon the latter's mere desistance, for in both contingencies, the lack of sufficient legal basis must be the cause. The integrity of the common cause of action against all the defendants and the indispensability of all of them in the proceedings do not permit any possibility of waiver of the plaintiff's right only as to one or some of them, without including all of them, and so, as a rule, withdrawal must be deemed to be a confession of weakness as to all. This is not only elementary justice; it also precludes the concomitant hazard that plaintiff might resort to the kind of procedural strategem practiced by private respondent herein that resulted in totally depriving petitioners of every opportunity to defend themselves against her claims which, after all, as will be seen later in this opinion, the record does not show to be invulnerable, both in their factual and legal aspects, taking into consideration the tenor of the pleadings and the probative value of the competent evidence which were before the trial court when it rendered its assailed decision where all the defendants are indispensable parties, for which reason the absence of any of them in the case would result in the court losing its competency to act validly, any compromise that the plaintiff might wish to make with any of them must, as a matter of correct procedure, have to await until after the rendition of the judgment, at which stage the plaintiff may then treat the matter of its execution and the satisfaction of his claim as variably as he might please. Accordingly, in the case now before Us together with the dismissal of the complaint against the non-defaulted defendants, the court should have ordered also the dismissal thereof as to petitioners. Indeed, there is more reason to apply here the principle of unity and indivisibility of the action just discussed because all the defendants here have already joined genuine issues with plaintiff. Their default was only at the pre-trial. And as to such absence of petitioners at the pre-trial, the same could

be attributed to the fact that they might not have considered it necessary anymore to be present, since their respective children Lim and Leonardo, with whom they have common defenses, could take care of their defenses as well. Anything that might have had to be done by them at such pre-trial could have been done for them by their children, at least initially, specially because in the light of the pleadings before the court, the prospects of a compromise must have appeared to be rather remote. Such attitude of petitioners is neither uncommon nor totally unjustified. Under the circumstances, to declare them immediately and irrevocably in default was not an absolute necessity. Practical considerations and reasons of equity should have moved respondent court to be more understanding in dealing with the situation. After all, declaring them in default as respondent court did not impair their right to a common fate with their children. 3 Another issue to be resolved in this case is the question of whether or not herein petitioners were entitled to notice of plaintiff's motion to drop their co-defendants Lim and Leonardo, considering that petitioners had been previously declared in default. In this connection, the decisive consideration is that according to the applicable rule, Section 9, Rule 13, already quoted above, (1) even after a defendant has been declared in default, provided he "files a motion to set aside the order of default, he shall be entitled to notice of all further proceedings regardless of whether the order of default is set aside or not" and (2) a party in default who has not filed such a motion to set aside must still be served with all "substantially amended or supplemented pleadings." In the instant case, it cannot be denied that petitioners had all filed their motion for reconsideration of the order declaring them in default. Respondents' own answer to the petition therein makes reference to the order of April 3, 1973, Annex 8 of said answer, which denied said motion for reconsideration. On page 3 of petitioners' memorandum herein this motion is referred to as "a motion to set aside the order of default." But as We have not been favored by the parties with a copy of the said motion, We do not even know the excuse given for petitioners' failure to appear at the pre-trial, and We cannot, therefore, determine whether or not the motion complied with the requirements of Section 3 of Rule 18 which We have held to be controlling in cases of default for failure to answer on time. (The Philippine-British Co. Inc. etc. et al. vs. The Hon. Walfrido de los Angeles etc. et al., 63 SCRA 50.) We do not, however, have here, as earlier noted, a case of default for failure to answer but one for failure to appear at the pre-trial. We reiterate, in the situation now before Us, issues have already been joined. In fact, evidence had been partially offered already at the pre-trial and more of it at the actual trial which had already begun with the first witness of the plaintiff undergoing re-cross-examination. With these facts in mind and considering that issues had already been joined even as regards the defaulted defendants, it would be requiring the obvious to pretend that there was still need for an oath or a verification as to the merits of the defense of the defaulted defendants in their motion to reconsider their default. Inasmuch as none of the parties had asked for a summary judgment there can be no question that the issues joined were genuine, and consequently, the reason for requiring such oath or verification no longer holds. Besides, it may also be reiterated that being the parents of the nondefaulted defendants, petitioners must have assumed that their presence was superfluous, particularly because the cause of action against them as well as their own defenses are common. Under these circumstances, the form of the motion by which the default was sought to be lifted is secondary and the requirements of Section 3 of Rule 18 need not be strictly complied with, unlike in cases of default for failure to answer. We can thus hold as We do hold for the purposes of the revival of their right to notice under Section 9 of Rule 13, that petitioner's motion for reconsideration was in substance legally adequate regardless of whether or not it was under oath.

In any event, the dropping of the defendants Lim and Leonardo from plaintiff's amended complaint was virtually a second amendment of plaintiffs complaint. And there can be no doubt that such amendment was substantial, for with the elimination thereby of two defendants allegedly solidarily liable with their co-defendants, herein petitioners, it had the effect of increasing proportionally what each of the remaining defendants, the said petitioners, would have to answer for jointly and severally. Accordingly, notice to petitioners of the plaintiff's motion of October 18, 1974 was legally indispensable under the rule above-quoted. Consequently, respondent court had no authority to act on the motion, to dismiss, pursuant to Section 6 of Rule 15, for according to Senator Francisco, "(t) he Rules of Court clearly provide that no motion shall be acted upon by the Court without the proof of service of notice thereof, together with a copy of the motion and other papers accompanying it, to all parties concerned at least three days before the hearing thereof, stating the time and place for the hearing of the motion. (Rule 26, section 4, 5 and 6, Rules of Court (now Sec. 15, new Rules). When the motion does not comply with this requirement, it is not a motion. It presents no question which the court could decide. And the Court acquires no jurisdiction to consider it. (Roman Catholic Bishop of Lipa vs. Municipality of Unisan 44 Phil., 866; Manakil vs. Revilla, 42 Phil., 81.) (Laserna vs. Javier, et al., CA-G.R. No. 7885, April 22, 1955; 21 L.J. 36, citing Roman Catholic Bishop of Lipa vs. Municipality of Unisan 44 Phil., 866; Manakil vs. Revilla, 42 Phil., 81.) (Francisco. The Revised Rules of Court in the Philippines, pp. 861-862.) Thus, We see again, from a different angle, why respondent court's order of dismissal of October 21, 1974 is fatally ineffective. 4 The foregoing considerations notwithstanding, it is respondents' position that certiorari is not the proper remedy of petitioners. It is contended that inasmuch as said petitioners have in fact made their appeal already by filing the required notice of appeal and appeal bond and a motion for extension to file their record on appeal, which motion was granted by respondent court, their only recourse is to prosecute that appeal. Additionally, it is also maintained that since petitioners have expressly withdrawn their motion to quash of January 4, 1975 impugning the order of October 28, 1974, they have lost their right to assail by certiorari the actuations of respondent court now being questioned, respondent court not having been given the opportunity to correct any possible error it might have committed. We do not agree. As already shown in the foregoing discussion, the proceedings in the court below have gone so far out of hand that prompt action is needed to restore order in the entangled situation created by the series of plainly illegal orders it had issued. The essential purpose of certiorari is to keep the proceedings in lower judicial courts and tribunals within legal bounds, so that due process and the rule of law may prevail at all times and arbitrariness, whimsicality and unfairness which justice abhors may immediately be stamped out before graver injury, juridical and otherwise, ensues. While generally these objectives may well be attained in an ordinary appeal, it is undoubtedly the better rule to allow the special remedy of certiorari at the option of the party adversely affected, when the irregularity committed by the trial court is so grave and so far reaching in its consequences that the long and cumbersome procedure of appeal will only further aggravate the situation of the aggrieved party because other untoward actuations are likely to materialize as natural consequences of those already perpetrated. If the law were otherwise, certiorari would have no reason at all for being. No elaborate discussion is needed to show the urgent need for corrective measures in the case at bar. Verily, this is one case that calls for the exercise of the Supreme Court's inherent power of supervision over all kinds of judicial actions of lower courts. Private respondent's procedural technique designed to disable petitioners to defend themselves against her claim which appears on the face of the record itself

to be at least highly controversial seems to have so fascinated respondent court that none would be surprised should her pending motion for immediate execution of the impugned judgment receive similar ready sanction as her previous motions which turned the proceedings into a one-sided affair. The stakes here are high. Not only is the subject matter considerably substantial; there is the more important aspect that not only the spirit and intent of the rules but even the basic rudiments of fair play have been disregarded. For the Court to leave unrestrained the obvious tendency of the proceedings below would be nothing short of wittingly condoning inequity and injustice resulting from erroneous construction and unwarranted application of procedural rules. 5 The sum and total of all the foregoing disquisitions is that the decision here in question is legally anomalous. It is predicated on two fatal malactuations of respondent court namely (1) the dismissal of the complaint against the non-defaulted defendants Lim and Leonardo and (2) the ex-parte reception of the evidence of the plaintiff by the clerk of court, the subsequent using of the same as basis for its judgment and the rendition of such judgment. For at least three reasons which We have already fully discussed above, the order of dismissal of October 21, 1974 is unworthy of Our sanction: (1) there was no timely notice of the motion therefor to the non-defaulted defendants, aside from there being no notice at all to herein petitioners; (2) the common answer of the defendants, including the non-defaulted, contained a compulsory counterclaim incapable of being determined in an independent action; and (3) the immediate effect of such dismissal was the removal of the two non-defaulted defendants as parties, and inasmuch as they are both indispensable parties in the case, the court consequently lost the" sine qua non of the exercise of judicial power", per Borlasa vs. Polistico, supra. This is not to mention anymore the irregular delegation to the clerk of court of the function of receiving plaintiff's evidence. And as regards the ex-parte reception of plaintiff's evidence and subsequent rendition of the judgment by default based thereon, We have seen that it was violative of the right of the petitioners, under the applicable rules and principles on default, to a common and single fate with their non-defaulted co-defendants. And We are not yet referring, as We shall do this anon to the numerous reversible errors in the decision itself. It is to be noted, however, that the above-indicated two fundamental flaws in respondent court's actuations do not call for a common corrective remedy. We cannot simply rule that all the impugned proceedings are null and void and should be set aside, without being faced with the insurmountable obstacle that by so doing We would be reviewing the case as against the two non-defaulted defendants who are not before Us not being parties hereto. Upon the other hand, for Us to hold that the order of dismissal should be allowed to stand, as contended by respondents themselves who insist that the same is already final, not only because the period for its finality has long passed but also because allegedly, albeit not very accurately, said 'non-defaulted defendants unsuccessfully tried to have it set aside by the Court of Appeals whose decision on their petition is also already final, We would have to disregard whatever evidence had been presented by the plaintiff against them and, of course, the findings of respondent court based thereon which, as the assailed decision shows, are adverse to them. In other words, whichever of the two apparent remedies the Court chooses, it would necessarily entail some kind of possible juridical imperfection. Speaking of their respective practical or pragmatic effects, to annul the dismissal would inevitably prejudice the rights of the non-defaulted defendants whom We have not heard and who even respondents would not wish to have anything anymore to do with the case. On the other hand, to include petitioners in the dismissal would naturally set at naught every effort private respondent has made to establish or prove her case thru means sanctioned by respondent

court. In short, We are confronted with a legal para-dilemma. But one thing is certain this difficult situations has been brought about by none other than private respondent who has quite cynically resorted to procedural maneuvers without realizing that the technicalities of the adjective law, even when apparently accurate from the literal point of view, cannot prevail over the imperatives of the substantive law and of equity that always underlie them and which have to be inevitably considered in the construction of the pertinent procedural rules. All things considered, after careful and mature deliberation, the Court has arrived at the conclusion that as between the two possible alternatives just stated, it would only be fair, equitable and proper to uphold the position of petitioners. In other words, We rule that the order of dismissal of October 21, 1974 is in law a dismissal of the whole case of the plaintiff, including as to petitioners herein. Consequently, all proceedings held by respondent court subsequent thereto including and principally its decision of December 20, 1974 are illegal and should be set aside. This conclusion is fully justified by the following considerations of equity: 1. It is very clear to Us that the procedural maneuver resorted to by private respondent in securing the decision in her favor was ill-conceived. It was characterized by that which every principle of law and equity disdains taking unfair advantage of the rules of procedure in order to unduly deprive the other party of full opportunity to defend his cause. The idea of "dropping" the non-defaulted defendants with the end in view of completely incapacitating their co-defendants from making any defense, without considering that all of them are indispensable parties to a common cause of action to which they have countered with a common defense readily connotes an intent to secure a one-sided decision, even improperly. And when, in this connection, the obvious weakness of plaintiff's evidence is taken into account, one easily understands why such tactics had to be availed of. We cannot directly or indirectly give Our assent to the commission of unfairness and inequity in the application of the rules of procedure, particularly when the propriety of reliance thereon is not beyond controversy. 2. The theories of remedial law pursued by private respondents, although approved by His Honor, run counter to such basic principles in the rules on default and such elementary rules on dismissal of actions and notice of motions that no trial court should be unaware of or should be mistaken in applying. We are at a loss as to why His Honor failed to see through counsel's inequitous strategy, when the provisions (1) on the three-day rule on notice of motions, Section 4 of Rule 15, (2) against dismissal of actions on motion of plaintiff when there is a compulsory counterclaim, Section 2, Rule 17, (3) against permitting the absence of indispensable parties, Section 7, Rule 3, (4) on service of papers upon defendants in default when there are substantial amendments to pleadings, Section 9, Rule 13, and (5) on the unity and integrity of the fate of defendants in default with those not in default where the cause of action against them and their own defenses are common, Section 4, Rule 18, are so plain and the jurisprudence declaratory of their intent and proper construction are so readily comprehensible that any error as to their application would be unusual in any competent trial court. 3. After all, all the malactuations of respondent court are traceable to the initiative of private respondent and/or her counsel. She cannot, therefore, complain that she is being made to unjustifiably suffer the consequences of what We have found to be erroneous orders of respondent court. It is only fair that she should not be allowed to benefit from her own frustrated objective of securing a one-sided decision.

4. More importantly, We do not hesitate to hold that on the basis of its own recitals, the decision in question cannot stand close scrutiny. What is more, the very considerations contained therein reveal convincingly the inherent weakness of the cause of the plaintiff. To be sure, We have been giving serious thought to the idea of merely returning this case for a resumption of trial by setting aside the order of dismissal of October 21, 1974, with all its attendant difficulties on account of its adverse effects on parties who have not been heard, but upon closer study of the pleadings and the decision and other circumstances extant in the record before Us, We are now persuaded that such a course of action would only lead to more legal complications incident to attempts on the part of the parties concerned to desperately squeeze themselves out of a bad situation. Anyway, We feel confident that by and large, there is enough basis here and now for Us to rule out the claim of the plaintiff. Even a mere superficial reading of the decision would immediately reveal that it is littered on its face with deficiencies and imperfections which would have had no reason for being were there less haste and more circumspection in rendering the same. Recklessness in jumping to unwarranted conclusions, both factual and legal, is at once evident in its findings relative precisely to the main bases themselves of the reliefs granted. It is apparent therein that no effort has been made to avoid glaring inconsistencies. Where references are made to codal provisions and jurisprudence, inaccuracy and inapplicability are at once manifest. It hardly commends itself as a deliberate and consciencious adjudication of a litigation which, considering the substantial value of the subject matter it involves and the unprecedented procedure that was followed by respondent's counsel, calls for greater attention and skill than the general run of cases would. Inter alia, the following features of the decision make it highly improbable that if We took another course of action, private respondent would still be able to make out any case against petitioners, not to speak of their co-defendants who have already been exonerated by respondent herself thru her motion to dismiss: 1. According to His Honor's own statement of plaintiff's case, "she is the widow of the late Tee Hoon Po Chuan (Po Chuan, for short) who was then one of the partners in the commercial partnership, Glory Commercial Co. with defendants Antonio Lim Tanhu (Lim Tanhu, for short) and Alfonso Leonardo Ng Sua (Ng Sua, for short) as co-partners; that after the death of her husband on March 11, 1966 she is entitled to share not only in the capital and profits of the partnership but also in the other assets, both real and personal, acquired by the partnership with funds of the latter during its lifetime." Relatedly, in the latter part of the decision, the findings are to the following effect: . That the herein plaintiff Tan Put and her late husband Po Chuan married at the Philippine Independent Church of Cebu City on December, 20, 1949; that Po Chuan died on March 11, 1966; that the plaintiff and the late Po Chuan were childless but the former has a foster son Antonio Nuez whom she has reared since his birth with whom she lives up to the present; that prior to the marriage of the plaintiff to Po Chuan the latter was already managing the partnership Glory Commercial Co. then engaged in a little business in hardware at Manalili St., Cebu City; that prior to and just after the marriage of the plaintiff to Po Chuan she was engaged in the drugstore business; that not long after her marriage, upon the suggestion of Po Chuan the plaintiff sold her drugstore for P125,000.00 which amount she gave to her husband in the presence of defendant Lim Tanhu and was invested in the partnership Glory Commercial Co. sometime in 1950; that after the investment of the above-stated amount in the

partnership its business flourished and it embarked in the import business and also engaged in the wholesale and retail trade of cement and GI sheets and under huge profits; xxx xxx xxx That the late Po Chuan was the one who actively managed the business of the partnership Glory Commercial Co. he was the one who made the final decisions and approved the appointments of new personnel who were taken in by the partnership; that the late Po Chuan and defendants Lim Tanhu and Ng Sua are brothers, the latter two (2) being the elder brothers of the former; that defendants Lim Tanhu and Ng Sua are both naturalized Filipino citizens whereas the late Po Chuan until the time of his death was a Chinese citizen; that the three (3) brothers were partners in the Glory Commercial Co. but Po Chuan was practically the owner of the partnership having the controlling interest; that defendants Lim Tanhu and Ng Sua were partners in name but they were mere employees of Po Chuan .... (Pp. 89-91, Record.) How did His Honor arrive at these conclusions? To start with, it is not clear in the decision whether or not in making its findings of fact the court took into account the allegations in the pleadings of the parties and whatever might have transpired at the pre-trial. All that We can gather in this respect is that references are made therein to pre-trial exhibits and to Annex A of the answer of the defendants to plaintiff's amended complaint. Indeed, it was incumbent upon the court to consider not only the evidence formally offered at the trial but also the admissions, expressed or implied, in the pleadings, as well as whatever might have been placed before it or brought to its attention during the pre-trial. In this connection, it is to be regretted that none of the parties has thought it proper to give Us an idea of what took place at the pre-trial of the present case and what are contained in the pre-trial order, if any was issued pursuant to Section 4 of Rule 20. The fundamental purpose of pre-trial, aside from affording the parties every opportunity to compromise or settle their differences, is for the court to be apprised of the unsettled issues between the parties and of their respective evidence relative thereto, to the end that it may take corresponding measures that would abbreviate the trial as much as possible and the judge may be able to ascertain the facts with the least observance of technical rules. In other words whatever is said or done by the parties or their counsel at the pre- trial serves to put the judge on notice of their respective basic positions, in order that in appropriate cases he may, if necessary in the interest of justice and a more accurate determination of the facts, make inquiries about or require clarifications of matters taken up at the pre-trial, before finally resolving any issue of fact or of law. In brief, the pre-trial constitutes part and parcel of the proceedings, and hence, matters dealt with therein may not be disregarded in the process of decision making. Otherwise, the real essence of compulsory pre-trial would be insignificant and worthless. Now, applying these postulates to the findings of respondent court just quoted, it will be observed that the court's conclusion about the supposed marriage of plaintiff to the deceased Tee Hoon Lim Po Chuan is contrary to the weight of the evidence brought before it during the trial and the pre-trial. Under Article 55 of the Civil Code, the declaration of the contracting parties that they take each other as husband and wife "shall be set forth in an instrument" signed by the parties as well as by their witnesses and the person solemnizing the marriage. Accordingly, the primary evidence of a marriage must be an authentic copy of the marriage contract. While a marriage may also be proved by other competent

evidence, the absence of the contract must first be satisfactorily explained. Surely, the certification of the person who allegedly solemnized a marriage is not admissible evidence of such marriage unless proof of loss of the contract or of any other satisfactory reason for its non-production is first presented to the court. In the case at bar, the purported certification issued by a Mons. Jose M. Recoleto, Bishop, Philippine Independent Church, Cebu City, is not, therefore, competent evidence, there being absolutely no showing as to unavailability of the marriage contract and, indeed, as to the authenticity of the signature of said certifier, the jurat allegedly signed by a second assistant provincial fiscal not being authorized by law, since it is not part of the functions of his office. Besides, inasmuch as the bishop did not testify, the same is hearsay. As regards the testimony of plaintiff herself on the same point and that of her witness Antonio Nuez, there can be no question that they are both self-serving and of very little evidentiary value, it having been disclosed at the trial that plaintiff has already assigned all her rights in this case to said Nuez, thereby making him the real party in interest here and, therefore, naturally as biased as herself. Besides, in the portion of the testimony of Nuez copied in Annex C of petitioner's memorandum, it appears admitted that he was born only on March 25, 1942, which means that he was less than eight years old at the supposed time of the alleged marriage. If for this reason alone, it is extremely doubtful if he could have been sufficiently aware of such event as to be competent to testify about it. Incidentally, another Annex C of the same memorandum purports to be the certificate of birth of one Antonio T. Uy supposed to have been born on March 23, 1937 at Centro Misamis, Misamis Occidental, the son of one Uy Bien, father, and Tan Put, mother. Significantly, respondents have not made any adverse comment on this document. It is more likely, therefore, that the witness is really the son of plaintiff by her husband Uy Kim Beng. But she testified she was childless. So which is which? In any event, if on the strength of this document, Nuez is actually the legitimate son of Tan Put and not her adopted son, he would have been but 13 years old in 1949, the year of her alleged marriage to Po Chuan, and even then, considering such age, his testimony in regard thereto would still be suspect. Now, as against such flimsy evidence of plaintiff, the court had before it, two documents of great weight belying the pretended marriage. We refer to (1) Exhibit LL, the income tax return of the deceased Tee Hoon Lim Po Chuan indicating that the name of his wife was Ang Sick Tin and (2) the quitclaim, Annex A of the answer, wherein plaintiff Tan Put stated that she had been living with the deceased without benefit of marriage and that she was his "common-law wife". Surely, these two documents are far more reliable than all the evidence of the plaintiff put together. Of course, Exhibit LL is what might be termed as pre-trial evidence. But it is evidence offered to the judge himself, not to the clerk of court, and should have at least moved him to ask plaintiff to explain if not rebut it before jumping to the conclusion regarding her alleged marriage to the deceased, Po Chuan. And in regard to the quitclaim containing the admission of a common-law relationship only, it is to be observed that His Honor found that "defendants Lim Tanhu and Ng Sua had the plaintiff execute a quitclaim on November 29, 1967 (Annex "A", Answer) where they gave plaintiff the amount of P25,000 as her share in the capital and profits of the business of Glory Commercial Co. which was engaged in the hardware business", without making mention of any evidence of fraud and misrepresentation in its execution, thereby indicating either that no evidence to prove that allegation of the plaintiff had been presented by her or that whatever evidence was actually offered did not produce persuasion upon the court. Stated differently, since the existence of the quitclaim has been duly established without any circumstance to detract from its legal import, the court should have held that plaintiff was bound by her admission therein that she was the common-law wife only of Po Chuan and what is more, that she had

already renounced for valuable consideration whatever claim she might have relative to the partnership Glory Commercial Co. And when it is borne in mind that in addition to all these considerations, there are mentioned and discussed in the memorandum of petitioners (1) the certification of the Local Civil Registrar of Cebu City and (2) a similar certification of the Apostolic Prefect of the Philippine Independent Church, Parish of Sto. Nio, Cebu City, that their respective official records corresponding to December 1949 to December 1950 do not show any marriage between Tee Hoon Lim Po Chuan and Tan Put, neither of which certifications have been impugned by respondent until now, it stands to reason that plaintiff's claim of marriage is really unfounded. Withal, there is still another document, also mentioned and discussed in the same memorandum and unimpugned by respondents, a written agreement executed in Chinese, but purportedly translated into English by the Chinese Consul of Cebu, between Tan Put and Tee Hoon Lim Po Chuan to the following effect: CONSULATE OF THE REPUBLIC OF CHINA Cebu City, Philippines TRANSLATION This is to certify that 1, Miss Tan Ki Eng Alias Tan Put, have lived with Mr. Lim Po Chuan alias TeeHoon since 1949 but it recently occurs that we are incompatible with each other and are not in the position to keep living together permanently. With the mutual concurrence, we decided to terminate the existing relationship of common lawmarriage and promised not to interfere each other's affairs from now on. The Forty Thousand Pesos (P40,000.00) has been given to me by Mr. Lim Po Chuan for my subsistence. Witnesses: Mr. Lim Beng Guan Mr. Huang Sing Se Signed on the 10 day of the 7th month of the 54th year of the Republic of China (corresponding to the year 1965). (SGD) TAN KI ENG Verified from the records. JORGE TABAR (Pp. 283-284, Record.) Indeed, not only does this document prove that plaintiff's relation to the deceased was that of a common-law wife but that they had settled their property interests with the payment to her of P40,000. In the light of all these circumstances, We find no alternative but to hold that plaintiff Tan Put's allegation that she is the widow of Tee Hoon Lim Po Chuan has not been satisfactorily established and that, on the contrary, the evidence on record convincingly shows that her relation with said deceased was that of a common-law wife and furthermore, that all her claims against the company and its surviving partners as well as those against the estate of the deceased have already been settled and paid. We take judicial notice of the fact that the respective counsel who assisted the parties in the quitclaim, Attys. H. Hermosisima and Natalio Castillo, are members in good standing of the Philippine

Bar, with the particularity that the latter has been a member of the Cabinet and of the House of Representatives of the Philippines, hence, absent any credible proof that they had allowed themselves to be parties to a fraudulent document His Honor did right in recognizing its existence, albeit erring in not giving due legal significance to its contents. 2. If, as We have seen, plaintiff's evidence of her alleged status as legitimate wife of Po Chuan is not only unconvincing but has been actually overcome by the more competent and weighty evidence in favor of the defendants, her attempt to substantiate her main cause of action that defendants Lim Tanhu and Ng Sua have defrauded the partnership Glory Commercial Co. and converted its properties to themselves is even more dismal. From the very evidence summarized by His Honor in the decision in question, it is clear that not an iota of reliable proof exists of such alleged misdeeds. Of course, the existence of the partnership has not been denied, it is actually admitted impliedly in defendants' affirmative defense that Po Chuan's share had already been duly settled with and paid to both the plaintiff and his legitimate family. But the evidence as to the actual participation of the defendants Lim Tanhu and Ng Sua in the operation of the business that could have enabled them to make the extractions of funds alleged by plaintiff is at best confusing and at certain points manifestly inconsistent. In her amended complaint, plaintiff repeatedly alleged that as widow of Po Chuan she is entitled to / 3 share of the assets and properties of the partnership. In fact, her prayer in said complaint is, among others, for the delivery to her of such / 3 share. His Honor's statement of the case as well as his findings and judgment are all to that same effect. But what did she actually try to prove at the ex- parte hearing? According to the decision, plaintiff had shown that she had money of her own when she "married" Po Chuan and "that prior to and just after the marriage of the plaintiff to Po Chuan, she was engaged in the drugstore business; that not long after her marriage, upon the suggestion of Po Chuan, the plaintiff sold her drugstore for P125,000 which amount she gave to her husband in the presence of Tanhu and was invested in the partnership Glory Commercial Co. sometime in 1950; that after the investment of the above-stated amount in the partnership, its business flourished and it embarked in the import business and also engaged in the wholesale and retail trade of cement and GI sheets and under (sic) huge profits." (pp. 25-26, Annex L, petition.) To begin with, this theory of her having contributed of P125,000 to the capital of the partnership by reason of which the business flourished and amassed all the millions referred to in the decision has not been alleged in the complaint, and inasmuch as what was being rendered was a judgment by default, such theory should not have been allowed to be the subject of any evidence. But inasmuch as it was the clerk of court who received the evidence, it is understandable that he failed to observe the rule. Then, on the other hand, if it was her capital that made the partnership flourish, why would she claim to be entitled to only to / 3 of its assets and profits? Under her theory found proven by respondent court, she was actually the owner of everything, particularly because His Honor also found "that defendants Lim Tanhu and Ng Sua were partners in the name but they were employees of Po Chuan that defendants Lim Tanhu and Ng Sua had no means of livelihood at the time of their employment with the Glory Commercial Co. under the management of the late Po Chuan except their salaries therefrom; ..." (p. 27, id.) Why then does she claim only / 3 share? Is this an indication of her generosity towards defendants or of a concocted cause of action existing only in her confused imagination engendered by the death of her common-law husband with whom she had settled her common-law claim for

recompense of her services as common law wife for less than what she must have known would go to his legitimate wife and children? Actually, as may be noted from the decision itself, the trial court was confused as to the participation of defendants Lim Tanhu and Ng Sua in Glory Commercial Co. At one point, they were deemed partners, at another point mere employees and then elsewhere as partners-employees, a newly found concept, to be sure, in the law on partnership. And the confusion is worse comfounded in the judgment which allows these "partners in name" and "partners-employees" or employees who had no means of livelihood and who must not have contributed any capital in the business, "as Po Chuan was practically the owner of the partnership having the controlling interest", / 3 each of the huge assets and profits of the partnership. Incidentally, it may be observed at this juncture that the decision has made Po Chuan play the inconsistent role of being "practically the owner" but at the same time getting his capital from the P125,000 given to him by plaintiff and from which capital the business allegedly "flourished." Anent the allegation of plaintiff that the properties shown by her exhibits to be in the names of defendants Lim Tanhu and Ng Sua were bought by them with partnership funds, His Honor confirmed the same by finding and holding that "it is likewise clear that real properties together with the improvements in the names of defendants Lim Tanhu and Ng Sua were acquired with partnership funds as these defendants were only partners-employees of deceased Po Chuan in the Glory Commercial Co. until the time of his death on March 11, 1966." (p. 30, id.) It Is Our considered view, however, that this conclusion of His Honor is based on nothing but pure unwarranted conjecture. Nowhere is it shown in the decision how said defendants could have extracted money from the partnership in the fraudulent and illegal manner pretended by plaintiff. Neither in the testimony of Nuez nor in that of plaintiff, as these are summarized in the decision, can there be found any single act of extraction of partnership funds committed by any of said defendants. That the partnership might have grown into a multi-million enterprise and that the properties described in the exhibits enumerated in the decision are not in the names of Po Chuan, who was Chinese, but of the defendants who are Filipinos, do not necessarily prove that Po Chuan had not gotten his share of the profits of the business or that the properties in the names of the defendants were bought with money of the partnership. In this connection, it is decisively important to consider that on the basis of the concordant and mutually cumulative testimonies of plaintiff and Nuez, respondent court found very explicitly that, and We reiterate: xxx xxx xxx That the late Po Chuan was the one who actively managed the business of the partnership Glory Commercial Co. he was the one who made the final decisions and approved the appointments of new Personnel who were taken in by the partnership; that the late Po Chuan and defendants Lim Tanhu and Ng Sua are brothers, the latter to (2) being the elder brothers of the former; that defendants Lim Tanhu and Ng Sua are both naturalized Filipino citizens whereas the late Po Chuan until the time of his death was a Chinese citizen; that the three (3) brothers were partners in the Glory Commercial Co. but Po Chuan was practically the owner of the partnership having the controlling interest; that defendants Lim Tanhu and Ng Sua were partners in name but they were mere employees of Po Chuan; .... (Pp. 90-91, Record.) If Po Chuan was in control of the affairs and the running of the partnership, how could the defendants have defrauded him of such huge amounts as plaintiff had made his Honor believe? Upon the other hand, since Po Chuan was in control of the affairs of the partnership, the more logical inference is that if

defendants had obtained any portion of the funds of the partnership for themselves, it must have been with the knowledge and consent of Po Chuan, for which reason no accounting could be demanded from them therefor, considering that Article 1807 of the Civil Code refers only to what is taken by a partner without the consent of the other partner or partners. Incidentally again, this theory about Po Chuan having been actively managing the partnership up to his death is a substantial deviation from the allegation in the amended complaint to the effect that "defendants Antonio Lim Tanhu, Alfonso Leonardo Ng Sua, Lim Teck Chuan and Eng Chong Leonardo, through fraud and machination, took actual and active management of the partnership and although Tee Hoon Lim Po Chuan was the manager of Glory Commercial Co., defendants managed to use the funds of the partnership to purchase lands and buildings etc. (Par. 4, p. 2 of amended complaint, Annex B of petition) and should not have been permitted to be proven by the hearing officer, who naturally did not know any better. Moreover, it is very significant that according to the very tax declarations and land titles listed in the decision, most if not all of the properties supposed to have been acquired by the defendants Lim Tanhu and Ng Sua with funds of the partnership appear to have been transferred to their names only in 1969 or later, that is, long after the partnership had been automatically dissolved as a result of the death of Po Chuan. Accordingly, defendants have no obligation to account to anyone for such acquisitions in the absence of clear proof that they had violated the trust of Po Chuan during the existence of the partnership. (See Hanlon vs. Hansserman and. Beam, 40 Phil. 796.) There are other particulars which should have caused His Honor to readily disbelieve plaintiffs' pretensions. Nuez testified that "for about 18 years he was in charge of the GI sheets and sometimes attended to the imported items of the business of Glory Commercial Co." Counting 18 years back from 1965 or 1966 would take Us to 1947 or 1948. Since according to Exhibit LL, the baptismal certificate produced by the same witness as his birth certificate, shows he was born in March, 1942, how could he have started managing Glory Commercial Co. in 1949 when he must have been barely six or seven years old? It should not have escaped His Honor's attention that the photographs showing the premises of Philippine Metal Industries after its organization "a year or two after the establishment of Cebu Can Factory in 1957 or 1958" must have been taken after 1959. How could Nuez have been only 13 years old then as claimed by him to have been his age in those photographs when according to his "birth certificate", he was born in 1942? His Honor should not have overlooked that according to the same witness, defendant Ng Sua was living in Bantayan until he was directed to return to Cebu after the fishing business thereat floundered, whereas all that the witness knew about defendant Lim Teck Chuan's arrival from Hongkong and the expenditure of partnership money for him were only told to him allegedly by Po Chuan, which testimonies are veritably exculpatory as to Ng Sua and hearsay as to Lim Teck Chuan. Neither should His Honor have failed to note that according to plaintiff herself, "Lim Tanhu was employed by her husband although he did not go there always being a mere employee of Glory Commercial Co." (p. 22, Annex the decision.) The decision is rather emphatic in that Lim Tanhu and Ng Sua had no known income except their salaries. Actually, it is not stated, however, from what evidence such conclusion was derived in so far as Ng Sua is concerned. On the other hand, with respect to Lim Tanhu, the decision itself states that according to Exhibit NN-Pre trial, in the supposed income tax return of Lim Tanhu for 1964, he had an income of P4,800 as salary from Philippine Metal Industries alone and had a total assess sable net income of P23,920.77 that year for which he paid a tax of P4,656.00. (p. 14. Annex L, id.) And per Exhibit GG-Pretrial in the year, he had a net income of P32,000 for which be paid a tax of P3,512.40. (id.) As early as 1962, "his fishing business in Madridejos Cebu was making money, and he reported "a net gain from operation (in) the amount of P865.64" (id., per Exhibit VV-Pre-trial.) From what then did his Honor

gather the conclusion that all the properties registered in his name have come from funds malversed from the partnership? It is rather unusual that His Honor delved into financial statements and books of Glory Commercial Co. without the aid of any accountant or without the same being explained by any witness who had prepared them or who has knowledge of the entries therein. This must be the reason why there are apparent inconsistencies and inaccuracies in the conclusions His Honor made out of them. In Exhibit SSPre-trial, the reported total assets of the company amounted to P2,328,460.27 as of December, 1965, and yet, Exhibit TT-Pre-trial, according to His Honor, showed that the total value of goods available as of the same date was P11,166,327.62. On the other hand, per Exhibit XX-Pre-trial, the supposed balance sheet of the company for 1966, "the value of inventoried merchandise, both local and imported", as found by His Honor, was P584,034.38. Again, as of December 31, 1966, the value of the company's goods available for sale was P5,524,050.87, per Exhibit YY and YY-Pre-trial. Then, per Exhibit II-3-Pretrial, the supposed Book of Account, whatever that is, of the company showed its "cash analysis" was P12,223,182.55. We do not hesitate to make the observation that His Honor, unless he is a certified public accountant, was hardly qualified to read such exhibits and draw any definite conclusions therefrom, without risk of erring and committing an injustice. In any event, there is no comprehensible explanation in the decision of the conclusion of His Honor that there were P12,223,182.55 cash money defendants have to account for, particularly when it can be very clearly seen in Exhibits 11-4, 11-4- A, 11-5 and 11-6-Pre-trial, Glory Commercial Co. had accounts payable as of December 31, 1965 in the amount of P4,801,321.17. (p. 15, id.) Under the circumstances, We are not prepared to permit anyone to predicate any claim or right from respondent court's unaided exercise of accounting knowledge. Additionally, We note that the decision has not made any finding regarding the allegation in the amended complaint that a corporation denominated Glory Commercial Co., Inc. was organized after the death of Po Chuan with capital from the funds of the partnership. We note also that there is absolutely no finding made as to how the defendants Dy Ochay and Co Oyo could in any way be accountable to plaintiff, just because they happen to be the wives of Lim Tanhu and Ng Sua, respectively. We further note that while His Honor has ordered defendants to deliver or pay jointly and severally to the plaintiff P4,074,394.18 or / 3 of the P12,223,182.55, the supposed cash belonging to the partnership as of December 31, 1965, in the same breath, they have also been sentenced to partition and give / 3 share of the properties enumerated in the dispositive portion of the decision, which seemingly are the very properties allegedly purchased from the funds of the partnership which would naturally include the P12,223,182.55 defendants have to account for. Besides, assuming there has not yet been any liquidation of the partnership, contrary to the allegation of the defendants, then Glory Commercial Co. would have the status of a partnership in liquidation and the only right plaintiff could have would be to what might result after such liquidation to belong to the deceased partner, and before this is finished, it is impossible to determine, what rights or interests, if any, the deceased had (Bearneza vs. Dequilla 43 Phil. 237). In other words, no specific amounts or properties may be adjudicated to the heir or legal representative of the deceased partner without the liquidation being first terminated. Indeed, only time and the fear that this decision would be much more extended than it is already prevent us from further pointing out the inexplicable deficiencies and imperfections of the decision in question. After all, what have been discussed should be more than sufficient to support Our conclusion that not only must said decision be set aside but also that the action of the plaintiff must be totally dismissed, and, were it not seemingly futile and productive of other legal complications, that plaintiff is liable on defendants' counterclaims. Resolution of the other issues raised by the parties albeit important and perhaps pivotal has likewise become superfluous.

IN VIEW OF ALL THE FOREGOING, the petition is granted. All proceedings held in respondent court in its Civil Case No. 12328 subsequent to the order of dismissal of October 21, 1974 are hereby annulled and set aside, particularly the ex-parte proceedings against petitioners and the decision on December 20, 1974. Respondent court is hereby ordered to enter an order extending the effects of its order of dismissal of the action dated October 21, 1974 to herein petitioners Antonio Lim Tanhu, Dy Ochay, Alfonso Leonardo Ng Sua and Co Oyo. And respondent court is hereby permanently enjoined from taking any further action in said civil case gave and except as herein indicated. Costs against private respondent. Makalintal, C.J., Fernando, Aquino and Concepcion Jr., JJ., concur.

Republic of the Philippines SUPREME COURT Manila EN BANC G.R. No. L-5837 May 31, 1954

CRISTOBAL BONNEVIE, ET AL., plaintiffs-appellants, vs. JAIME HERNANDEZ, defendant-appellee. Ojeda and Vilgera for appellants. Cea and Zurbano for appellee. REYES, J.: This is an action for the recovery of the sum of P115,312.50, with interests, as plaintiffs' alleged share in the profits of a partnership. It appears that prior to January, 1947, plaintiffs with other associates formed a syndicate or secret partnership for the purpose of acquiring the plants, franchises and other properties of the Manila Electric Co. hereinafter called the Meralco in the provinces of Camarines Sur, Albay, and Sorsogon, with the idea of continuing that company's business in that region. No formal articles were drawn for it was the purpose of the members to incorporate once the deal had been consummated. But in the meantime they elected Pedro Serranzana and David Serrano general manager and secretary-treasurer, respectively, of the partnership. Negotiation for the purchase was commenced, but as it made no headway, defendant was taken in as a member of the partnership so that he could push the deal through, and to that end he was given the necessary power of attorney. Using partnership funds, defendant was able to buy the Meralco properties for P122,000, paying P40,000 upon the signing of the deed of sale and agreeing to pay the balance in two equal installments, that is, P41,000 on or before July 31, 1947, and another P41,000 on or before January 31, 1948, with interest at 6 per cent per annum and with a penalty clause which reads: (6) That in case the VENDEE fails to make the payment or payments of the balance due or any part thereof as herein provided, this contract shall, at the option of the VENDOR, be annuled and, in such an event, all payments made by the VENDEE to the VENDOR by virtue of this contract shall be forfeited and retained by the VENDOR in full satisfaction as the liquidated damages sustained by said VENDOR; and the said VENDOR shall have the right to forthwith reenter and take possession of the premises, properties and rights which are the subject-matter of this contract. Although defendant was the one named vendee in the deed of sale, there is no question that the transaction was in penalty made for the partnership so that the latter assumed control of the business the day following the sale.

About the latter half of the following month the members of the partnership proceeded with the formation of the proposed corporation, apportioning among themselves its shares of stock in proportion to their respective contributions to the capital of the partnership and their individual efforts in bringing about the acquisition of the Meralco properties. But before the incorporation papers could be perfected, several partners, not satisfied with the way matters were being run and fearful that the venture might prove a failure because the business was not going well and there was a possibility of their being assessed more than their original investments when the time came to meet the two installments of the unpaid purchase price due the Meralco, expressed their desire to withdraw from the partnership and get back the money they had invested therein. In accordance with this wish, one of them, Judge Jaime Reyes, in a meeting held on April 10, 1947, to consider various matters connected with the business, presented a resolution to the effect that those partners who did not want to remain in the association should be allowed to withdraw and get back their contributions. The resolution was approved, with the herein plaintiffs voting affirmatively, and on that same day plaintiffs and Judge Reyes withdrew from the partnership, and, as admitted by both parties, the partnership was then dissolved. In accordance with the terms of the resolution, the withdrawing partners were, on the following day, reimbursed their respective contributions to the partnership fund. Following the dissolution of the partnership, the members who preferred to remain in the business went ahead with the formation of the corporation, taking in new associates as stockholders. And defendant, on his part, in fulfillment of his trust, made a formal assignment of the Meralco properties to the treasurer of the corporation, giving them a book value of P365,000, in return for which the corporation issued, to the various subscribers to its capital stock, shares of stock of the total face value of P225,000 and assumed the obligation of paying what was still due the Meralco on the purchase price. The new corporation was named "Bicol Electric Company." Though business was losing during the first year, that is, in 1947, the corporation, thanks to a loan obtained from the RFC later prospered and made money. Then trouble began for one of its big stockholders, the defendant herein. Two years from their withdrawal from the partnership, when the corporate business was already in a prosperous condition, plaintiffs brought the present suit against Jaime Hernandez, claiming a share in the profit the latter is supposed to have made from the assignment of the Meralco properties to the corporation, estimated by plaintiffs to be P225,000 and their share of it to be P115,312.50. Defendant's answer denies that he has made any profit out of the assignment in question and alleges that in any event plaintiffs, after their withdrawal from the partnership, ceased to have any further interest in the subsequent transactions of the remaining members. After trial the lower court found that the partnership had not realized any profit out of the assignment of the Meralco properties to the corporation and that, even supposing that profit had really been made, defendant would not be the one to answer to plaintiffs for their share thereof, because he did not receive the consideration for the assignment, which according to the court, consisted of the subscriptions of various persons to the capital stock of the corporation. The court therefore dismissed the complaint with costs against the plaintiffs. From this decision plaintiffs appealed. The case comes within our jurisdiction because of the amount involved. We find no merit in the appeal.

In the first place, the profit alleged to have been realized from the assignment of the Meralco properties to the new corporation, the Bicol Electric Company, is more apparent than real. It is true that the value set for those properties in the deed of assignment was P365,000 when the acquisition price was only P122,000. But one should not jump to the conclusion that a profit, consisting of the difference between the two sums was really made out of the transaction, for the assignment was not made for cash but in payment for subscriptions to shares of stock in the assignee, and while those shares had a total face value of P225,000, this is not necessarily their real worth. Needless to say, the real value of the shares of stock of a corporation depends upon the value of its assets over and above its liabilities. It does not appear that the Bicol Electric Company had any assets other than those acquired from the Meralco, and according to the evidence the company, aside from owing the Meralco, P82,000 was, in the language of the court below, actually "in the red." In the second place, assuming that the assignment actually brought profit to the partnership, it is hard to see how defendant could be made to answer for plaintiffs' alleged share thereof. As stated in the decision below, defendant did not receive the consideration for the assignment for, as already stated, the assignment was made in payment for subscriptions of various persons to the capital stock of the new corporation. Plaintiffs, in order to give color of legality to their claim against defendant, maintain that the latter should be held liable for damages caused to them, consisting of the loss of their share of the profits, due to defendant's failure properly to perform his duty as a liquidator of the dissolved partnership, this on the theory that as managing partner of the partnership, it was defendant's duty to liquidate its affairs upon its dissolutions. But it does not appear that plaintiffs have ever asked for a liquidation, and as will presently be explained no liquidation was called for because when plaintiffs withdrew from the partnership the understanding was that after they had been reimbursed their investment, they were no longer to have any further interest in the partnership or its assets and liabilities. Moreover, the stipulation of facts made at the hearing does not bear out the claim that defendant was the managing partner of the partnership, for if there appears that the partnership had its general manager in the person of Pedro Serranzana, who upon the formation of the new corporation also became its vice-president and general manager. As a general rule, when a partner retires from the firm, he is entitled to the payment of what may be due him after a liquidation. But certainly no liquidation is necessary where there is already a settlement or an agreement as to what the retiring partner shall receive. In the instant case, it appears that a settlement was agreed upon on the very day the partnership was dissolved. For when plaintiffs and Judge Jaime Reyes withdrew from the partnership on that day they did so as agreed to by all the partners, subject to the only condition that they were to be repaid their contributions or investments within three days from said date. And this condition was fulfilled when on the following day they were reimbursed the respective amounts due them pursuant to the agreement. There is evidence that the partnership was at that time operating its business at a loss and that the partnership did not have necessary funds to meet its obligation to Meralco for the balance of the purchase price. And in that connection it should be recalled that nonpayment of that obligation would result in the partnership losing its entire investment because of the penalty clause in the deed of sale. Because of these circumstances there is every reason to believe that plaintiffs together with Judge Jaime Reyes, withdrew from the partnership for fear that they might lose their entire investment should they choose to remain in the partnership which then faced the danger of losing its entire assets. As testified to by Judge Reyes, one of the withdrawing partners, it was clearly understood that upon their withdrawal and return to them of their investment they would have nothing more to do with the association. It must, therefore, have been the intention or understanding of the parties that the

withdrawing partners were relinquishing all their rights and interest in the partnership upon the return to them of their investment. That Judge Reyes did not join the plaintiffs in this action is a clear indication that such was really the understanding. Judge Reyes has testified that when he was invited to join in the present claim he refused because he did not want to be a "sin verguenza." And, indeed, if the agreement was that the withdrawing partners were still to have participation in the subsequent transactions of the partnership so that they would have a share not only in the profits but also in the losses, it is not likely that their investment would have been returned to them. It is, therefore, our conclusion that the acceptance by the withdrawing partners, including the plaintiffs, of their investment in the instant case was understood and intended by all the parties as a final settlement of whatever rights or claim the withdrawing partners might have in the dissolved partnership. Such being the case they are now precluded from claiming any share in the alleged profits, should there be any, at the time of the dissolution. In view of the foregoing, we find plaintiffs' claim against defendant to be without legal basis so that the judgment of dismissal rendered by the court below should be, as it is hereby, affirmed, with costs against the appellants. Paras, C. J., Pablo, Bengzon, Montemayor, Jugo, Bautista Angelo, Labrador and Concepcion, JJ., concur.