G.R. No.

L-24193 June 28, 1968
MAURICIO AGAD, plaintiff-appellant,
vs.
SEVERINO MABATO and MABATO and AGAD
COMPANY, defendants-appellees.
Angeles, Maskarino and Associates for plaintiff-appellant.
Victorio S. Advincula for defendants-appellees.
CONCEPCION, C.J.:
In this appeal, taken by plaintiff Mauricio Agad, from an order
of dismissal of the Court of First Instance of Davao, we are
called upon to determine the applicability of Article 1773 of
our Civil Code to the contract of partnership on which the
complaint herein is based.
Alleging that he and defendant Severino Mabato are
pursuant to a public instrument dated August 29, 1952, copy
of which is attached to the complaint as Annex "A" partners
in a fishpond business, to the capital of which Agad
contributed P1,000, with the right to receive 50% of the
profits; that from 1952 up to and including 1956, Mabato who
handled the partnership funds, had yearly rendered accounts
of the operations of the partnership; and that, despite
repeated demands, Mabato had failed and refused to render
accounts for the years 1957 to 1963, Agad prayed in his
complaint against Mabato and Mabato & Agad Company, filed
on June 9, 1964, that judgment be rendered sentencing
Mabato to pay him (Agad) the sum of P14,000, as his share in
the profits of the partnership for the period from 1957 to
1963, in addition to P1,000 as attorney's fees, and ordering
the dissolution of the partnership, as well as the winding up of
its affairs by a receiver to be appointed therefor.
In his answer, Mabato admitted the formal allegations of the
complaint and denied the existence of said partnership, upon
the ground that the contract therefor had not been perfected,
despite the execution of Annex "A", because Agad had
allegedly failed to give his P1,000 contribution to the
partnership capital. Mabato prayed, therefore, that the
complaint be dismissed; that Annex "A" be declared void ab
initio; and that Agad be sentenced to pay actual, moral and
exemplary damages, as well as attorney's fees.
are contributed thereto, in which case a public
instrument shall be necessary.
Art. 1773. A contract of partnership is void, whenever
immovable property is contributed thereto, if
inventory of said property is not made, signed by the
parties; and attached to the public instrument.
The issue before us hinges on whether or not "immovable
property or real rights" have been contributed to the
partnership under consideration. Mabato alleged and the
lower court held that the answer should be in the affirmative,
because "it is really inconceivable how a partnership engaged
in the fishpond business could exist without said fishpond
property (being) contributed to the partnership." It should be
noted, however, that, as stated in Annex "A" the partnership
was established "to operate a fishpond", not to "engage in a
fishpond business". Moreover, none of the partners
contributed either a fishpond or a real right to any fishpond.
Their contributions were limited to the sum of P1,000 each.
Indeed, Paragraph 4 of Annex "A" provides:
That the capital of the said partnership is Two
Thousand (P2,000.00) Pesos Philippine Currency, of
which One Thousand (P1,000.00) pesos has been
contributed by Severino Mabato and One Thousand
(P1,000.00) Pesos has been contributed by Mauricio
Agad.
xxx xxx xxx
The operation of the fishpond mentioned in Annex "A" was the
purpose of the partnership. Neither said fishpond nor a real
right thereto was contributed to the partnership or became
part of the capital thereof, even if a fishpond or a real right
thereto could become part of its assets.
WHEREFORE, we find that said Article 1773 of the Civil Code is
not in point and that, the order appealed from should be, as it
is hereby set aside and the case remanded to the lower court
for further proceedings, with the costs of this instance against
defendant-appellee, Severino Mabato. It is so ordered.

Subsequently, Mabato filed a motion to dismiss, upon the

ground that the complaint states no cause of action and that
the lower court had no jurisdiction over the subject matter of
the case, because it involves principally the determination of
rights over public lands. After due hearing, the court issued
the order appealed from, granting the motion to dismiss the
complaint for failure to state a cause of action. This conclusion
was predicated upon the theory that the contract of
partnership, Annex "A", is null and void, pursuant to Art. 1773
of our Civil Code, because an inventory of the fishpond
referred in said instrument had not been attached thereto. A
reconsideration of this order having been denied, Agad
brought the matter to us for review by record on appeal.

Articles 1771 and 1773 of said Code provide:

Art. 1771. A partnership may be constituted in any

form, except where immovable property or real rights

G.R. No. L-68118 October 29, 1985
JOSE P. OBILLOS, JR., SARAH P. OBILLOS, ROMEO P.
OBILLOS and REMEDIOS P. OBILLOS, brothers and
sisters, petitioners
vs.
COMMISSIONER OF INTERNAL REVENUE and COURT OF
TAX APPEALS, respondents.
Demosthenes B. Gadioma for petitioners.
AQUINO, J.:
This case is about the income tax liability of four brothers and
sisters who sold two parcels of land which they had acquired
from their father.
On March 2, 1973 Jose Obillos, Sr. completed payment to
Ortigas & Co., Ltd. on two lots with areas of 1,124 and 963
square meters located at Greenhills, San Juan, Rizal. The next
day he transferred his rights to his four children, the
petitioners, to enable them to build their residences. The
company sold the two lots to petitioners for P178,708.12 on
March 13 (Exh. A and B, p. 44, Rollo). Presumably, the Torrens
titles issued to them would show that they were co-owners of
the two lots.
In 1974, or after having held the two lots for more than a
year, the petitioners resold them to the Walled City Securities
Corporation and Olga Cruz Canda for the total sum of
P313,050 (Exh. C and D). They derived from the sale a total
profit of P134,341.88 or P33,584 for each of them. They
treated the profit as a capital gain and paid an income tax on
one-half thereof or of P16,792.
In April, 1980, or one day before the expiration of the five-
year prescriptive period, the Commissioner of Internal
Revenue required the four petitioners to pay corporate
income tax on the total profit of P134,336 in addition to
individual income tax on their shares thereof He assessed
P37,018 as corporate income tax, P18,509 as 50% fraud
surcharge and P15,547.56 as 42% accumulated interest, or a
total of P71,074.56.
Not only that. He considered the share of the profits of each
petitioner in the sum of P33,584 as a " taxable in full (not a
mere capital gain of which is taxable) and required them to
pay deficiency income taxes aggregating P56,707.20
including the 50% fraud surcharge and the accumulated
interest.
Thus, the petitioners are being held liable for deficiency
income taxes and penalties totalling P127,781.76 on their
profit of P134,336, in addition to the tax on capital gains
already paid by them.
The Commissioner acted on the theory that the four
petitioners had formed an unregistered partnership or joint
venture within the meaning of sections 24(a) and 84(b) of the
Tax Code (Collector of Internal Revenue vs. Batangas Trans.
Co., 102 Phil. 822).
The petitioners contested the assessments. Two Judges of the
Tax Court sustained the same. Judge Roaquin dissented.
Hence, the instant appeal.
We hold that it is error to consider the petitioners as having
formed a partnership under article 1767 of the Civil Code
simply because they allegedly contributed P178,708.12 to buy
the two lots, resold the same and divided the profit among
themselves.
To regard the petitioners as having formed a taxable
unregistered partnership would result in oppressive taxation
and confirm the dictum that the power to tax involves the
power to destroy. That eventuality should be obviated.
As testified by Jose Obillos, Jr., they had no such intention.
They were co-owners pure and simple. To consider them as
partners would obliterate the distinction between a co-
ownership and a partnership. The petitioners were not
engaged in any joint venture by reason of that isolated
transaction.
Their original purpose was to divide the lots for residential
purposes. If later on they found it not feasible to build their
residences on the lots because of the high cost of
construction, then they had no choice but to resell the same
to dissolve the co-ownership. The division of the profit was
merely incidental to the dissolution of the co-ownership which
was in the nature of things a temporary state. It had to be
terminated sooner or later. Castan Tobeas says:
Como establecer el deslinde entre la
comunidad ordinaria o copropiedad y la
sociedad?
El criterio diferencial-segun la doctrina mas
generalizada-esta: por razon del origen, en
que la sociedad presupone necesariamente
la convencion, mentras que la comunidad
puede existir y existe ordinariamente sin
ela; y por razon del fin objecto, en que el
objeto de la sociedad es obtener lucro,
mientras que el de la indivision es solo
mantener en su integridad la cosa comun y
favorecer su conservacion.
 Reflejo de este criterio es la sentencia de 15 income tax law. To hold otherwise, would be
de Octubre de 1940, en la que se dice que si to subject the income of all
en nuestro Derecho positive se ofrecen a co-ownerships of inherited properties to the
veces dificultades al tratar de fijar la linea tax on corporations, inasmuch as if a
divisoria entre comunidad de bienes y property does not produce an income at all,
contrato de sociedad, la moderna it is not subject to any kind of income tax,
orientacion de la doctrina cientifica seala whether the income tax on individuals or
como nota fundamental de diferenciacion the income tax on corporation. (De Leon vs.
aparte del origen de fuente de que surgen, CI R, CTA Case No. 738, September 11,
no siempre uniforme, la finalidad perseguida 1961, cited in Araas, 1977 Tax Code
por los interesados: lucro comun partible en Annotated, Vol. 1, 1979 Ed., pp. 77-78).
la sociedad, y mera conservacion y
aprovechamiento en la comunidad. Commissioner of Internal Revenue, L-19342, May 25, 1972, 45
(Derecho Civil Espanol, Vol. 2, Part 1, 10 Ed., SCRA 74, where after an extrajudicial settlement the co-heirs
1971, 328- 329). used the inheritance or the incomes derived therefrom as a
common fund to produce profits for themselves, it was held
Article 1769(3) of the Civil Code provides that "the sharing of that they were taxable as an unregistered partnership.
gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or It is likewise different from Reyes vs. Commissioner of Internal
common right or interest in any property from which the Revenue, 24 SCRA 198, where father and son purchased a lot
returns are derived". There must be an unmistakable intention and building, entrusted the administration of the building to
to form a partnership or joint venture.* an administrator and divided equally the net income, and
from Evangelista vs. Collector of Internal Revenue, 102 Phil.
Such intent was present in Gatchalian vs. Collector of Internal 140, where the three Evangelista sisters bought four pieces of
Revenue, 67 Phil. 666, where 15 persons contributed small real property which they leased to various tenants and
amounts to purchase a two-peso sweepstakes ticket with the derived rentals therefrom. Clearly, the petitioners in these two
agreement that they would divide the prize The ticket won the cases had formed an unregistered partnership.
third prize of P50,000. The 15 persons were held liable for
income tax as an unregistered partnership. In the instant case, what the Commissioner should have
investigated was whether the father donated the two lots to
The instant case is distinguishable from the cases where the the petitioners and whether he paid the donor's tax (See Art.
parties engaged in joint ventures for profit. Thus, in Oa vs. 1448, Civil Code). We are not prejudging this matter. It might
have already prescribed.
** This view is supported by the following rulings of
respondent Commissioner: WHEREFORE, the judgment of the Tax Court is reversed and
set aside. The assessments are cancelled. No costs.
Co-owership distinguished from partnership.
We find that the case at bar is SO ORDERED.
fundamentally similar to the De Leon case.
Thus, like the De Leon heirs, the Longa heirs
inherited the 'hacienda' in questionpro-
indiviso from their deceased parents; they
did not contribute or invest additional '
capital to increase or expand the inherited
properties; they merely continued
dedicating the property to the use to which
it had been put by their forebears; they
individually reported in their tax returns
their corresponding shares in the income
and expenses of the 'hacienda', and they
continued for many years the status of co-
ownership in order, as conceded by
respondent, 'to preserve its (the 'hacienda')
value and to continue the existing
contractual relations with the Central
Azucarera de Bais for milling purposes.
Longa vs. Aranas, CTA Case No. 653, July 31,
1963).

All co-ownerships are not deemed

unregistered pratnership.Co-Ownership
who own properties which produce income
should not automatically be considered
partners of an unregistered partnership, or a
corporation, within the purview of the
 THE COMMISSIONER OF INTERNAL REVENUE and COURT
OF TAX APPEALS, respondents.

De la Cuesta, De las Alas and Callanta Law Offices for

petitioners.

The Solicitor General for respondents

GANCAYCO, J.:

The distinction between co-ownership and an unregistered

partnership or joint venture for income tax purposes is the
issue in this petition.

On June 22, 1965, petitioners bought two (2) parcels of land

from Santiago Bernardino, et al. and on May 28, 1966, they
bought another three (3) parcels of land from Juan Roque. The
first two parcels of land were sold by petitioners in 1968
toMarenir Development Corporation, while the three parcels of
land were sold by petitioners to Erlinda Reyes and Maria
Samson on March 19,1970. Petitioners realized a net profit in
the sale made in 1968 in the amount of P165,224.70, while
they realized a net profit of P60,000.00 in the sale made in
1970. The corresponding capital gains taxes were paid by
petitioners in 1973 and 1974 by availing of the tax amnesties
granted in the said years.

However, in a letter dated March 31, 1979 of then Acting BIR

Commissioner Efren I. Plana, petitioners were assessed and
required to pay a total amount of P107,101.70 as alleged
deficiency corporate income taxes for the years 1968 and
1970.

Petitioners protested the said assessment in a letter of June

26, 1979 asserting that they had availed of tax amnesties way
back in 1974.

In a reply of August 22, 1979, respondent Commissioner

informed petitioners that in the years 1968 and 1970,
petitioners as co-owners in the real estate transactions
formed an unregistered partnership or joint venture taxable as
a corporation under Section 20(b) and its income was subject
to the taxes prescribed under Section 24, both of the National
Internal Revenue Code 1 that the unregistered partnership was
subject to corporate income tax as distinguished from profits
derived from the partnership by them which is subject to
individual income tax; and that the availment of tax amnesty
under P.D. No. 23, as amended, by petitioners relieved
petitioners of their individual income tax liabilities but did not
relieve them from the tax liability of the unregistered
partnership. Hence, the petitioners were required to pay the
deficiency income tax assessed.

Petitioners filed a petition for review with the respondent

Court of Tax Appeals docketed as CTA Case No. 3045. In due
course, the respondent court by a majority decision of March
30, 1987, 2 affirmed the decision and action taken by
G.R. No. 78133 October 18, 1988 respondent commissioner with costs against petitioners.

MARIANO P. PASCUAL and RENATO P. It ruled that on the basis of the principle enunciated
DRAGON, petitioners, in Evangelista 3 an unregistered partnership was in fact
vs.
formed by petitioners which like a corporation was subject to
corporate income tax distinct from that imposed on the
partners.
In a separate dissenting opinion, Associate Judge Constante
Roaquin stated that considering the circumstances of this
case, although there might in fact be a co-ownership between
the petitioners, there was no adequate basis for the
conclusion that they thereby formed an unregistered
partnership which made "hem liable for corporate income tax
under the Tax Code.
Hence, this petition wherein petitioners invoke as basis
thereof the following alleged errors of the respondent court:
A. IN HOLDING AS PRESUMPTIVELY CORRECT
THE DETERMINATION OF THE RESPONDENT
COMMISSIONER, TO THE EFFECT THAT
PETITIONERS FORMED AN UNREGISTERED
PARTNERSHIP SUBJECT TO CORPORATE
INCOME TAX, AND THAT THE BURDEN OF
OFFERING EVIDENCE IN OPPOSITION
THERETO RESTS UPON THE PETITIONERS.
B. IN MAKING A FINDING, SOLELY ON THE
BASIS OF ISOLATED SALE TRANSACTIONS,
THAT AN UNREGISTERED PARTNERSHIP
EXISTED THUS IGNORING THE
REQUIREMENTS LAID DOWN BY LAW THAT
WOULD WARRANT THE
PRESUMPTION/CONCLUSION THAT A
PARTNERSHIP EXISTS.
C. IN FINDING THAT THE INSTANT CASE IS
SIMILAR TO THE EVANGELISTA CASE AND
THEREFORE SHOULD BE DECIDED
ALONGSIDE THE EVANGELISTA CASE.
D. IN RULING THAT THE TAX AMNESTY DID
NOT RELIEVE THE PETITIONERS FROM
PAYMENT OF OTHER TAXES FOR THE PERIOD
COVERED BY SUCH AMNESTY. (pp. 12-13,
Rollo.)
The petition is meritorious.
The basis of the subject decision of the respondent court is
the ruling of this Court in Evangelista. 4
In the said case, petitioners borrowed a sum of money from
their father which together with their own personal funds they
used in buying several real properties. They appointed their
brother to manage their properties with full power to lease,
collect, rent, issue receipts, etc. They had the real properties
rented or leased to various tenants for several years and they
gained net profits from the rental income. Thus, the Collector
of Internal Revenue demanded the payment of income tax on
a corporation, among others, from them.
In resolving the issue, this Court held as follows:
The issue in this case is whether petitioners
are subject to the tax on corporations
provided for in section 24 of Commonwealth
Act No. 466, otherwise known as the
National Internal Revenue Code, as well as
to the residence tax for corporations and the
real estate dealers' fixed tax. With respect
to the tax on corporations, the issue hinges
on the meaning of the terms corporation
and partnership as used in sections 24 and
84 of said Code, the pertinent parts of which
read:
Sec. 24. Rate of the tax on corporations.
There shall be levied, assessed, collected,
and paid annually upon the total net income
received in the preceding taxable year from
all sources by every corporation organized
in, or existing under the laws of the
Philippines, no matter how created or
organized but not including duly registered
general co-partnerships (companies
collectives), a tax upon such income equal
to the sum of the following: ...
Sec. 84(b). The term "corporation" includes
partnerships, no matter how created or
organized, joint-stock companies, joint
accounts (cuentas en participation),
associations or insurance companies, but
does not include duly registered general co-
partnerships (companies colectivas).
Article 1767 of the Civil Code of the
Philippines provides:
By the contract of partnership two or more
persons bind themselves to contribute
money, property, or industry to a common
fund, with the intention of dividing the
profits among themselves.
Pursuant to this article, the essential
elements of a partnership are two, namely:
(a) an agreement to contribute money,
property or industry to a common fund; and
(b) intent to divide the profits among the
contracting parties. The first element is
undoubtedly present in the case at bar, for,
admittedly, petitioners have agreed to, and
did, contribute money and property to a
common fund. Hence, the issue narrows
down to their intent in acting as they did.
Upon consideration of all the facts and
circumstances surrounding the case, we are
fully satisfied that their purpose was to
engage in real estate transactions for
monetary gain and then divide the same
among themselves, because:
1. Said common fund was not something
they found already in existence. It was not a
property inherited by them pro indiviso.
They created it purposely. What is more
they jointly borrowed a substantial portion
thereof in order to establish said common
fund.
2. They invested the same, not merely in
one transaction, but in a series of
transactions. On February 2, 1943, they
bought a lot for P100,000.00. On April 3,
1944, they purchased 21 lots for
P18,000.00. This was soon followed, on April
23, 1944, by the acquisition of another real
estate for P108,825.00. Five (5) days later
(April 28, 1944), they got a fourth lot for
P237,234.14. The number of lots (24)
acquired and transcations undertaken, as
well as the brief interregnum between each,
particularly the last three purchases, is
strongly indicative of a pattern or common
design that was not limited to the
conservation and preservation of the
aforementioned common fund or even of
the property acquired by petitioners in
February, 1943. In other words, one cannot
but perceive a character of habituality
peculiar to business transactions engaged
in for purposes of gain.
3. The aforesaid lots were not devoted to
residential purposes or to other personal
uses, of petitioners herein. The properties
were leased separately to several persons,
who, from 1945 to 1948 inclusive, paid the
total sum of P70,068.30 by way of rentals.
Seemingly, the lots are still being so let, for
petitioners do not even suggest that there
has been any change in the utilization
thereof.
4. Since August, 1945, the properties have
been under the management of one person,
namely, Simeon Evangelists, with full power
to lease, to collect rents, to issue receipts,
to bring suits, to sign letters and contracts,
and to indorse and deposit notes and
checks. Thus, the affairs relative to said
properties have been handled as if the
same belonged to a corporation or business
enterprise operated for profit.
5. The foregoing conditions have existed for
more than ten (10) years, or, to be exact,
over fifteen (15) years, since the first
property was acquired, and over twelve (12)
years, since Simeon Evangelists became the
manager.
6. Petitioners have not testified or
introduced any evidence, either on their
purpose in creating the set up already
adverted to, or on the causes for its
continued existence. They did not even try
to offer an explanation therefor.
Although, taken singly, they might not
suffice to establish the intent necessary to
constitute a partnership, the collective
effect of these circumstances is such as to
leave no room for doubt on the existence of
said intent in petitioners herein. Only one or
two of the aforementioned circumstances
were present in the cases cited by
petitioners herein, and, hence, those cases
are not in point. 5
In the present case, there is no evidence that petitioners
entered into an agreement to contribute money, property or
industry to a common fund, and that they intended to divide
the profits among themselves. Respondent commissioner and/
or his representative just assumed these conditions to be
present on the basis of the fact that petitioners purchased
certain parcels of land and became co-owners thereof.
In Evangelists, there was a series of transactions where
petitioners purchased twenty-four (24) lots showing that the
purpose was not limited to the conservation or preservation of
the common fund or even the properties acquired by
them. The character of habituality peculiar to business
transactions engaged in for the purpose of gain was present.
In the instant case, petitioners bought two (2) parcels of land
in 1965. They did not sell the same nor make any
improvements thereon. In 1966, they bought another three
(3) parcels of land from one seller. It was only 1968 when they
sold the two (2) parcels of land after which they did not make
any additional or new purchase. The remaining three (3)
parcels were sold by them in 1970. The transactions were
isolated. The character of habituality peculiar to business
transactions for the purpose of gain was not present.
In Evangelista, the properties were leased out to tenants for
several years. The business was under the management of
one of the partners. Such condition existed for over fifteen
(15) years. None of the circumstances are present in the case
at bar. The co-ownership started only in 1965 and ended in
1970.
Thus, in the concurring opinion of Mr. Justice Angelo Bautista
in Evangelista he said:
I wish however to make the following
observation Article 1769 of the new Civil
Code lays down the rule for determining
when a transaction should be deemed a
partnership or a co-ownership. Said article
paragraphs 2 and 3, provides;
(2) Co-ownership or co-possession does not
itself establish a partnership, whether such
co-owners or co-possessors do or do not
share any profits made by the use of the
property;
(3) The sharing of gross returns does not of
itself establish a partnership, whether or not
the persons sharing them have a joint or
common right or interest in any property
from which the returns are derived;
From the above it appears that the fact that
those who agree to form a co- ownership
share or do not share any profits made by
the use of the property held in common
does not convert their venture into a
partnership. Or the sharing of the gross
returns does not of itself establish a
partnership whether or not the persons
sharing therein have a joint or common
right or interest in the property. This only
means that, aside from the circumstance of
profit, the presence of other elements
constituting partnership is necessary, such
as the clear intent to form a partnership,
the existence of a juridical personality
different from that of the individual
partners, and the freedom to transfer or
assign any interest in the property by one
with the consent of the others (Padilla, Civil
Code of the Philippines Annotated, Vol. I,
1953 ed., pp. 635-636)
It is evident that an isolated transaction
whereby two or more persons contribute
funds to buy certain real estate for profit in
the absence of other circumstances
showing a contrary intention cannot be
considered a partnership.
Persons who contribute property or funds for
a common enterprise and agree to share the
gross returns of that enterprise in proportion
to their contribution, but who severally
retain the title to their respective
contribution, are not thereby rendered
partners. They have no common stock or
capital, and no community of interest as
principal proprietors in the business itself
which the proceeds derived. (Elements of
the Law of Partnership by Flord D. Mechem
2nd Ed., section 83, p. 74.)
A joint purchase of land, by two, does not
constitute a co-partnership in respect
thereto; nor does an agreement to share the
profits and losses on the sale of land create
a partnership; the parties are only tenants in
common. (Clark vs. Sideway, 142 U.S.
682,12 Ct. 327, 35 L. Ed., 1157.)
Where plaintiff, his brother, and another
agreed to become owners of a single tract
of realty, holding as tenants in common, and
to divide the profits of disposing of it, the
brother and the other not being entitled to
share in plaintiffs commission, no
partnership existed as between the three
parties, whatever their relation may have
been as to third parties. (Magee vs. Magee
123 N.E. 673, 233 Mass. 341.)
In order to constitute a partnership inter
sese there must be: (a) An intent to form
the same; (b) generally participating in both
profits and losses; (c) and such a
community of interest, as far as third
persons are concerned as enables each
party to make contract, manage the
business, and dispose of the whole
property.-Municipal Paving Co. vs. Herring
150 P. 1067, 50 III 470.)
The common ownership of property does
not itself create a partnership between the
owners, though they may use it for the
purpose of making gains; and they may,
without becoming partners, agree among
themselves as to the management, and use
of such property and the application of the
proceeds therefrom. (Spurlock vs. Wilson,
142 S.W. 363,160 No. App. 14.) 6
The sharing of returns does not in itself establish a
partnership whether or not the persons sharing therein have a
joint or common right or interest in the property. There must
be a clear intent to form a partnership, the existence of a
juridical personality different from the individual partners, and
the freedom of each party to transfer or assign the whole
property.
In the present case, there is clear evidence of co-ownership
between the petitioners. There is no adequate basis to
support the proposition that they thereby formed an
unregistered partnership. The two isolated transactions
whereby they purchased properties and sold the same a few
years thereafter did not thereby make them partners. They
shared in the gross profits as co- owners and paid their capital
gains taxes on their net profits and availed of the tax amnesty
thereby. Under the circumstances, they cannot be considered
to have formed an unregistered partnership which is thereby
liable for corporate income tax, as the respondent
commissioner proposes.
And even assuming for the sake of argument that such
unregistered partnership appears to have been formed, since
there is no such existing unregistered partnership with a
distinct personality nor with assets that can be held liable for
said deficiency corporate income tax, then petitioners can be
held individually liable as partners for this unpaid obligation of
the partnership p. 7 However, as petitioners have availed of
the benefits of tax amnesty as individual taxpayers in these
transactions, they are thereby relieved of any further tax
liability arising therefrom.
WHEREFROM, the petition is hereby GRANTED and the
decision of the respondent Court of Tax Appeals of March 30,
1987 is hereby REVERSED and SET ASIDE and another
decision is hereby rendered relieving petitioners of the
corporate income tax liability in this case, without
pronouncement as to costs.
SO ORDERED.

G.R. NOS. 166299-300 December 13, 2005
AURELIO K. LITONJUA, JR., Petitioner,
vs.
EDUARDO K. LITONJUA, SR., ROBERT T. YANG, ANGLO
PHILS. MARITIME, INC., CINEPLEX, INC., DDM
GARMENTS, INC., EDDIE K. LITONJUA SHIPPING
AGENCY, INC., EDDIE K. LITONJUA SHIPPING CO., INC.,
LITONJUA SECURITIES, INC. (formerly E. K. Litonjua
Sec), LUNETA THEATER, INC., E & L REALTY, (formerly E
& L INTL SHIPPING CORP.), FNP CO., INC., HOME
ENTERPRISES, INC., BEAUMONT DEV. REALTY CO., INC.,
GLOED LAND CORP., EQUITY TRADING CO., INC., 3D
CORP., "L" DEV. CORP, LCM THEATRICAL ENTERPRISES,
INC., LITONJUA SHIPPING CO. INC., MACOIL INC.,
ODEON REALTY CORP., SARATOGA REALTY, INC., ACT
THEATER INC. (formerly General Theatrical & Film
Exchange, INC.), AVENUE REALTY, INC., AVENUE
THEATER, INC. and LVF PHILIPPINES, INC., (Formerly VF
PHILIPPINES),Respondents.
DECISION
GARCIA, J.:
In this petition for review under Rule 45 of the Rules of Court,
petitioner Aurelio K. Litonjua, Jr. seeks to nullify and set aside
the Decision of the Court of Appeals (CA) dated March 31,
20041 in consolidated cases C.A. G.R. Sp. No. 76987 and C.A.
G.R. SP. No 78774 and its Resolution dated December 07,
2004,2 denying petitioners motion for reconsideration.
The recourse is cast against the following factual backdrop:
Petitioner Aurelio K. Litonjua, Jr. (Aurelio) and herein
respondent Eduardo K. Litonjua, Sr. (Eduardo) are brothers.
The legal dispute between them started when, on December
4, 2002, in the Regional Trial Court (RTC) at Pasig City, Aurelio
filed a suit against his brother Eduardo and herein respondent
Robert T. Yang (Yang) and several corporations for specific
performance and accounting. In his complaint,3 docketed as
Civil Case No. 69235 and eventually raffled to Branch 68 of
the court,4 Aurelio alleged that, since June 1973, he and
Eduardo are into a joint venture/partnership arrangement in
the Odeon Theater business which had expanded thru
investment in Cineplex, Inc., LCM Theatrical Enterprises,
Odeon Realty Corporation (operator of Odeon I and II
theatres), Avenue Realty, Inc., owner of lands and buildings,
among other corporations. Yang is described in the complaint
as petitioners and Eduardos partner in their Odeon Theater
investment.5 The same complaint also contained the following
material averments:
3.01 On or about 22 June 1973, [Aurelio] and Eduardo entered
into a joint venture/partnership for the continuation of their
family business and common family funds .
3.01.1 This joint venture/[partnership] agreement was
contained in a memorandum addressed by Eduardo to his
siblings, parents and other relatives. Copy of this
memorandum is attached hereto and made an integral part
asAnnex "A" and the portion referring to [Aurelio] submarked
as Annex "A-1".
3.02 It was then agreed upon between [Aurelio] and Eduardo
that in consideration of [Aurelios] retaining his share in the
remaining family businesses (mostly, movie theaters, shipping
and land development) and contributing his industry to the
continued operation of these businesses, [Aurelio] will be
given P1 Million or 10% equity in all these businesses and
those to be subsequently acquired by them whichever is
greater. . . .
4.01 from 22 June 1973 to about August 2001, or [in] a
span of 28 years, [Aurelio] and Eduardo had accumulated in
their joint venture/partnership various assets including but not
limited to the corporate defendants and [their] respective
assets.
4.02 In addition . . . the joint venture/partnership had also
acquired [various other assets], but Eduardo caused to be
registered in the names of other parties.
xxx xxx xxx
4.04 The substantial assets of most of the corporate
defendants consist of real properties . A list of some of
these real properties is attached hereto and made an integral
part as Annex "B".
xxx xxx xxx
5.02 Sometime in 1992, the relations between [Aurelio] and
Eduardo became sour so that [Aurelio] requested for an
accounting and liquidation of his share in the joint
venture/partnership [but these demands for complete
accounting and liquidation were not heeded].
xxx xxx xxx
5.05 What is worse, [Aurelio] has reasonable cause to believe
that Eduardo and/or the corporate defendants as well as
Bobby [Yang], are transferring . . . various real properties of
the corporations belonging to the joint venture/partnership to
other parties in fraud of [Aurelio]. In consequence, [Aurelio] is
therefore causing at this time the annotation on the titles of
these real properties a notice of lis pendens . (Emphasis in
the original; underscoring and words in bracket added.)
For ease of reference, Annex "A-1" of the complaint, which
petitioner asserts to have been meant for him by his brother
Eduardo, pertinently reads:
10) JR. (AKL) [Referring to petitioner Aurelio K. Litonjua]:
You have now your own life to live after having been married.
. 1. On April 14, 2003, Yang filed his ANSWER, but expressly
I am trying my best to mold you the way I work so you can
follow the pattern . You will be the only one left with the
company, among us brothers and I will ask you to stay as I
want you to run this office every time I am away. I want you to
run it the way I am trying to run it because I will be all alone
and I will depend entirely to you (sic). My sons will not be
ready to help me yet until about maybe 15/20 years from now.
Whatever is left in the corporation, I will make sure that you
get ONE MILLION PESOS (P1,000,000.00) or ten percent (10%)
equity, whichever is greater. We two will gamble the whole
thing of what I have and what you are entitled to. . It will be
you and me alone on this. If ever I pass away, I want you to
take care of all of this. You keep my share for my two sons are
ready take over but give them the chance to run the company
which I have built.
xxx xxx xxx
Because you will need a place to stay, I will arrange to give
you first ONE HUNDRED THOUSANDS PESOS: (P100, 000.00)
in cash or asset, like Lt. Artiaga so you can live better there.
The rest I will give you in form of stocks which you can keep.
This stock I assure you is good and saleable. I will also gladly
give you the share of Wack-Wack and Valley Golf because
you have been good. The rest will be in stocks from all the
corporations which I repeat, ten percent (10%) equity. 6
On December 20, 2002, Eduardo and the corporate
respondents, as defendants a quo, filed a joint ANSWERWith
Compulsory Counterclaim denying under oath the material
allegations of the complaint, more particularly that portion
thereof depicting petitioner and Eduardo as having entered
into a contract of partnership. As affirmative defenses,
Eduardo, et al., apart from raising a jurisdictional matter,
alleged that the complaint states no cause of action, since no
cause of action may be derived from the actionable
document, i.e., Annex "A-1",being void under the terms of
Article 1767 in relation to Article 1773 of the Civil
Code, infra. It is further alleged that whatever undertaking
Eduardo agreed to do, if any, under Annex "A-1", are
unenforceable under the provisions of the Statute of Frauds.7
For his part, Yang - who was served with summons long after
the other defendants submitted their answer moved to
dismiss on the ground, inter alia, that, as to him, petitioner
has no cause of action and the complaint does not state
any.8 Petitioner opposed this motion to dismiss.
On January 10, 2003, Eduardo, et al., filed a Motion to Resolve
Affirmative Defenses.9 To this motion, petitioner interposed
an Opposition with ex-Parte Motion to Set the Case for Pre-
trial.10
Acting on the separate motions immediately adverted to
above, the trial court, in an Omnibus Order dated March 5,
2003, denied the affirmative defenses and, except for Yang,
set the case for pre-trial on April 10, 2003. 11
In another Omnibus Order of April 2, 2003, the same court
denied the motion of Eduardo, et al., for reconsideration12 and
Yangs motion to dismiss. The following then transpired insofar
as Yang is concerned:
reserved the right to seek reconsideration of the April 2, 2003
Omnibus Order and to pursue his failed motion to dismiss 13 to
its full resolution.
2. On April 24, 2003, he moved for reconsideration of the
Omnibus Order of April 2, 2003, but his motion was denied in
an Order of July 4, 2003.14
3. On August 26, 2003, Yang went to the Court of Appeals (CA)
in a petition for certiorari under Rule 65 of the Rules of Court,
docketed as CA-G.R. SP No. 78774,15 to nullify the separate
orders of the trial court, the first denying his motion to dismiss
the basic complaint and, the second, denying his motion for
reconsideration.
Earlier, Eduardo and the corporate defendants, on the
contention that grave abuse of discretion and injudicious
haste attended the issuance of the trial courts
aforementioned Omnibus Orders dated March 5, and April 2,
2003, sought relief from the CA via similar recourse. Their
petition for certiorari was docketed as CA G.R. SP No.
76987.
Per its resolution dated October 2, 2003,16 the CAs 14th
Division ordered the consolidation of CA G.R. SP No.
78774 with CA G.R. SP No. 76987.
Following the submission by the parties of their respective
Memoranda of Authorities, the appellate court came out with
the herein assailed Decision dated March 31, 2004, finding
for Eduardo and Yang, as lead petitioners therein, disposing as
follows:
WHEREFORE, judgment is hereby rendered granting the
issuance of the writ of certiorari in these consolidated cases
annulling, reversing and setting aside the assailed orders of
the court a quo dated March 5, 2003, April 2, 2003 and July 4,
2003 and the complaint filed by private respondent [now
petitioner Aurelio] against all the petitioners [now herein
respondents Eduardo, et al.] with the court a quo is
hereby dismissed.
SO ORDERED.17 (Emphasis in the original; words in bracket
added.)
Explaining its case disposition, the appellate court
stated, inter alia, that the alleged partnership, as evidenced
by the actionable documents, Annex "A" and "A-1" attached
to the complaint, and upon which petitioner solely predicates
his right/s allegedly violated by Eduardo, Yang and the
corporate defendants a quo is "void or legally inexistent".
In time, petitioner moved for reconsideration but his motion
was denied by the CA in its equally assailedResolution of
December 7, 2004.18 .
Hence, petitioners present recourse, on the contention that
the CA erred:
A. When it ruled that there was no partnership created by the
actionable document because this was not a public
instrument and immovable properties were contributed to the
partnership.
B. When it ruled that the actionable document did not create
a demandable right in favor of petitioner.
C. When it ruled that the complaint stated no cause of action
against [respondent] Robert Yang; and
D. When it ruled that petitioner has changed his theory on
appeal when all that Petitioner had done was to support his
pleaded cause of action by another legal
perspective/argument.
The petition lacks merit.
Petitioners demand, as defined in the petitory portion of his
complaint in the trial court, is for delivery or payment to him,
as Eduardos and Yangs partner, of his partnership/joint
venture share, after an accounting has been duly conducted
of what he deems to be partnership/joint venture property. 19
A partnership exists when two or more persons agree to place
their money, effects, labor, and skill in lawful commerce or
business, with the understanding that there shall be a
proportionate sharing of the profits and losses between
them.20 A contract of partnership is defined by the Civil Code
as one where two or more persons bound themselves to
contribute money, property, or industry to a common fund
with the intention of dividing the profits among
themselves.21 A joint venture, on the other hand, is hardly
distinguishable from, and may be likened to, a partnership
since their elements are similar, i.e., community of interests in
the business and sharing of profits and losses. Being a form of
partnership, a joint venture is generally governed by the law
on partnership.22
The underlying issue that necessarily comes to mind in this
proceedings is whether or not petitioner and respondent
Eduardo are partners in the theatre, shipping and realty
business, as one claims but which the other denies. And the
issue bearing on the first assigned error relates to the
question of what legal provision is applicable under the
premises, petitioner seeking, as it were, to enforce the
actionable document - Annex "A-1" - which he depicts in his
complaint to be the contract of partnership/joint venture
between himself and Eduardo. Clearly, then, a look at the
legal provisions determinative of the existence, or defining the
formal requisites, of a partnership is indicated. Foremost of
these are the following provisions of the Civil Code:
Art. 1771. A partnership may be constituted in any form,
except where immovable property or real rights are
contributed thereto, in which case a public instrument shall be
necessary.
Art. 1772. Every contract of partnership having a capital of
three thousand pesos or more, in money or property, shall
appear in a public instrument, which must be recorded in the
Office of the Securities and Exchange Commission.
Failure to comply with the requirement of the preceding
paragraph shall not affect the liability of the partnership and
the members thereof to third persons.
Art. 1773. A contract of partnership is void, whenever
immovable property is contributed thereto, if an inventory of
said property is not made, signed by the parties, and attached
to the public instrument.
Annex "A-1", on its face, contains typewritten entries,
personal in tone, but is unsigned and undated. As an unsigned
document, there can be no quibbling that Annex "A-1" does
not meet the public instrumentation requirements exacted
under Article 1771 of the Civil Code. Moreover, being
unsigned and doubtless referring to a partnership involving
more than P3,000.00 in money or property, Annex "A-
1" cannot be presented for notarization, let alone registered
with the Securities and Exchange Commission (SEC), as called
for under the Article 1772 of the Code. And inasmuch as the
inventory requirement under the succeeding Article 1773
goes into the matter of validity when immovable property is
contributed to the partnership, the next logical point of inquiry
turns on the nature of petitioners contribution, if any, to the
supposed partnership.
The CA, addressing the foregoing query, correctly stated that
petitioners contribution consisted of immovables and real
rights. Wrote that court:
A further examination of the allegations in the complaint
would show that [petitioners] contribution to the so-called
"partnership/joint venture" was his supposed share in the
family business that is consisting of movie theaters, shipping
and land development under paragraph 3.02 of the complaint.
In other words, his contribution as a partner in the alleged
partnership/joint venture consisted of immovable properties
and real rights. .23
Significantly enough, petitioner matter-of-factly concurred
with the appellate courts observation that, prescinding from
what he himself alleged in his basic complaint, his
contribution to the partnership consisted of his share in the
Litonjua family businesses which owned variable immovable
properties. Petitioners assertion in his motion for
reconsideration24 of the CAs decision, that "what was to be
contributed to the business [of the partnership] was
[petitioners] industry and his share in the family [theatre and
land development] business" leaves no room for speculation
as to what petitioner contributed to the perceived partnership.
Lest it be overlooked, the contract-validating inventory
requirement under Article 1773 of the Civil Code applies as
long real property or real rights are initially brought into the
partnership. In short, it is really of no moment which of the
partners, or, in this case, who between petitioner and his
brother Eduardo, contributed immovables. In context, the
more important consideration is that real property was
contributed, in which case an inventory of the contributed
property duly signed by the parties should be attached to the
public instrument, else there is legally no partnership to speak
of.
Petitioner, in an obvious bid to evade the application of Article
1773, argues that the immovables in question were not
contributed, but were acquired after the formation of the
supposed partnership. Needless to stress, the Court cannot
accord cogency to this specious argument. For, as earlier
stated, petitioner himself admitted contributing his share in
the supposed shipping, movie theatres and realty
development family businesses which already owned
immovables even before Annex "A-1" was allegedly executed.
Considering thus the value and nature of petitioners alleged
contribution to the purported partnership, the Court, even if
so disposed, cannot plausibly extend Annex "A-1" the legal
effects that petitioner so desires and pleads to be given.
Annex "A-1", in fine, cannot support the existence of the
partnership sued upon and sought to be enforced. The legal
and factual milieu of the case calls for this disposition. A
partnership may be constituted in any form, save when
immovable property or real rights are contributed thereto or
when the partnership has a capital of at least P3,000.00, in
which case a public instrument shall be necessary.25 And if
only to stress what has repeatedly been articulated, an
inventory to be signed by the parties and attached to the
public instrument is also indispensable to the validity of the
partnership whenever immovable property is contributed to it.
Given the foregoing perspective, what the appellate court
wrote in its assailed Decision26 about the probative value and
legal effect of Annex "A-1" commends itself for concurrence:
Considering that the allegations in the complaint showed that
[petitioner] contributed immovable properties to the alleged
partnership, the "Memorandum" (Annex "A" of the complaint)
which purports to establish the said "partnership/joint
venture" is NOT a public instrument and there was NO
inventory of the immovable property duly signed by the
parties. As such, the said "Memorandum" is null and void
for purposes of establishing the existence of a valid contract
of partnership. Indeed, because of the failure to comply with
the essential formalities of a valid contract, the purported
"partnership/joint venture" is legally inexistent and it produces
no effect whatsoever. Necessarily, a void or legally inexistent
contract cannot be the source of any contractual or legal
right. Accordingly, the allegations in the complaint, including
the actionable document attached thereto, clearly
demonstrates that [petitioner] has NO valid contractual or
legal right which could be violated by the [individual
respondents] herein. As a consequence, [petitioners]
complaint does NOT state a valid cause of action because
NOT all the essential elements of a cause of action are
present. (Underscoring and words in bracket added.)
Likewise well-taken are the following complementary excerpts
from the CAs equally assailed Resolution of December 7,
200427 denying petitioners motion for reconsideration:
Further, We conclude that despite glaring defects in the
allegations in the complaint as well as the actionable
document attached thereto (Rollo, p. 191), the [trial] court did
not appreciate and apply the legal provisions which were
brought to its attention by herein [respondents] in the their
pleadings. In our evaluation of [petitioners] complaint, the
latter alleged inter alia to have contributed immovable
properties to the alleged partnership but the actionable
document is not a public document and there was no
inventory of immovable properties signed by the parties. Both
the allegations in the complaint and the actionable documents
considered, it is crystal clear that [petitioner] has no valid or
legal right which could be violated by [respondents]. (Words in
bracket added.)
Under the second assigned error, it is petitioners posture that
Annex "A-1", assuming its inefficacy or nullity as a
partnership document, nevertheless created demandable
rights in his favor. As petitioner succinctly puts it in this
petition:
43. Contrariwise, this actionable document, especially its
above-quoted provisions, established an actionable contract
even though it may not be a partnership. This actionable
contract is what is known as an innominate contract (Civil
Code, Article 1307).
44. It may not be a contract of loan, or a mortgage or
whatever, but surely the contract does create rights and
obligations of the parties and which rights and obligations
may be enforceable and demandable. Just because the
relationship created by the agreement cannot be specifically
labeled or pigeonholed into a category of nominate contract
does not mean it is void or unenforceable.
Petitioner has thus thrusted the notion of an innominate
contract on this Court - and earlier on the CA after he
experienced a reversal of fortune thereat - as an afterthought.
The appellate court, however, cannot really be faulted for not
yielding to petitioners dubious stratagem of altering his
theory of joint venture/partnership to an innominate contract.
For, at bottom, the appellate courts certiorari jurisdiction was
circumscribed by what was alleged to have been the order/s
issued by the trial court in grave abuse of discretion. As
respondent Yang pointedly observed,28 since the parties basic
position had been well-defined, that of petitioner being that
the actionable document established a partnership/joint
venture, it is on those positions that the appellate court
exercised its certiorari jurisdiction. Petitioners act of changing
his original theory is an impermissible practice and
constitutes, as the CA aptly declared, an admission of the
untenability of such theory in the first place.
[Petitioner] is now humming a different tune . . . . In a sudden
twist of stance, he has now contended that the actionable
instrument may be considered an innominate contract. xxx
Verily, this now changes [petitioners] theory of the case
which is not only prohibited by the Rules but also is an implied
admission that the very theory he himself has adopted,
filed and prosecuted before the respondent court is erroneous.
Be that as it may . . We hold that this new theory
contravenes [petitioners] theory of the actionable document
being a partnership document. If anything, it is so obvious we
do have to test the sufficiency of the cause of action on the
basis of partnership law xxx.29 (Emphasis in the original;
Words in bracket added).
But even assuming in gratia argumenti that Annex "A-1"
partakes of a perfected innominate contract, petitioners
complaint would still be dismissible as against Eduardo and,
more so, against Yang. It cannot be over-emphasized that
petitioner points to Eduardo as the author of Annex "A-1".
Withal, even on this consideration alone, petitioners claim
against Yang is doomed from the very start.
As it were, the only portion of Annex "A-1" which could
perhaps be remotely regarded as vesting petitioner with a
right to demand from respondent Eduardo the observance of a
determinate conduct, reads:
xxx You will be the only one left with the company, among us
brothers and I will ask you to stay as I want you to run this
office everytime I am away. I want you to run it the way I am
trying to run it because I will be alone and I will depend
entirely to you, My sons will not be ready to help me yet until
about maybe 15/20 years from now.Whatever is left in the
corporation, I will make sure that you get ONE MILLION PESOS
(P1,000,000.00) or ten percent (10%) equity, whichever is
greater. (Underscoring added)
It is at once apparent that what respondent Eduardo imposed
upon himself under the above passage, if he indeed wrote
Annex "A-1", is a promise which is not to be performed within
one year from "contract" execution on June 22, 1973.
Accordingly, the agreement embodied in Annex "A-1" is
covered by the Statute of Frauds andergo unenforceable for
non-compliance therewith.30 By force of the statute of frauds,
an agreement that by its terms is not to be performed within a
year from the making thereof shall be unenforceable by
action, unless the same, or some note or memorandum
thereof, be in writing and subscribed by the party charged.
Corollarily, no action can be proved unless the requirement
exacted by the statute of frauds is complied with.31
Lest it be overlooked, petitioner is the intended beneficiary of
the P1 Million or 10% equity of the family businesses
supposedly promised by Eduardo to give in the near future.
Any suggestion that the stated amount or the equity
component of the promise was intended to go to a common
fund would be to read something not written in Annex "A-1".
Thus, even this angle alone argues against the very idea of a
partnership, the creation of which requires two or more
contracting minds mutually agreeing to contribute money,
property or industry to a common fund with the intention of
dividing the profits between or among themselves.32
In sum then, the Court rules, as did the CA, that petitioners
complaint for specific performance anchored on an actionable
document of partnership which is legally inexistent or void or,
at best, unenforceable does not state a cause of action as
against respondent Eduardo and the corporate defendants.
And if no of action can successfully be maintained against
respondent Eduardo because no valid partnership existed
between him and petitioner, the Court cannot see its way
clear on how the same action could plausibly prosper against
Yang. Surely, Yang could not have become a partner in, or
could not have had any form of business relationship with, an
inexistent partnership.
As may be noted, petitioner has not, in his complaint, provide
the logical nexus that would tie Yang to him as his partner. In
fact, attendant circumstances would indicate the contrary.
Consider:
1. Petitioner asserted in his complaint that his so-called joint
venture/partnership with Eduardo was "for the continuation of
their family business and common family funds which were
theretofore being mainly managed by Eduardo." 33 But Yang
denies kinship with the Litonjua family and petitioner has not
disputed the disclaimer.
2. In some detail, petitioner mentioned what he had
contributed to the joint venture/partnership with Eduardo and
what his share in the businesses will be. No allegation is made
whatsoever about what Yang contributed, if any, let alone his
proportional share in the profits. But such allegation cannot,
however, be made because, as aptly observed by the CA, the
actionable document did not contain such provision, let alone
mention the name of Yang. How, indeed, could a person be
considered a partner when the document purporting to
establish the partnership contract did not even mention his
name.
3. Petitioner states in par. 2.01 of the complaint that "[he] and
Eduardo are business partners in the [respondent]
corporations," while "Bobby is his and Eduardos partner in
their Odeon Theater investment (par. 2.03). This means that
the partnership between petitioner and Eduardo came first;
Yang became their partner in their Odeon Theater investment
thereafter. Several paragraphs later, however, petitioner
would contradict himself by alleging that his "investment and
that of Eduardo and Yang in the Odeon theater business has
expanded through a reinvestment of profit income and direct
investments in several corporation including but not limited to
[six] corporate respondents" This simply means that the
"Odeon Theatre business" came before the corporate
respondents. Significantly enough, petitioner refers to the
corporate respondents as "progeny" of the Odeon Theatre
business.34
Needless to stress, petitioner has not sufficiently established
in his complaint the legal vinculum whence he sourced his
right to drag Yang into the fray. The Court of Appeals, in its
assailed decision, captured and formulated the legal situation
in the following wise:
[Respondent] Yang, is impleaded because, as alleged in the
complaint, he is a "partner" of [Eduardo] and the [petitioner]
in the Odeon Theater Investment which expanded through
reinvestments of profits and direct investments in several
corporations, thus:
xxx xxx xxx
Clearly, [petitioners] claim against Yang arose from his
alleged partnership with petitioner and the respondent.
However, there was NO allegation in the complaint which
directly alleged how the supposed contractual relation was
created between [petitioner] and Yang. More importantly,
however, the foregoing ruling of this Court that the purported
partnership between [Eduardo] is void and legally inexistent
directly affects said claim against Yang. Since [petitioner] is
trying to establish his claim against Yang by linking him to
the legally inexistent partnership . . . such attempt had
become futile because there was NOTHING that would
contractually connect [petitioner] and Yang. To establish a
valid cause of action, the complaint should have a statement
of fact upon which to connect [respondent] Yang to the
alleged partnership between [petitioner] and respondent
[Eduardo], including their alleged investment in the Odeon
Theater. A statement of facts on those matters is pivotal to
the complaint as they would constitute the ultimate facts
necessary to establish the elements of a cause of action
against Yang. 35
Pressing its point, the CA later stated in its resolution denying
petitioners motion for reconsideration the following:
xxx Whatever the complaint calls it, it is the actionable
document attached to the complaint that is controlling. Suffice
it to state, We have not ignored the actionable document
As a matter of fact, We emphasized in our decision that
insofar as [Yang] is concerned, he is not even mentioned in
the said actionable document. We are therefore puzzled how a
person not mentioned in a document purporting to establish a
partnership could be considered a partner.36 (Words in bracket
ours).
The last issue raised by petitioner, referring to whether or not
he changed his theory of the case, as peremptorily
determined by the CA, has been discussed at length earlier
and need not detain us long. Suffice it to say that after the CA
has ruled that the alleged partnership is inexistent, petitioner
took a different tack. Thus, from a joint venture/partnership
theory which he adopted and consistently pursued in his
complaint, petitioner embraced the innominate contract
theory. Illustrative of this shift is petitioners statement in par.
#8 of his motion for reconsideration of the CAs decision
combined with what he said in par. # 43 of this petition, as
follows:
8. Whether or not the actionable document creates a
partnership, joint venture, or whatever, is a legal matter. What
is determinative for purposes of sufficiency of the
complainants allegations, is whether the actionable
document bears out an actionable contract be it a
partnership, a joint venture or whatever or some innominate
contract It may be noted that one kind of innominate
contract is what is known as du ut facias (I give that you may
do).37
43. Contrariwise, this actionable document, especially its
above-quoted provisions, established an actionable contract
even though it may not be a partnership. This actionable
contract is what is known as an innominate contract (Civil
Code, Article 1307).38
Springing surprises on the opposing party is offensive to the
sporting idea of fair play, justice and due process; hence, the
proscription against a party shifting from one theory at the
trial court to a new and different theory in the appellate
court.39 On the same rationale, an issue which was neither
averred in the complaint cannot be raised for the first time on
appeal.40 It is not difficult, therefore, to agree with the CA
when it made short shrift of petitioners innominate contract
theory on the basis of the foregoing basic reasons.
Petitioners protestation that his act of introducing the
concept of innominate contract was not a case of changing
theories but of supporting his pleaded cause of action that
of the existence of a partnership - by another legal
perspective/argument, strikes the Court as a strained attempt
to rationalize an untenable position. Paragraph 12 of his
motion for reconsideration of the CAs decision virtually
relegates partnership as a fall-back theory. Two paragraphs
later, in the same notion, petitioner faults the appellate court
for reading, with myopic eyes, the actionable document solely
as establishing a partnership/joint venture. Verily, the cited
paragraphs are a study of a party hedging on whether or not
to pursue the original cause of action or altogether
abandoning the same, thus:
12. Incidentally, assuming that the actionable document
created a partnership between [respondent] Eduardo, Sr. and
[petitioner], no immovables were contributed to this
partnership. xxx
14. All told, the Decision takes off from a false premise that
the actionable document attached to the complaint does not
establish a contractual relationship between [petitioner] and
Eduardo, Sr. and Roberto T Yang simply because his
document does not create a partnership or a joint venture.
This is a myopic reading of the actionable document.
Per the Courts own count, petitioner used in his complaint the
mixed words "joint venture/partnership" nineteen (19) times
and the term "partner" four (4) times. He made reference to
the "law of joint venture/partnership [being applicable] to the
business relationship between [him], Eduardo and Bobby
[Yang]" and to his "rights in all specific properties of their joint
venture/partnership". Given this consideration, petitioners
right of action against respondents Eduardo and Yang
doubtless pivots on the existence of the partnership between
the three of them, as purportedly evidenced by the undated
and unsigned Annex "A-1". A void Annex "A-1", as an
actionable document of partnership, would strip petitioner of
a cause of action under the premises. A complaint for delivery
and accounting of partnership property based on such void or
legally non-existent actionable document is dismissible for
failure to state of action. So, in gist, said the Court of Appeals.
The Court agrees.
WHEREFORE, the instant petition is DENIED and the
impugned Decision and Resolution of the Court of Appeals is
AFFIRMED.
 VITUG, J.:

The instant petition seeks a review of the decision rendered

by the Court of Appeals, dated 26 February 1993, in CA-G.R.
SP No. 24638 and No. 24648 affirming in toto that of the
Securities and Exchange Commission ("SEC") in SEC AC 254.

The antecedents of the controversy, summarized by

respondent Commission and quoted at length by the appellate
court in its decision, are hereunder restated.

The law firm of ROSS, LAWRENCE, SELPH and

CARRASCOSO was duly registered in the Mercantile
Registry on 4 January 1937 and reconstituted with
the Securities and Exchange Commission on 4
August 1948. The SEC records show that there were
several subsequent amendments to the articles of
partnership on 18 September 1958, to change the
firm [name] to ROSS, SELPH and CARRASCOSO; on 6
July 1965 . . . to ROSS, SELPH, SALCEDO, DEL
ROSARIO, BITO & MISA; on 18 April 1972 to
SALCEDO, DEL ROSARIO, BITO, MISA & LOZADA; on 4
December 1972 to SALCEDO, DEL ROSARIO, BITO,
MISA & LOZADA; on 11 March 1977 to DEL ROSARIO,
BITO, MISA & LOZADA; on 7 June 1977 to BITO, MISA
& LOZADA; on 19 December 1980, [Joaquin L. Misa]
appellees Jesus B. Bito and Mariano M. Lozada
associated themselves together, as senior partners
with respondents-appellees Gregorio F. Ortega,
Tomas O. del Castillo, Jr., and Benjamin Bacorro, as
junior partners.

On February 17, 1988, petitioner-appellant wrote the

respondents-appellees a letter stating:

I am withdrawing and retiring from

the firm of Bito, Misa and Lozada,
effective at the end of this month.

"I trust that the accountants will be

instructed to make the proper
liquidation of my participation in
the firm."

On the same day, petitioner-appellant wrote

respondents-appellees another letter stating:

"Further to my letter to you today, I

would like to have a meeting with
all of you with regard to the
mechanics of liquidation, and more
particularly, my interest in the two
floors of this building. I would like
to have this resolved soon because
G.R. No. 109248 July 3, 1995 it has to do with my own plans."

GREGORIO F. ORTEGA, TOMAS O. DEL CASTILLO, JR.,
and BENJAMIN T. BACORRO, petitioners,
vs.
HON. COURT OF APPEALS, SECURITIES AND EXCHANGE
COMMISSION and JOAQUIN L. MISA,respondents.
On 19 February 1988, petitioner-appellant wrote
respondents-appellees another letter stating:
"The partnership has ceased to be
mutually satisfactory because of
the working conditions of our
employees including the assistant
attorneys. All my efforts to
 ameliorate the below subsistence
level of the pay scale of our
employees have been thwarted by
the other partners. Not only have
they refused to give meaningful
increases to the employees, even
attorneys, are dressed down
publicly in a loud voice in a manner
that deprived them of their self-
respect. The result of such policies
is the formation of the union,
including the assistant attorneys."
On 30 June 1988, petitioner filed with this
Commission's Securities Investigation and Clearing
Department (SICD) a petition for dissolution and
liquidation of partnership, docketed as SEC Case No.
3384 praying that the Commission:
"1. Decree the formal dissolution
and order the immediate
liquidation of (the partnership of)
Bito, Misa & Lozada;
"2. Order the respondents to
deliver or pay for petitioner's share
in the partnership assets plus the
profits, rent or interest attributable
to the use of his right in the assets
of the dissolved partnership;
"3. Enjoin respondents from using
the firm name of Bito, Misa &
Lozada in any of their
correspondence, checks and
pleadings and to pay petitioners
damages for the use thereof
despite the dissolution of the
partnership in the amount of at
least P50,000.00;
"4. Order respondents jointly and
severally to pay petitioner
attorney's fees and expense of
litigation in such amounts as
maybe proven during the trial and
which the Commission may deem
just and equitable under the
premises but in no case less than
ten (10%) per cent of the value of
the shares of petitioner or
P100,000.00;
"5. Order the respondents to pay
petitioner moral damages with the
amount of P500,000.00 and
exemplary damages in the amount
of P200,000.00.
"Petitioner likewise prayed for such
other and further reliefs that the
Commission may deem just and
equitable under the premises."
On 13 July 1988, respondents-appellees filed their
opposition to the petition.
On 13 July 1988, petitioner filed his Reply to the
Opposition.
On 31 March 1989, the hearing officer rendered a
decision ruling that:
"[P]etitioner's withdrawal from the
law firm Bito, Misa & Lozada did not
dissolve the said law partnership.
Accordingly, the petitioner and
respondents are hereby enjoined to
abide by the provisions of the
Agreement relative to the matter
governing the liquidation of the
shares of any retiring or
withdrawing partner in the
partnership interest." 1
On appeal, the SEC en banc reversed the decision of the
Hearing Officer and held that the withdrawal of Attorney
Joaquin L. Misa had dissolved the partnership of "Bito, Misa &
Lozada." The Commission ruled that, being a partnership at
will, the law firm could be dissolved by any partner at
anytime, such as by his withdrawal therefrom, regardless of
good faith or bad faith, since no partner can be forced to
continue in the partnership against his will. In its decision,
dated 17 January 1990, the SEC held:
WHEREFORE, premises considered the appealed
order of 31 March 1989 is hereby REVERSED insofar
as it concludes that the partnership of Bito, Misa &
Lozada has not been dissolved. The case is hereby
REMANDED to the Hearing Officer for determination
of the respective rights and obligations of the
parties. 2
The parties sought a reconsideration of the above decision.
Attorney Misa, in addition, asked for an appointment of a
receiver to take over the assets of the dissolved partnership
and to take charge of the winding up of its affairs. On 4 April
1991, respondent SEC issued an order denying
reconsideration, as well as rejecting the petition for
receivership, and reiterating the remand of the case to the
Hearing Officer.
The parties filed with the appellate court separate appeals
(docketed CA-G.R. SP No. 24638 and CA-G.R. SP No. 24648).
During the pendency of the case with the Court of Appeals,
Attorney Jesus Bito and Attorney Mariano Lozada both died on,
respectively, 05 September 1991 and 21 December 1991. The
death of the two partners, as well as the admission of new
partners, in the law firm prompted Attorney Misa to renew his
application for receivership (in CA G.R. SP No. 24648). He
expressed concern over the need to preserve and care for the
partnership assets. The other partners opposed the prayer.
The Court of Appeals, finding no reversible error on the part of
respondent Commission, AFFIRMED in toto the SEC decision
and order appealed from. In fine, the appellate court held, per
its decision of 26 February 1993, (a) that Atty. Misa's
withdrawal from the partnership had changed the relation of
the parties and inevitably caused the dissolution of the
partnership; (b) that such withdrawal was not in bad faith; (c)
that the liquidation should be to the extent of Attorney Misa's
interest or participation in the partnership which could be
computed and paid in the manner stipulated in the
partnership agreement; (d) that the case should be remanded
to the SEC Hearing Officer for the corresponding
determination of the value of Attorney Misa's share in the
partnership assets; and (e) that the appointment of a receiver
was unnecessary as no sufficient proof had been shown to
indicate that the partnership assets were in any such danger
of being lost, removed or materially impaired.
In this petition for review under Rule 45 of the Rules of Court,
petitioners confine themselves to the following issues:
1. Whether or not the Court of Appeals has erred in
holding that the partnership of Bito, Misa & Lozada
(now Bito, Lozada, Ortega & Castillo) is a partnership
at will;
2. Whether or not the Court of Appeals has erred in
holding that the withdrawal of private respondent
dissolved the partnership regardless of his good or
bad faith; and
3. Whether or not the Court of Appeals has erred in
holding that private respondent's demand for the
dissolution of the partnership so that he can get a
physical partition of partnership was not made in bad
faith;
to which matters we shall, accordingly, likewise limit
ourselves.
A partnership that does not fix its term is a partnership at will.
That the law firm "Bito, Misa & Lozada," and now "Bito,
Lozada, Ortega and Castillo," is indeed such a partnership
need not be unduly belabored. We quote, with approval, like
did the appellate court, the findings and disquisition of
respondent SEC on this matter; viz:
The partnership agreement (amended articles of 19
August 1948) does not provide for a specified period
or undertaking. The "DURATION" clause simply
states:
"5. DURATION. The partnership
shall continue so long as mutually
satisfactory and upon the death or
legal incapacity of one of the
partners, shall be continued by the
surviving partners."
The hearing officer however opined that the
partnership is one for a specific undertaking and
hence not a partnership at will, citing paragraph 2 of
the Amended Articles of Partnership (19 August
1948):
"2. Purpose. The purpose for which
the partnership is formed, is to act
as legal adviser and representative
of any individual, firm and
corporation engaged in
commercial, industrial or other
lawful businesses and occupations;
to counsel and advise such persons
and entities with respect to their
legal and other affairs; and to
appear for and represent their
principals and client in all courts of
justice and government
departments and offices in the
Philippines, and elsewhere when
legally authorized to do so."
The "purpose" of the partnership is not the specific
undertaking referred to in the law. Otherwise, all
partnerships, which necessarily must have a
purpose, would all be considered as partnerships for
a definite undertaking. There would therefore be no
need to provide for articles on partnership at will as
none would so exist. Apparently what the law
contemplates, is a specific undertaking or "project"
which has a definite or definable period of
completion. 3
The birth and life of a partnership at will is predicated on the
mutual desire and consent of the partners. The right to choose
with whom a person wishes to associate himself is the very
foundation and essence of that partnership. Its continued
existence is, in turn, dependent on the constancy of that
mutual resolve, along with each partner's capability to give it,
and the absence of a cause for dissolution provided by the law
itself. Verily, any one of the partners may, at his sole pleasure,
dictate a dissolution of the partnership at will. He must,
however, act in good faith, not that the attendance of bad
faith can prevent the dissolution of the partnership 4 but that it
can result in a liability for damages. 5
In passing, neither would the presence of a period for its
specific duration or the statement of a particular purpose for
its creation prevent the dissolution of any partnership by an
act or will of a partner. 6 Among partners, 7 mutual agency
arises and the doctrine of delectus personae allows them to
have the power, although not necessarily the right, to dissolve
the partnership. An unjustified dissolution by the partner can
subject him to a possible action for damages.
The dissolution of a partnership is the change in the relation
of the parties caused by any partner ceasing to be associated
in the carrying on, as might be distinguished from the winding
up of, the business. 8 Upon its dissolution, the partnership
continues and its legal personality is retained until the
complete winding up of its business culminating in its
termination. 9
The liquidation of the assets of the partnership following its
dissolution is governed by various provisions of the Civil
Code; 10 however, an agreement of the partners, like any
other contract, is binding among them and normally takes
precedence to the extent applicable over the Code's general
provisions. We here take note of paragraph 8 of the
"Amendment to Articles of Partnership" reading thusly:
. . . In the event of the death or retirement of any
partner, his interest in the partnership shall be
 liquidated and paid in accordance with the existing
agreements and his partnership participation shall
revert to the Senior Partners for allocation as the
Senior Partners may determine; provided, however,
that with respect to the two (2) floors of office
condominium which the partnership is now acquiring,
consisting of the 5th and the 6th floors of the Alpap
Building, 140 Alfaro Street, Salcedo Village, Makati,
Metro Manila, their true value at the time of such
death or retirement shall be determined by two (2)
independent appraisers, one to be appointed (by the
partnership and the other by the) retiring partner or
the heirs of a deceased partner, as the case may be.
In the event of any disagreement between the said
appraisers a third appraiser will be appointed by
them whose decision shall be final. The share of the
retiring or deceased partner in the aforementioned
two (2) floor office condominium shall be determined
upon the basis of the valuation above mentioned
which shall be paid monthly within the first ten (10)
days of every month in installments of not less than
P20,000.00 for the Senior Partners, P10,000.00 in the
case of two (2) existing Junior Partners and P5,000.00
in the case of the new Junior Partner. 11

The term "retirement" must have been used in the articles, as

we so hold, in a generic sense to mean the dissociation by a
partner, inclusive of resignation or withdrawal, from the
partnership that thereby dissolves it.

On the third and final issue, we accord due respect to the

appellate court and respondent Commission on their common
factual finding, i.e., that Attorney Misa did not act in bad faith.
Public respondents viewed his withdrawal to have been
spurred by "interpersonal conflict" among the partners. It
would not be right, we agree, to let any of the partners remain
in the partnership under such an atmosphere of animosity;
certainly, not against their will. 12Indeed, for as long as the
reason for withdrawal of a partner is not contrary to the
dictates of justice and fairness, nor for the purpose of unduly
visiting harm and damage upon the partnership, bad
faith cannot be said to characterize the act. Bad faith, in the
context here used, is no different from its normal concept of a
conscious and intentional design to do a wrongful act for a
dishonest purpose or moral obliquity.

WHEREFORE, the decision appealed from is AFFIRMED. No

pronouncement on costs.

G.R. No. 10695 December 15, 1916
TEODORO DE LOS REYES, plaintiff-appellee,
vs.
VICENTE LUKBAN and ESPERIDION BORJA, defendants.
VICENTE LUKBAN, appellant.
Ramon Diokno for appellant.
Ramon Salinas for appellee.
TORRES, J.:
On December 5, 1913, Teodoro de los Reyes brought suit in
the Court of First Instance of this city against Vicente Lukban
and Esperidion Borja, to recover from them individually the
sum of P853, the balance of a debt of P1,086.65 owing for
merchandise bought on credit in October and November,
1904, by the firm Lukban & Borja, from the plaintiff's ship
supply store, named La Industria.
In case No. 3759, prosecuted in the said court by the creditor
Reyes against the said firm of Lukban & Borja, the latter was
ordered by a final judgment of October 19, 1905, to pay the
said sum of P1,086.65, together with the interest thereon,
amounting to a total of P1,102.95, in addition to the costs,
P46.24.
One of the partner, Esperidion Borja, paid P522.69 on account
of the debt.lawphi1.net There still remains to be paid P610.21,
and this sum, together with the costs and legal interest
thereon from July 14, 1905, to the date of the complaint,
December 5, 1913, aggregates the total sum of P894.17. The
plaintiff prayed the court to order the defendants jointly or
severally to pay him, the plaintiff, this last mentioned amount,
together with the legal interest thereon from the date of the
complaint, and the costs.
After due summons the defendants appeared, and one of
them, Esperidion Borja, in answer to the complaint entered a
general and specific denial of each and all of the allegations
therein contained, and, as a special defense, alleged that it
was res judicata and that the plaintiff's action, if it existed,
had already prescribed.
The other defendant, Vicente Lukban, in his amended answer
set forth (1) that he denied generally and specifically each
and all of the facts alleged in each and all of the paragraphs
of the complaint; (2) that the issues raised by the complaint
had already been decided in case No. 10908, in which the firm
of Lukban & Borja was acquitted, without costs; (3) that the
defendant Lukban was merely an industrial partner in the firm
of Lukban & Borja, Espiridion Borja being the partner thereof
who furnished the capital; (4) that the assets of the firm of
Lukban & Borja had not been exhausted (by attachment),
wherefore the present action is premature; and (5) that the
plaintiff Reyes' action, as regards this defendant Lukban, has
prescribed.
At the trial of the case the parties made the following
stipulation:
1. That on July 15, 1905, the herein plaintiff Teodoro
de los Reyes brought suit against the firm of Lukban
& Borja to recover the sum of P1,086.65 owing for
merchandise bought on credit in the months of
October and November, 1904, from the ship supply
store known by the name of La Industria. The said
suit was heard before the Honorable John C.
Sweeney, on October 19, 1905, on which date the
said judge sentenced the defendant firm to pay the
sum of P1,086.65, Philippine currency, with legal
interest thereon from July 14, 1905, to the date of the
judgment, amounting to P16.30, Philippine currency,
and costs amounting to P46.24. It does not appear
that this obligation was set forth in writing. All the
preceding has been taken from the record of that
court in case No. 3759, De los Reyes vs, Lukban &
Borja.
2. On August 19, 1913, the same plaintiff Teodoro de
los Reyes brought suit against Lukban & Borja to
recover the sum of P853, alleging for this purpose
that the defendant Espiridion Borja paid P522.69 on
account of the sum of P1,086.65 allowed in the
judgment referred to in the preceding paragraph,
there remaining unpaid P610.21 of the principal debt,
to which is added the legal interest thereon from
January 1, 1906, to the date of the commencement
of the said suit, thus forming the total sum above
stated of P853. After hearing the case, the Honorable
Judge Del Rosario, on November 20, 1913, rendered
judgment absolving the firm of Lukban & Borja from
the complaint without special finding as to costs. All
the facts related in this paragraph appear in case No.
10908 of this court.
3. That several years ago and seven months after its
organization, or, more specifically, on April 13, 1909,
the firm of Lukban & Borja was lawfully dissolved, as
stated by Borja; and that the five years from the 13th
of the same month of the year 1904, stipulated for
its duration had elapsed. (Judgment in case No.
10908.) The articles of incorporation of the firm of
Lukban & Borja are found in the attached document,
which, for its identification, is marked as Exhibit A of
this agreement.
4. That the assets of the firm of Lukban & Borja had
not been exhausted (by attachment) for the reason
that the plaintiff did not know what property
belonged to it.
5. Vicente Lukban and Espiridion Borja,
notwithstanding that they alleged themselves to be
copartners of the firm of Lukban & Borja, were not
sued by the herein plaintiff in cases Nos. 3759 and
10908, but that plaintiff sued the firm of Lukban &
Borja, represented by Borja.
After hearing the evidence, the court rendered judgment on
November 25, 1914, sentencing the defendants Vicente
Lukban and Espiridion Borja jointly and severally to pay to the
plaintiff Teodoro de los Reyes the sum of P610.20, together
with the legal interest thereon from December 17, 1913, and
the costs. To this judgment Lukban excepted, announced his
intention to file the proper bill of exceptions and moved for a
new trial on the grounds that the evidence did not justify the
decision and that the latter was contrary to law. By an order of
December 10, the motion for a new trial was overruled and an
exception was entered by this defendant-appellant. The other
defendant, Espiridion Borja, made no exception to the said
ruling so the judgment became final with respect to him.
The subject matter of this suit is an acknowledged debt held
to be owing by a judicial pronouncement contained in a
judgment rendered in case No. 3759, prosecuted by the
creditor Teodor de los Reyes against the general partnership
of Lukban & Borja, which was sentenced to pay the said debt.
The creditor was unable to collect it in its entirety but
recovered only a part thereof, to wit, P522.69, which was paid
by the partner Borja. In order to demonstrate the propriety of
the judgment appealed from, rendered against the parties
who were the partners of the said firm, we shall confine
ourselves in this decision to the four errors assigned to the
said judgment by the defendant Lukban, inasmuch as the
other defendant Borja acquiesced in the said judgment and
the same became final as to him. These error are the
following:
1. In not holding that the action brought against this
defendant is improper, inasmuch as prior to its
prosecution no attachment was levied on the assets
of the said partnership.
2. In not holding that the action brought against this
appellee [defendant] has not been proven.
3. In not holding that the present is not a true case
of res judicata.
4. In not holding that the appellee's action has
prescribed in so far as it concerns this appellant.
With respect to the first assignment of error, the contents of
the writ and the return of the execution of the final judgment
rendered in the said case No. 3759 show that the dissolved
partnership of Lukban & Borja had absolutely no property
whatever of its own. Had any property whatever of the said
partnership still remained, the defendant Lukban would have
pointed it out inorder to avoid being obliged to pay in solidum
all the balance of the sum which the firm was sentenced to
pay by the said final judgment of October 19, 1905. He did not
do so because the firm of Lukban & Borja no longer had any
kind of property or credits, as shown by the document setting
forth the agreement made by and between several creditors
of the said firm, a third party named Ramon Tinsay and the
former partner of the firm, Espiridion Borja, in which
document it appears that the firm Lukban & Borja owed four
creditors, among them the plaintiff De los Reyes, the total
sum of P10,165.01 and these creditors with some difficulty
succeeded in collecting the sum of P5,000 through a
transaction with the said Ramon Tinsay who paid this last
amount for the account of the partner Espiridion Borja. It
appears that the latter paid to the creditor De los Reyes the
aforementioned sum of P522.69, on account of the firm's debt
to Teodoro de los Reyes, a debt which was recognized in the
said judgment of October 19, 1905. The attachment, or
recourse to the property, the lack of which proceeding was
complained of, is a proceeding that was resorted to when
attempt was made to execute the final judgment rendered
against the partnership of Lukban & Borja, which proceeding
gave negative results; therefore, if the requirement of article
237 of the Code of Commerce must be complied with by the
creditor it is evident that it has already been done for the
defendant Lukban was unable to show that the partnership to
which he belonged actually possessed any more assets.
With respect to the second assignment of error, if Teodoro de
los Reyes is entitled to collect individually from the partners
Lukban and Borja the amount of the debt that the dissolved
partnership owed at the time of its dissolution, it is
unquestionable that such a right has given rise to the
corresponding right of action to demand the payment of the
debt from the partners individually, or from each of them, by
the insolvency of the partnership, inasmuch as they are
personally and severally liable with all their property for the
results of the operations of the partnership which they
conducted.
Article 127 of the Code of Commerce provides:
All the member of the general copartnership, be they
or be they not managing partners of the same, are
personally and severally liable with all their property
for the results of the transactions made in the name
and for the account of the partnership, under the
signature of the latter, and by a person authorized to
make use thereof.
With regard to the third assignment of error. Although the
action brought in case No. 10908 by the creditor Teodoro de
los Reyes against the partnership Lukban & Borja be not
different from that brought in the present case No. 11296, and
although it be deemed to have arisen out of the right of the
plaintiff-creditor to collect his credit, yet the first time it was
brought against the partnership. The action against Vicente
Lukban and Espiridion Borja individually ca not be demurred
to on the ground of res judicata by the judgment of acquittal
entered in case No. 10908.
Article 1252 of the Civil Code provides:
In order that the presumption of the res judicata may
be valid in another suit, it is necessary that, between
the case decided by the sentence and that in which
the name is invoked, there must be the most perfect
identity between the things causes, and persons of
the litigants, and their capacity as such.
There may be perfect identity between the cause of action
and the things demanded in case no. 10908, wherein the said
partnership was absolved from the complaint, and in the
present case No. 11296; it is, however, undeniable that the
parties defendant are not the same nor is their capacity as
such. In the first case it was the partnership that was sued,
while in the present case it is Lukban and Borja individually,
as former members of that dissolved partnership, who are
sued jointly and severally. Therefore, pursuant to the above-
cited article of the Civil Code, the provisions of which
harmonize with those of section 307 of the Code of Civil
Procedure, the former judgment can not be set up as res
judicata in the present action.
As regards the last assignment of error, alleging prescription G.R. No. L-39780 November 11, 1985
of action, suffice it to say that from October 19, 1905, to
December 5, 1913, even without counting the interruption ELMO MUASQUE, petitioner,
caused by the action brought on August 18th of this latter vs.
year, the ten year period fixed by section 43 of the Code of COURT OF APPEALS,CELESTINO GALAN TROPICAL
Civil Procedure has not elapsed. In view of the negative COMMERCIAL COMPANY and RAMON PONS,respondents.
results of the proceedings had by the sheriff in levying
execution of the final judgment rendered against the
John T. Borromeo for petitioner.
partnership of Lukban & Borja, the creditor in the exercise of
his rights has brought the proper action against those who
were the members of that firm for the recovery of the unpaid Juan D. Astete for respondent C. Galan.
balance of his credit, and he filed his complaint within the
period fixed by the law of procedure and the defendants Paul Gornes for respondent R. Pons.
cannot allege that it is now res judicata.

Viu Montecillo for respondent Tropical.

For the foregoing reasons the judgment appealed from is
affirmed with the costs of this instance against the appellant.
Paterno P. Natinga for Intervenor Blue Diamond Glass Palace.
So ordered.

GUTTIERREZ, JR., J.:

In this petition for certiorari, the petitioner seeks to annul and

set added the decision of the Court of Appeals affirming the
existence of a partnership between petitioner and one of the
respondents, Celestino Galan and holding both of them liable
to the two intervenors which extended credit to their
partnership. The petitioner wants to be excluded from the
liabilities of the partnership.

Petitioner Elmo Muasque filed a complaint for payment of

sum of money and damages against respondents Celestino
Galan, Tropical Commercial, Co., Inc. (Tropical) and Ramon
Pons, alleging that the petitioner entered into a contract with
respondent Tropical through its Cebu Branch Manager Pons for
remodelling a portion of its building without exchanging or
expecting any consideration from Galan although the latter
was casually named as partner in the contract; that by virtue
of his having introduced the petitioner to the employing
company (Tropical). Galan would receive some kind of
compensation in the form of some percentages or
commission; that Tropical, under the terms of the contract,
agreed to give petitioner the amount of P7,000.00 soon after
the construction began and thereafter, the amount of
P6,000.00 every fifteen (15) days during the construction to
make a total sum of P25,000.00; that on January 9, 1967,
Tropical and/or Pons delivered a check for P7,000.00 not to the
plaintiff but to a stranger to the contract, Galan, who
succeeded in getting petitioner's indorsement on the same
check persuading the latter that the same be deposited in a
joint account; that on January 26, 1967 when the second
check for P6,000.00 was due, petitioner refused to indorse
said cheek presented to him by Galan but through later
manipulations, respondent Pons succeeded in changing the
payee's name from Elmo Muasque to Galan and Associates,
thus enabling Galan to cash the same at the Cebu Branch of
the Philippine Commercial and Industrial Bank (PCIB) placing
the petitioner in great financial difficulty in his construction
business and subjecting him to demands of creditors to pay'
for construction materials, the payment of which should have
been made from the P13,000.00 received by Galan; that
petitioner undertook the construction at his own expense
completing it prior to the March 16, 1967 deadline;that
because of the unauthorized disbursement by respondents
Tropical and Pons of the sum of P13,000.00 to Galan petitioner
demanded that said amount be paid to him by respondents
under the terms of the written contract between the petitioner
and respondent company.
The respondents answered the complaint by denying some
and admitting some of the material averments and setting up
counterclaims.
During the pre-trial conference, the petitioners and
respondents agreed that the issues to be resolved are:
(1) Whether or not there existed a partners
between Celestino Galan and Elmo
Muasque; and
(2) Whether or not there existed a justifiable
cause on the part of respondent Tropical to
disburse money to respondent Galan.
The business firms Cebu Southern Hardware Company and
Blue Diamond Glass Palace were allowed to intervene, both
having legal interest in the matter in litigation.
After trial, the court rendered judgment, the dispositive
portion of which states:
IN VIEW WHEREOF, Judgment is hereby
rendered:
(1) ordering plaintiff Muasque and
defendant Galan to pay jointly and severally
the intervenors Cebu and Southern
Hardware Company and Blue Diamond Glass
Palace the amount of P6,229.34 and
P2,213.51, respectively;
(2) absolving the defendants Tropical
Commercial Company and Ramon Pons from
any liability,
No damages awarded whatsoever.
The petitioner and intervenor Cebu Southern Company and its
proprietor, Tan Siu filed motions for reconsideration.
On January 15, 197 1, the trial court issued 'another order
amending its judgment to make it read as follows:
IN VIEW WHEREOF, Judgment is hereby
rendered:
(1) ordering plaintiff Muasque and
defendant Galan to pay jointly and severally
the intervenors Cebu Southern Hardware
Company and Blue Diamond Glass Palace
the amount of P6,229.34 and P2,213.51,
respectively,
(2) ordering plaintiff and defendant Galan to
pay Intervenor Cebu Southern Hardware
Company and Tan Siu jointly and severally
interest at 12% per annum of the sum of
P6,229.34 until the amount is fully paid;
(3) ordering plaintiff and defendant Galan to
pay P500.00 representing attorney's fees
jointly and severally to Intervenor Cebu
Southern Hardware Company:
(4) absolving the defendants Tropical
Commercial Company and Ramon Pons from
any liability,
No damages awarded whatsoever.
On appeal, the Court of Appeals affirmed the judgment of the
trial court with the sole modification that the liability imposed
in the dispositive part of the decision on the credit of Cebu
Southern Hardware and Blue Diamond Glass Palace was
changed from "jointly and severally" to "jointly."
Not satisfied, Mr. Muasque filed this petition.
The present controversy began when petitioner Muasque in
behalf of the partnership of "Galan and Muasque" as
Contractor entered into a written contract with respondent
Tropical for remodelling the respondent's Cebu branch
building. A total amount of P25,000.00 was to be paid under
the contract for the entire services of the Contractor. The
terms of payment were as follows: thirty percent (30%) of the
whole amount upon the signing of the contract and the
balance thereof divided into three equal installments at the
lute of Six Thousand Pesos (P6,000.00) every fifteen (15)
working days.
The first payment made by respondent Tropical was in the
form of a check for P7,000.00 in the name of the
petitioner.Petitioner, however, indorsed the check in favor of
respondent Galan to enable the latter to deposit it in the bank
and pay for the materials and labor used in the project.
Petitioner alleged that Galan spent P6,183.37 out of the
P7,000.00 for his personal use so that when the second check
in the amount of P6,000.00 came and Galan asked the
petitioner to indorse it again, the petitioner refused.
The check was withheld from the petitioner. Since Galan
informed the Cebu branch of Tropical that there was
a"misunderstanding" between him and petitioner, respondent
Tropical changed the name of the payee in the second check
from Muasque to "Galan and Associates" which was the duly
registered name of the partnership between Galan and
petitioner and under which name a permit to do construction
business was issued by the mayor of Cebu City. This enabled
Galan to encash the second check.
Meanwhile, as alleged by the petitioner, the construction
continued through his sole efforts. He stated that he borrowed
some P12,000.00 from his friend, Mr. Espina and although the
expenses had reached the amount of P29,000.00 because of
the failure of Galan to pay what was partly due the laborers
and partly due for the materials, the construction work was
finished ahead of schedule with the total expenditure reaching
P34,000.00.
The two remaining checks, each in the amount of
P6,000.00,were subsequently given to the petitioner alone
with the last check being given pursuant to a court order.
As stated earlier, the petitioner filed a complaint for payment
of sum of money and damages against the
respondents,seeking to recover the following: the amounts
covered by the first and second checks which fell into the
hands of respondent Galan, the additional expenses that the
petitioner incurred in the construction, moral and exemplary
damages, and attorney's fees.
Both the trial and appellate courts not only absolved
respondents Tropical and its Cebu Manager, Pons, from any
liability but they also held the petitioner together with
respondent Galan, hable to the intervenors Cebu Southern
Hardware Company and Blue Diamond Glass Palace for the
credit which the intervenors extended to the partnership of
petitioner and Galan
In this petition the legal questions raised by the petitioner are
as follows: (1) Whether or not the appellate court erred in
holding that a partnership existed between petitioner and
respondent Galan. (2) Assuming that there was such a
partnership, whether or not the court erred in not finding
Galan guilty of malversing the P13,000.00 covered by the first
and second checks and therefore, accountable to the
petitioner for the said amount; and (3) Whether or not the
court committed grave abuse of discretion in holding that the
payment made by Tropical through its manager Pons to Galan
was "good payment, "
Petitioner contends that the appellate court erred in holding
that he and respondent Galan were partners, the truth being
that Galan was a sham and a perfidious partner who
misappropriated the amount of P13,000.00 due to the
petitioner.Petitioner also contends that the appellate court
committed grave abuse of discretion in holding that the
payment made by Tropical to Galan was "good" payment
when the same gave occasion for the latter to misappropriate
the proceeds of such payment.
The contentions are without merit.
The records will show that the petitioner entered into a con-
tract with Tropical for the renovation of the latter's building on
behalf of the partnership of "Galan and Muasque." This is
readily seen in the first paragraph of the contract where it
states:
This agreement made this 20th day of
December in the year 1966 by Galan and
Muasque hereinafter called the Contractor,
and Tropical Commercial Co., Inc.,
hereinafter called the owner do hereby for
and in consideration agree on the
following: ... .
There is nothing in the records to indicate that the partner-
ship organized by the two men was not a genuine one. If there
was a falling out or misunderstanding between the partners,
such does not convert the partnership into a sham
organization.
Likewise, when Muasque received the first payment of
Tropical in the amount of P7,000.00 with a check made out in
his name, he indorsed the check in favor of Galan.
Respondent Tropical therefore, had every right to presume
that the petitioner and Galan were true partners. If they were
not partners as petitioner claims, then he has only himself to
blame for making the relationship appear otherwise, not only
to Tropical but to their other creditors as well. The payments
made to the partnership were, therefore, valid payments.
In the case of Singsong v. Isabela Sawmill (88 SCRA 643),we
ruled:
Although it may be presumed that Margarita
G. Saldajeno had acted in good faith, the
appellees also acted in good faith in
extending credit to the partnership. Where
one of two innocent persons must suffer,
that person who gave occasion for the
damages to be caused must bear the
consequences.
No error was committed by the appellate court in holding that
the payment made by Tropical to Galan was a good payment
which binds both Galan and the petitioner. Since the two were
partners when the debts were incurred, they, are also both
liable to third persons who extended credit to their
partnership. In the case of George Litton v. Hill and Ceron, et
al, (67 Phil. 513, 514), we ruled:
There is a general presumption that each
individual partner is an authorized agent for
the firm and that he has authority to bind
the firm in carrying on the partnership
transactions. (Mills vs. Riggle,112 Pan, 617).
The presumption is sufficient to permit third
persons to hold the firm liable on
transactions entered into by one of
members of the firm acting apparently in its
behalf and within the scope of his authority.
(Le Roy vs. Johnson, 7 U.S. (Law. ed.), 391.)
Petitioner also maintains that the appellate court committed
grave abuse of discretion in not holding Galan liable for the
amounts which he "malversed" to the prejudice of the
petitioner. He adds that although this was not one of the
issues agreed upon by the parties during the pretrial, he,
nevertheless, alleged the same in his amended complaint
which was, duly admitted by the court.
When the petitioner amended his complaint, it was only for
the purpose of impleading Ramon Pons in his personal
capacity. Although the petitioner made allegations as to the
alleged malversations of Galan, these were the same
allegations in his original complaint. The malversation by one
partner was not an issue actually raised in the amended
complaint but the alleged connivance of Pons with Galan as a
means to serve the latter's personal purposes.
The petitioner, therefore, should be bound by the delimitation
of the issues during the pre-trial because he himself agreed to
the same. In Permanent Concrete Products, Inc. v. Teodoro,
(26 SCRA 336), we ruled:
 xxx xxx xxx
... The appellant is bound by the
delimitation of the issues contained in the
trial court's order issued on the very day the
pre-trial conference was held. Such an order
controls the subsequent course of the
action, unless modified before trial to
prevent manifest injustice.In the case at bar,
modification of the pre-trial order was never
sought at the instance of any party.
partnership is liable therefor to the same
extent as the partner so acting or omitting
to act.
Art. 1823. The partnership is bound to make
good:
(1) Where one partner acting within the
scope of his apparent authority receives
money or property of a third person and
misapplies it; and

Petitioner could have asked at least for a modification of the (2) Where the partnership in the course of
issues if he really wanted to include the determination of its business receives money or property of a
Galan's personal liability to their partnership but he chose not third person and t he money or property so
to do so, as he vehemently denied the existence of the received is misapplied by any partner while
partnership. At any rate, the issue raised in this petition is the it is in the custody of the partnership.
contention of Muasque that the amounts payable to the
intervenors should be shouldered exclusively by Galan. We
The obligation is solidary, because the law protects him, who
note that the petitioner is not solely burdened by the
in good faith relied upon the authority of a partner, whether
obligations of their illstarred partnership. The records show
such authority is real or apparent. That is why under Article
that there is an existing judgment against respondent Galan,
1824 of the Civil Code all partners, whether innocent or guilty,
holding him liable for the total amount of P7,000.00 in favor of
as well as the legal entity which is the partnership, are
Eden Hardware which extended credit to the partnership aside
solidarily liable.
from the P2, 000. 00 he already paid to Universal Lumber.

In the case at bar the respondent Tropical had every reason to

We, however, take exception to the ruling of the appellate
believe that a partnership existed between the petitioner and
court that the trial court's ordering petitioner and Galan to
Galan and no fault or error can be imputed against it for
pay the credits of Blue Diamond and Cebu Southern
making payments to "Galan and Associates" and delivering
Hardware"jointly and severally" is plain error since the liability
the same to Galan because as far as it was concerned, Galan
of partners under the law to third persons for contracts
was a true partner with real authority to transact on behalf of
executed inconnection with partnership business is only pro
the partnership with which it was dealing. This is even more
rata under Art. 1816, of the Civil Code.
true in the cases of Cebu Southern Hardware and Blue
Diamond Glass Palace who supplied materials on credit to the
While it is true that under Article 1816 of the Civil Code,"All partnership. Thus, it is but fair that the consequences of any
partners, including industrial ones, shall be liable prorate with wrongful act committed by any of the partners therein should
all their property and after all the partnership assets have be answered solidarily by all the partners and the partnership
been exhausted, for the contracts which may be entered into as a whole
the name and fm the account cd the partnership, under its
signature and by a person authorized to act for the partner-
However. as between the partners Muasque and
ship. ...". this provision should be construed together with
Galan,justice also dictates that Muasque be reimbursed by
Article 1824 which provides that: "All partners are liable
Galan for the payments made by the former representing the
solidarily with the partnership for everything chargeable to
liability of their partnership to herein intervenors, as it was
the partnership under Articles 1822 and 1823." In short, while
satisfactorily established that Galan acted in bad faith in his
the liability of the partners are merely joint in transactions
dealings with Muasque as a partner.
entered into by the partnership, a third person who transacted
with said partnership can hold the partners solidarily liable for
the whole obligation if the case of the third person falls under WHEREFORE, the decision appealed from is hereby AFFIRMED
Articles 1822 or 1823. with the MODIFICATION that the liability of petitioner and
respondent Galan to intervenors Blue Diamond Glass and
Cebu Southern Hardware is declared to be joint and solidary.
Articles 1822 and 1823 of the Civil Code provide:
Petitioner may recover from respondent Galan any amount
that he pays, in his capacity as a partner, to the above
Art. 1822. Where, by any wrongful act or intervenors,
omission of any partner acting in the
ordinary course of the business of the
SO ORDERED.
partner-ship or with the authority of his co-
partners, loss or injury is caused to any
person, not being a partner in the
partnership or any penalty is incurred, the