The trial court ruled that a partnership
Lim Tong Lim vs Philippine fishing Gear among Lim, Chua and Yao existed based (1) on
Facts: On behalf of "Ocean Quest Fishing
Corporation," Antonio Chua and Peter Yao
entered into a Contract dated February 7, 1990,
for the purchase of fishing nets of various sizes
from the Philippine Fishing Gear Industries, Inc.
(herein respondent). They claimed that they were
engaged in a business venture with Petitioner
Lim Tong Lim, who however was not a
signatory to the agreement. The total price of the
nets amounted to P532,045. Four hundred pieces
of floats worth P68,000 were also sold to the
Corporation.[4]
The buyers, however, failed to pay for the
fishing nets and the floats; hence, private
respondent filed a collection suit against Chua,
Yao and Petitioner Lim Tong Lim with a prayer
for a writ of preliminary attachment.The suit was
brought against the three in their capacities as
general partners, on the allegation that Ocean
Quest Fishing Corporation was a nonexistent
corporation as shown by a Certification from the
Securities and Exchange Commission.[5] On
September 20, 1990, the lower court issued a
Writ of Preliminary Attachment, which the
sheriff enforced by attaching the fishing nets on
board F/B Lourdes which was then docked at the
Fisheries Port, Navotas, Metro Manila.
Instead of answering the Complaint, Chua
filed a Manifestation admitting his liability and
requesting a reasonable time within which to
pay. He also turned over to respondent some of
the nets which were in his possession. Peter Yao
filed an Answer, after which he was deemed to
have waived his right to cross-examine witnesses
and to present evidence on his behalf, because of
his failure to appear in subsequent hearings. Lim
Tong Lim, on the other hand, filed an Answer
with Counterclaim and Crossclaim and moved
for the lifting of the Writ of Attachment.[6] The
trial court maintained the Writ, and upon motion
of private respondent, ordered the sale of the
fishing nets at a public auction. Philippine
Fishing Gear Industries won the bidding and
deposited with the said court the sales proceeds
of P900,000.[7]
On November 18, 1992, the trial court
rendered its Decision, ruling that Philippine
Fishing Gear Industries was entitled to the Writ
of Attachment and that Chua, Yao and Lim, as
general partners, were jointly liable to pay
respondent.[8]
the testimonies of the witnesses presented and
(2) on a Compromise Agreement executed by the
three[9] in Civil Case No. 1492-MN which Chua
and Yao had brought against Lim in the RTC of
Malabon, Branch 72, for (a) a declaration of
nullity of commercial documents; (b) a
reformation of contracts; (c) a declaration of
ownership of fishing boats; (d) an injunction and
(e) damages.[10] The Compromise Agreement
provided:
a) That the parties plaintiffs & Lim Tong Lim
agree to have the four (4) vessels sold in the
amount of P5,750,000.00 including the fishing
net. This P5,750,000.00 shall be applied as full
payment for P3,250,000.00 in favor of JL
Holdings Corporation and/or Lim Tong Lim;
b) If the four (4) vessel[s] and the fishing net will
be sold at a higher price than P5,750,000.00
whatever will be the excess will be divided into
3: 1/3 Lim Tong Lim; 1/3 Antonio Chua; 1/3
Peter Yao;
c) If the proceeds of the sale the vessels will be
less than P5,750,000.00 whatever the deficiency
shall be shouldered and paid to JL Holding
Corporation by 1/3 Lim Tong Lim; 1/3 Antonio
Chua; 1/3 Peter Yao.[11]
The trial court noted that the Compromise
Agreement was silent as to the nature of their
obligations, but that joint liability could be
presumed from the equal distribution of the
profit and loss.[12]
Lim appealed to the Court of Appeals (CA)
which, as already stated, affirmed the RTC.
Ruling of the Court of Appeals
In affirming the trial court, the CA held that
petitioner was a partner of Chua and Yao in a
fishing business and may thus be held liable as a
such for the fishing nets and floats purchased by
and for the use of the partnership. The appellate
court ruled:
The evidence establishes that all the defendants
including herein appellant Lim Tong Lim
undertook a partnership for a specific
undertaking, that is for commercial fishing x x
x. Obviously, the ultimate undertaking of the
defendants was to divide the profits among
themselves which is what a partnership
essentially is x x x. By a contract of partnership,
two or more persons bind themselves to
contribute money, property or industry to a
common fund with the intention of dividing the
profits among themselves (Article 1767, New
Civil Code).[13]
Hence, petitioner brought this recourse
before this Court.[14]
ISSUE: WON by their acts, Lim, Chua and
Yao could be deemed to have entered into a
partnership.
Ruling:
In arguing that he should not be held liable
for the equipment purchased from respondent,
petitioner controverts the CA finding that a
partnership existed between him, Peter Yao and
Antonio Chua. He asserts that the CA based its
finding on the Compromise Agreement
alone. Furthermore, he disclaims any direct
participation in the purchase of the nets, alleging
that the negotiations were conducted by Chua
and Yao only, and that he has not even met the
representatives of the respondent
company. Petitioner further argues that he was a
lessor, not a partner, of Chua and Yao, for the
"Contract of Lease" dated February 1, 1990,
showed that he had merely leased to the two the
main asset of the purported partnership -- the
fishing boat F/B Lourdes. The lease was for six
months, with a monthly rental of P37,500 plus
25 percent of the gross catch of the boat.
We are not persuaded by the arguments
of petitioner. The facts as found by the two
lower courts clearly showed that there existed
a partnership among Chua, Yao and him,
pursuant to Article 1767 of the Civil Code
which provides:
Article 1767 - By the contract of partnership, two
or more persons bind themselves to contribute
money, property, or industry to a common fund,
with the intention of dividing the profits among
themselves.
Specifically, both lower courts ruled that a
partnership among the three existed based on the
following factual findings:[15]
(1) That Petitioner Lim Tong Lim requested
Peter Yao who was engaged in commercial
fishing to join him, while Antonio Chua was
already Yaos partner;
(2) That after convening for a few times, Lim
Chua, and Yao verbally agreed to acquire two
fishing boats, the FB Lourdes and the FB
Nelson for the sum of P3.35 million;
(3) That they borrowed P3.25 million from Jesus
Lim, brother of Petitioner Lim Tong Lim, to
finance the venture.
(4) That they bought the boats from CMF
Fishing Corporation, which executed a Deed of
Sale over these two (2) boats in favor of
Petitioner Lim Tong Lim only to serve as
security for the loan extended by Jesus Lim;
(5) That Lim, Chua and Yao agreed that the
refurbishing , re-equipping, repairing, dry
docking and other expenses for the boats would
be shouldered by Chua and Yao;
(6) That because of the unavailability of funds,
Jesus Lim again extended a loan to the
partnership in the amount of P1 million secured
by a check, because of which, Yao and Chua
entrusted the ownership papers of two other
boats, Chuas FB Lady Anne Mel and Yaos FB
Tracy to Lim Tong Lim.
(7) That in pursuance of the business agreement,
Peter Yao and Antonio Chua bought nets from
Respondent Philippine Fishing Gear, in behalf of
"Ocean Quest Fishing Corporation," their
purported business name.
(8) That subsequently, Civil Case No. 1492-MN
was filed in the Malabon RTC, Branch 72 by
Antonio Chua and Peter Yao against Lim Tong
Lim for (a) declaration of nullity of commercial
documents; (b) reformation of contracts; (c)
declaration of ownership of fishing boats; (4)
injunction; and (e) damages.
(9) That the case was amicably settled through a
Compromise Agreement executed between the
parties-litigants the terms of which are already
enumerated above.
From the factual findings of both lower
courts, it is clear that Chua, Yao and Lim had
decided to engage in a fishing business, which
they started by buying boats worth P3.35 million,
financed by a loan secured from Jesus Lim who
was petitioners brother. In their Compromise
Agreement, they subsequently revealed their
intention to pay the loan with the proceeds of the
sale of the boats, and to divide equally among
them the excess or loss. These boats, the
purchase and the repair of which were financed
with borrowed money, fell under the term
common fund under Article 1767. The
contribution to such fund need not be cash or
fixed assets; it could be an intangible like
credit or industry. That the parties agreed
that any loss or profit from the sale and
operation of the boats would be divided
equally among them also shows that they had
indeed formed a partnership.
Moreover, it is clear that the partnership
extended not only to the purchase of the boat, but
also to that of the nets and the floats. The fishing
nets and the floats, both essential to fishing, were
obviously acquired in furtherance of their
business. It would have been inconceivable for
Lim to involve himself so much in buying the
boat but not in the acquisition of the aforesaid
equipment, without which the business could not
have proceeded.
Given the preceding facts, it is clear that
there was, among petitioner, Chua and Yao, a
partnership engaged in the fishing business. They
purchased the boats, which constituted the main
assets of the partnership, and they agreed that the
proceeds from the sales and operations thereof
would be divided among them.
Petitioner argues that the appellate courts
sole basis for assuming the existence of a
partnership was the Compromise Agreement. He
also claims that the settlement was entered into
only to end the dispute among them, but not to
adjudicate their preexisting rights and
obligations. His arguments are baseless. The
Agreement was but an embodiment of the
relationship extant among the parties prior to its
execution.
A proper adjudication of claimants rights
mandates that courts must review and thoroughly
appraise all relevant facts. Both lower courts
have done so and have found, correctly, a
preexisting partnership among the parties. In
implying that the lower courts have decided on
the basis of one piece of document alone,
petitioner fails to appreciate that the CA and the
RTC delved into the history of the document and
explored all the possible consequential
combinations in harmony with law, logic and
fairness. Verily, the two lower courts factual
findings mentioned above nullified petitioners
argument that the existence of a partnership was
based only on the Compromise Agreement.
We are not convinced by petitioners
argument that he was merely the lessor of the
boats to Chua and Yao, not a partner in the
fishing venture. His argument allegedly finds
support in the Contract of Lease and the
registration papers showing that he was the
owner of the boats, including F/B Lourdes where
the nets were found.
His allegation defies logic. In effect, he
would like this Court to believe that he consented
to the sale of his own boats to pay a debt of Chua
and Yao, with the excess of the proceeds to be
divided among the three of them. No lessor
would do what petitioner did. Indeed, his consent
to the sale proved that there was a preexisting
partnership among all three.
Verily, as found by the lower courts,
petitioner entered into a business agreement with
Chua and Yao, in which debts were undertaken
in order to finance the acquisition and the
upgrading of the vessels which would be used in
their fishing business. The sale of the boats, as
well as the division among the three of the
balance remaining after the payment of their
loans, proves beyond cavil that F/B Lourdes,
though registered in his name, was not his own
property but an asset of the partnership. It is not
uncommon to register the properties acquired
from a loan in the name of the person the lender
trusts, who in this case is the petitioner
himself. After all, he is the brother of the
creditor, Jesus Lim.
We stress that it is unreasonable indeed, it
is absurd -- for petitioner to sell his property to
pay a debt he did not incur, if the relationship
among the three of them was merely that of
lessor-lessee, instead of partners.
YULO vs Yang Chiao
Facts: The record discloses that on June 17,
1945, defendant Yang Chiao Seng wrote a
letter to the palintiff Mrs. Rosario U. Yulo,
proposing the formation of a partnership
between them to run and operate a theatre on
the premises occupied by former Cine Oro at
Plaza Sta. Cruz, Manila. The principal
conditions of the offer are (1) that Yang Chiao
Seng guarantees Mrs. Yulo a monthly
participation of P3,000 payable quarterly in
advance within the first 15 days of each
quarter, (2) that the partnership shall be for a
period of two years and six months, starting
from July 1, 1945 to December 31, 1947, with
the condition that if the land is expropriated
or rendered impracticable for the business, or
if the owner constructs a permanent building
thereon, or Mrs. Yulo's right of lease is
terminated by the owner, then the
partnership shall be terminated even if the
period for which the partnership was agreed
to be established has not yet expired; (3) that
Mrs. Yulo is authorized personally to conduct
such business in the lobby of the building as is
ordinarily carried on in lobbies of theatres in
operation, provided the said business may not
obstruct the free ingress and agrees of
patrons of the theatre; (4) that after
December 31, 1947, all improvements placed
by the partnership shall belong to Mrs. Yulo,
but if the partnership agreement is
terminated before the lapse of one and a half
years period under any of the causes
mentioned in paragraph (2), then Yang Chiao
Seng shall have the right to remove and take
away all improvements that the partnership
may place in the premises.
Pursuant to the above offer, which
plaintiff evidently accepted, the parties
executed a partnership agreement
establishing the "Yang & Company,
Limited," which was to exist from July 1,
1945 to December 31, 1947. It states that it
will conduct and carry on the business of
operating a theatre for the exhibition of
motion and talking pictures. The capital is
fixed at P100,000, P80,000 of which is to be
furnished by Yang Chiao Seng and P20,000, by
Mrs. Yulo. All gains and profits are to be
distributed among the partners in the same
proportion as their capital contribution and
the liability of Mrs. Yulo, in case of loss, shall
be limited to her capital contribution (Exh.
"B").
In June , 1946, they executed a
supplementary agreement, extending the
partnership for a period of three years . The
benefits are to be divided between them at the
rate of 50-50 and after December 31, 1950,
the showhouse building shall belong
exclusively to the second party, Mrs. Yulo.
The land on which the theatre was
constructed was leased by plaintiff Mrs. Yulo
from Emilia Carrion Santa Marina and Maria
Carrion Santa Marina.
In the contract of lease it was
stipulated that the lease shall continue for an
indefinite period of time, but that after one
year the lease may be cancelled by either
party by written notice to the other party at
least 90 days before the date of cancellation.
The last contract was executed between the
owners and Mrs. Yulo on April 5, 1948. But on
April 12, 1949, the attorney for the owners
notified Mrs. Yulo of the owner's desire to
cancel the contract of lease on July 31, 1949.
In view of the above notice, Mrs. Yulo
and her husband brought a civil action to the
Court of First Instance of Manila on July 3,
1949 to declare the lease of the premises. On
February 9, 1950, the Municipal Court of
Manila rendered judgment ordering the
ejectment of Mrs. Yulo and Mr. Yang. The
judgment was appealed. In the Court of First
Instance, the two cases were afterwards heard
jointly, and judgment was rendered
dismissing the complaint of Mrs. Yulo and her
husband, and declaring the contract of lease of
the premises terminated as of July 31, 1949,
and fixing the reasonable monthly rentals of
said premises at P100. Both parties appealed
from said decision and the Court of Appeals,
on April 30, 1955, affirmed the judgment.
On October 27, 1950, Mrs. Yulo
demanded from Yang Chiao Seng her share in
the profits of the business. Yang answered the
letter saying that upon the advice of his
counsel he had to suspend the payment (of
the rentals) because of the pendency of the
ejectment suit by the owners of the land
against Mrs. Yulo. In this letter Yang alleges
that inasmuch as he is a sublessee and
inasmuch as Mrs. Yulo has not paid to the
lessors the rentals from August, 1949, he was
retaining the rentals to make good to the
landowners the rentals due from Mrs. Yulo in
arrears (Exh. "E").
In view of the refusal of Yang to
pay her the amount agreed upon, Mrs. Yulo
instituted this action on May 26, 1954,
alleging the existence of a partnership
between them and that the defendant Yang
Chiao Seng has refused to pay her share the
partnership between Mrs. Yulo and Yang
terminated, as a result of which, plaintiff
became the absolute owner of the building
occupied by the Cine Astor; that the
reasonable rental that the defendant should
pay therefor from January, 1951 is P5,000
In answer to the complaint, defendant
alleges that the real agreement between the
plaintiff and the defendant was one of lease
and not of partnership; that the partnership
was adopted as a subterfuge to get around the
prohibition contained in the contract of lease
between the owners and the plaintiff against
the sublease of the said property.
After trial the court rendered the
decision making the following findings: that it
is not true that a partnership was created
between the plaintiff and the defendant
because defendant has not actually
contributed the sum mentioned in the Articles
of Partnership, or any other amount; that the
real agreement between the plaintiff and the
defendant is not of the partnership but one of
the lease for the reason that under the
agreement the plaintiff did not share either in
the profits or in the losses of the business as
required by Article 1769 of the Civil Code; and
that the fact that plaintiff was granted a
"guaranteed participation" in the profits also
belies the supposed existence of a partnership
between them. It. therefore, denied plaintiff's
claim for damages or supposed participation
in the profits.
Issue: WON there is a partnership
The most important issue raised in the appeal
is that contained in the fourth assignment of
error, to the effect that the lower court erred
in holding that the written contracts, Exhs.
"A", "B", and "C, between plaintiff and
defendant, are one of lease and not of
partnership. We have gone over the evidence
and we fully agree with the conclusion of the
trial court that the agreement was a sublease,
not a partnership. The following are the
requisites of partnership: (1) two or more
persons who bind themselves to contribute
money, property, or industry to a common
fund; (2) intention on the part of the partner
to divide the profits among themselves. (Art.
1767, Civil Code.).
In the first place, plaintiff did not furnish the
supposed P20,000 capital. In the second place,
she did not furnish any help or intervention in
the management of the theatre. In the third
place, it does not appear that she has ever
demanded from defendant any accounting of
the expenses and earnings of the business.
Were she really a partner, her first concern
should have been to find out how the business
was progressing, whether the expenses were
legitimate, whether the earnings were correct,
etc. She was absolutely silent with respect to
any of the acts that a partner should have
done; all that she did was to receive her share
of P3,000 a month, which can not be
interpreted in any manner than a payment for
the use of the premises which she had leased
from the owners. Clearly, plaintiff had always
acted in accordance with the original letter of
defendant of June 17, 1945 (Exh. "A"), which
shows that both parties considered this offer
as the real contract between them.
Plaintiff claims the sum of P41,000 as
representing her share or participation in the
business from December, 1949. But the
original letter of the defendant, Exh. "A",
expressly states that the agreement between
the plaintiff and the defendant was to end
upon the termination of the right of the
plaintiff to the lease. Plaintiff's right having
terminated in July, 1949 as found by the Court
of Appeals, the partnership agreement or the
agreement for her to receive a participation of
P3,000 automatically ceased as of said date.
ARSENIO T. MENDIOLA, petitioner,
vs.
COURT OF APPEALS, NATIONAL LABOR
RELATIONS COMMISSION, PACIFIC FOREST
RESOURCES, PHILS., INC. and/or
CELLMARK AB, respondents.
DECISION
PUNO, J.:
The facts are as follows:
Private respondent Pacific Forest Resources,
Phils., Inc. (Pacfor) is a corporation organized
and existing under the laws of California, USA.
It is a subsidiary of Cellulose Marketing
International, a corporation duly organized
under the laws of Sweden, with principal
office in Gothenburg, Sweden.
Private respondent Pacfor entered into a "Side
Agreement on Representative Office known as
Pacific Forest Resources (Phils.), Inc."5 with
petitioner Arsenio T. Mendiola (ATM),
effective May 1, 1995, "assuming that Pacfor-
Phils. is already approved by the Securities
and Exchange Commission [SEC] on the said
date."6 The Side Agreement outlines the
business relationship of the parties with
regard to the Philippine operations of Pacfor.
Private respondent will establish a Pacfor
representative office in the Philippines, to be
known as Pacfor Phils, and petitioner ATM
will be its President. Petitioner's base salary
and the overhead expenditures of the
company shall be borne by the representative
office and funded by Pacfor/ATM, since Pacfor
Phils. is equally owned on a 50-50 equity by
ATM and Pacfor-usa.
On July 14, 1995, the SEC granted the
application of private respondent Pacfor for a
license to transact business in the Philippines
under the name of Pacfor or Pacfor Phils.7 In
its application, private respondent Pacfor
proposed to establish its representative office
in the Philippines with the purpose of
monitoring and coordinating the market
activities for paper products. It also
designated petitioner as its resident agent in
the Philippines, authorized to accept
summons and processes in all legal
proceedings, and all notices affecting the
corporation.8
In March 1997, the Side Agreement was
amended through a "Revised Operating and
Profit Sharing Agreement for the
Representative Office Known as Pacific Forest
Resources (Philippines),"9 where the salary of
petitioner was increased to $78,000 per
annum. Both agreements show that the
operational expenses will be borne by the
representative office and funded by all parties
"as equal partners," while the profits and
commissions will be shared among them.
In July 2000, petitioner wrote Kevin Daley,
Vice President for Asia of Pacfor, seeking
confirmation of his 50% equity of Pacfor
Phils.10 Private respondent Pacfor, through
William Gleason, its President, replied that
petitioner is not a part-owner of Pacfor Phils.
because the latter is merely Pacfor-USA's
representative office and not an entity
separate and distinct from Pacfor-USA. "It's
simply a 'theoretical company' with the
purpose of dividing the income 50-
50."11 Petitioner presumably knew of this
arrangement from the start, having been the
one to propose to private respondent Pacfor
the setting up of a representative office, and
"not a branch office" in the Philippines to save
on taxes.12
Petitioner claimed that he was all along made
to believe that he was in a joint venture with
them. He alleged he would have been better
off remaining as an independent agent or
representative of Pacfor-USA as ATM
Marketing Corp.13 Had he known that no joint
venture existed, he would not have allowed
Pacfor to take the profitable business of his
own company, ATM Marketing
Corp.14 Petitioner raised other issues, such as
the rentals of office furniture, salary of the
employees, company car, as well as
commissions allegedly due him. The issues
were not resolved, hence, in October 2000,
petitioner wrote Pacfor-USA demanding
payment of unpaid commissions and office
furniture and equipment rentals, amounting
to more than one million dollars.15
On November 27, 2000, private respondent
Pacfor, through counsel, ordered petitioner to
turn over to it all papers, documents, files,
records, and other materials in his or ATM
Marketing Corporation's possession that
belong to Pacfor or Pacfor Phils.16 On
December 18, 2000, private respondent
Pacfor also required petitioner to remit more
than three hundred thousand-peso Christmas
giveaway fund for clients of Pacfor
Phils.17 Lastly, private respondent Pacfor
withdrew all its offers of settlement and
ordered petitioner to transfer title and turn
over to it possession of the service car.18
Private respondent Pacfor likewise sent
letters to its clients in the Philippines,
advising them not to deal with Pacfor Phils. In
its letter to Intercontinental Paper Industries,
Inc.,
Petitioner construed these directives as a
severance of the "unregistered partnership"
between him and Pacfor, and the termination
of his employment as resident manager of
Pacfor Phils.21 In a memorandum to the
employees of Pacfor Phils., dated January 29,
2001, he stated:
On the basis of the "Side Agreement,"
petitioner insisted that he and Pacfor equally
own Pacfor Phils. Thus, it follows that he and
Pacfor likewise own, on a 50/50 basis, Pacfor
Phils.' office furniture and equipment and the
service car. He also reiterated his demand for
unpaid commissions, and proposed to offset
these with the remaining Christmas giveaway
fund in his possession.23 Furthermore, he did
not renew the lease contract with Pulp and
Paper, Inc., the lessor of the office premises of
Pacfor Phils., wherein he was the signatory to
the lease agreement.24
On February 2, 2001, private respondent
Pacfor placed petitioner on preventive
suspension and ordered him to show cause
why no disciplinary action should be taken
against him. Private respondent Pacfor
charged petitioner with willful disobedience
and serious misconduct for his refusal to turn
over the service car and the Christmas
giveaway fund which he applied to his alleged
unpaid commissions. Private respondent also
alleged loss of confidence and gross neglect of
duty on the part of petitioner for allegedly
allowing another corporation owned by
petitioner's relatives, High End Products, Inc.
(HEPI), to use the same telephone and
facsimile numbers of Pacfor, to possibly steal
and divert the sales and business of private
respondent for HEPI's principal, International
Forest Products, a competitor of private
respondent.25
On February 15, 2001, petitioner filed his
complaint for illegal dismissal, recovery of
separation pay, and payment of attorney's
fees with the NLRC.28
In the meantime, private respondent Pacfor
lodged fresh charges against petitioner. In a
memorandum dated March 5, 2001, private
respondent directed petitioner to explain why
he should not be disciplined for serious
misconduct and conflict of interest. Private
respondent charged petitioner anew with
serious misconduct for the latter's alleged act
of fraud and misrepresentation in authorizing
the release of an additional peso salary for
himself, besides the dollar salary agreed upon
by the parties. Private respondent also
accused petitioner of disloyalty and
representation of conflicting interests for
having continued using the Pacfor Phils.' office
for operations of HEPI. In addition, petitioner
allegedly solicited business for HEPI from a
competitor company of private respondent
Pacfor.29
Labor Arbiter Felipe Pati ruled in favor of
petitioner, finding there was constructive
dismissal. By directing petitioner to turn over
all office records and materials, regardless of
whether he may have retained copies, private
respondent Pacfor virtually deprived
petitioner of his job by the gradual diminution
of his authority as resident manager.
Private respondent Pacfor appealed to the
NLRC which ruled in its favor. On December
20, 2001, the NLRC set aside the July 30, 2001
decision of the labor arbiter, for lack of
jurisdiction and lack of merit.31 It held there
was no employer-employee relationship
between the parties. Based on the two
agreements between the parties, it concluded
that petitioner is not an employee of private
respondent Pacfor, but a full co-owner (50/50
equity).
The NLRC denied petitioner's Motion for
Reconsideration.32
Petitioner was not successful on his appeal to
the Court of Appeals. The appellate court
upheld the ruling of the NLRC.
Petitioner's Motion for Reconsideration33 of
the decision of the Court of Appeals was
denied.
Hence, this appeal.34
ISSUE: whether an employer-employee
relationship exists between petitioner and
private respondent Pacfor.
The first issue is whether an employer-
employee relationship exists between
petitioner and private respondent Pacfor.
Petitioner argues that he is an industrial
partner of the partnership he formed with
private respondent Pacfor, and also an
employee of the partnership. Petitioner insists
that an industrial partner may at the same
time be an employee of the partnership,
provided there is such an agreement, which,
in this case, is the "Side Agreement" and the
"Revised Operating and Profit Sharing
Agreement." The Court of Appeals denied the
appeal of petitioner, holding that "the legal
basis of the complaint is not employment but
perhaps partnership, co-ownership, or
independent contractorship." Hence, the
Labor Code cannot apply.
RULING
We hold that petitioner is an employee of
private respondent Pacfor and that no
partnership or co-ownership exists
between the parties.
In a partnership, the members become co-
owners of what is contributed to the firm
capital and of all property that may be
acquired thereby and through the efforts of
the members.36 The property or stock of the
partnership forms a community of goods, a
common fund, in which each party has a
proprietary interest.37 In fact, the New Civil
Code regards a partner as a co-owner of
specific partnership property.38 Each partner
possesses a joint interest in the whole of
partnership property. If the relation does not
have this feature, it is not one of
partnership.39 This essential element, the
community of interest, or co-ownership of, or
joint interest in partnership property is
absent in the relations between petitioner and
private respondent Pacfor. Petitioner is not a
part-owner of Pacfor Phils. William Gleason,
private respondent Pacfor's President
established this fact when he said that Pacfor
Phils. is simply a "theoretical company" for
the purpose of dividing the income 50-50. He
stressed that petitioner knew of this
arrangement from the very start, having been
the one to propose to private respondent
Pacfor the setting up of a representative
office, and "not a branch office" in the
Philippines to save on taxes. Thus, the parties
in this case, merely shared profits. This alone
does not make a partnership.40
Besides, a corporation cannot become
a member of a partnership in the absence of
express authorization by statute or
charter.41 This doctrine is based on the
following considerations: (1) that the mutual
agency between the partners, whereby the
corporation would be bound by the acts of
persons who are not its duly appointed and
authorized agents and officers, would be
inconsistent with the policy of the law that the
corporation shall manage its own affairs
separately and exclusively; and, (2) that such
an arrangement would improperly allow
corporate property to become subject to risks
not contemplated by the stockholders when
they originally invested in the
corporation.42No such authorization has been
proved in the case at bar.
Be that as it may, we hold that on the
basis of the evidence, an employer-employee
relationship is present in the case at bar. The
elements to determine the existence of an
employment relationship are: (a) the selection
and engagement of the employee; (b) the
payment of wages; (c) the power of dismissal;
and (d) the employer's power to control the
employee's conduct. The most important
element is the employer's control of the
employee's conduct, not only as to the result
of the work to be done, but also as to the
means and methods to accomplish it.43
In the instant case, all the foregoing elements
are present. First, it was private respondent
Pacfor which selected and engaged the
services of petitioner as its resident agent in
the Philippines. Second, as stipulated in their
Side Agreement, private respondent Pacfor
pays petitioner his salary amounting to
$65,000 per annum which was later increased
to $78,000. Third, private respondent Pacfor
holds the power of dismissal, as may be
gleaned through the various memoranda it
issued against petitioner, placing the latter on
preventive suspension while charging him
with various offenses, including willful
disobedience, serious misconduct, and gross
neglect of duty, and ordering him to show
cause why no disciplinary action should be
taken against him.
Lastly and most important, private
respondent Pacfor has the power of control
over the means and method of petitioner in
accomplishing his work.
The power of control refers merely to the
existence of the power, and not to the actual
exercise thereof. The principal consideration
is whether the employer has the right to
control the manner of doing the work, and it is
not the actual exercise of the right by
interfering with the work, but the right to
control, which constitutes the test of the
existence of an employer-employee
relationship.44 In the case at bar, private
respondent Pacfor, as employer, clearly
possesses such right of control. Petitioner, as
private respondent Pacfor's resident agent in
the Philippines, is, exactly so, only an agent of
the corporation, a representative of Pacfor,
who transacts business, and accepts service
on its behalf.
This right of control was exercised by
private respondent Pacfor during the period
of November to December 2000, when it
directed petitioner to turn over to it all
records of Pacfor Phils.; when it ordered
petitioner to remit the Christmas giveaway
fund intended for clients of Pacfor Phils.; and,
when it withdrew all its offers of settlement
and ordered petitioner to transfer title and
turn over to it the possession of the service
car. It was also during this period when
private respondent Pacfor sent letters to its
clients in the Philippines, particularly
Intercontinental Paper Industries, Inc. and
DAVCOR, advising them not to deal with
petitioner and/or Pacfor Phils. In its letter to
DAVCOR, private respondent Pacfor replied to
the client's request for an invoice payment
extension, and formulated a revised payment
program for DAVCOR. This is one
unmistakable proof that private respondent
Pacfor exercises control over the petitioner.
ALFREDO N. AGUILA, JR, petitioner,
vs. HONORABLE COURT OF APPEALS and
FELICIDAD S. VDA.
ABROGAR, respondents.
DECISION
MENDOZA, J.:
The facts are as follows:
Petitioner is the manager of A.C. Aguila &
Sons, Co., a partnership engaged in lending
activities. Private respondent and her late
husband, Ruben M. Abrogar, were the
registered owners of a house and lot, covered
by Transfer Certificate of Title No. 195101, in
Marikina, Metro Manila. On April 18, 1991,
private respondent, with the consent of her
late husband, and A.C. Aguila & Sons, Co.,
represented by petitioner, entered into a
Memorandum of Agreement, which provided:
(1) That the SECOND PARTY [A.C. Aguila &
Sons, Co.] shall buy the above-described
property from the FIRST PARTY [Felicidad S.
Vda. de Abrogar], and pursuant to this
agreement, a Deed of Absolute Sale shall be
executed by the FIRST PARTY conveying the
property to the SECOND PARTY for and in
consideration of the sum of Two Hundred
Thousand Pesos (P200,000.00), Philippine
Currency;
(2) The FIRST PARTY is hereby given by the
SECOND PARTY the option to repurchase the
said property within a period of ninety (90)
days from the execution of this memorandum
of agreement effective April 18, 1991, for the
amount of TWO HUNDRED THIRTY
THOUSAND PESOS (P230,000.00);
(3) In the event that the FIRST PARTY fail to
exercise her option to repurchase the said
property within a period of ninety (90) days,
the FIRST PARTY is obliged to deliver
peacefully the possession of the property to
the SECOND PARTY within fifteen (15) days
after the expiration of the said 90 day grace
period;
(4) During the said grace period, the FIRST
PARTY obliges herself not to file any lis
pendens or whatever claims on the property
nor shall be cause the annotation of say claim
at the back of the title to the said property;
(5) With the execution of the deed of absolute
sale, the FIRST PARTY warrants her
ownership of the property and shall defend
the rights of the SECOND PARTY against any
party whom may have any interests over the
property;
(6) All expenses for documentation and other
incidental expenses shall be for the account of
the FIRST PARTY;
DE (7) Should the FIRST PARTY fail to deliver
peaceful possession of the property to the
SECOND PARTY after the expiration of the 15-
day grace period given in paragraph 3 above,
the FIRST PARTY shall pay an amount
equivalent to Five Percent of the principal
amount of TWO HUNDRED PESOS (P200.00)
or P10,000.00 per month of delay as and for
rentals and liquidated damages;
(8) Should the FIRST PARTY fail to exercise
her option to repurchase the property within
ninety (90) days period above-mentioned, this
memorandum of agreement shall be deemed
cancelled and the Deed of Absolute Sale,
executed by the parties shall be the final
contract considered as entered between the
parties and the SECOND PARTY shall proceed
to transfer ownership of the property above
described to its name free from lines and
encumbrances.[2]
On the same day, April 18, 1991, the parties
likewise executed a deed of absolute
sale,[3] dated June 11, 1991, wherein private
respondent, with the consent of her late
husband, sold the subject property to A.C.
Aguila & Sons, Co., represented by petitioner,
for P200,000.00. In a special power of
attorney dated the same day, private
respondent authorized petitioner to cause the
cancellation of TCT No. 195101 and the
issuance of a new certificate of title in the
name of A.C. Aguila and Sons, Co., in the event
she failed to redeem the subject property as
provided in the Memorandum of
Agreement.[4]
Private respondent failed to redeem the
property within the 90-day period. Hence,
petitioner caused the cancellation of TCT No.
195101 and the issuance of a new certificate
of title in the name of A.C. Aguila and Sons,
Co.[5]
Private respondent then received a letter
dated August 10, 1991 from Atty. Lamberto C.
Nanquil, counsel for A.C. Aguila & Sons, Co.,
demanding that she vacate the premises
within 15 days after receipt of the letter and
surrender its possession peacefully to A.C.
Aguila & Sons, Co. Otherwise, the latter would
bring the appropriate action in court.[6]
Upon the refusal of private respondent to
vacate the subject premises, A.C. Aguila &
Sons, Co. filed an ejectment case against her in
the Metropolitan Trial Court, Branch 76,
Marikina, Metro Manila. In a decision, dated
April 3, 1992, the Metropolitan Trial Court
ruled in favor of A.C. Aguila & Sons, Co. on the
ground that private respondent did not
redeem the subject property before the
expiration of the 90-day period provided in
the Memorandum of Agreement. Private
respondent appealed first to the Regional
Trial Court, Branch 163, Pasig, Metro Manila,
then to the Court of Appeals, and later to this
Court, but she lost in all the cases.
Private respondent then filed a petition for
declaration of nullity of a deed of sale with the
Regional Trial Court, Branch 273, Marikina,
Metro Manila on December 4, 1993. She
alleged that the signature of her husband on
the deed of sale was a forgery because he was
already dead when the deed was supposed to
have been executed on June 11, 1991.
It appears, however, that private respondent
had filed a criminal complaint for falsification
against petitioner with the Office of the
Prosecutor of Quezon City which was
dismissed in a resolution, dated February 14,
1994.
On April 11, 1995, Branch 273 of RTC-
Marikina rendered its decision:
Plaintiffs claim therefore that the Deed of
Absolute Sale is a forgery because they could
not personally appear before Notary Public
Lamberto C. Nanquil on June 11, 1991 because
her husband, Ruben Abrogar, died on May 8,
1991 or one month and 2 days before the
execution of the Deed of Absolute Sale, while
the plaintiff was still in the Quezon City
Medical Center recuperating from wounds
which she suffered at the same vehicular
accident on May 8, 1991, cannot be sustained.
The Court is convinced that the three
required documents, to wit: the Memorandum
of Agreement, the Special Power of Attorney,
and the Deed of Absolute Sale were all signed
by the parties on the same date on April 18,
1991. It is a common and accepted business
practice of those engaged in money lending to
prepare an undated absolute deed of sale in
loans of money secured by real estate for
various reasons, foremost of which is the
evasion of taxes and surcharges. The plaintiff
never questioned receiving the sum of
P200,000.00 representing her loan from the
defendant. Common sense dictates that an
established lending and realty firm like the
Aguila & Sons, Co. would not part with
P200,000.00 to the Abrogar spouses, who are
virtual strangers to it, without the
simultaneous accomplishment and signing of
all the required documents, more particularly
the Deed of Absolute Sale, to protect its
interest.
....
The Court of Appeals reversed. It held:
The facts and evidence show that the
transaction between plaintiff-appellant and
defendant-appellee is indubitably an equitable
mortgage. Article 1602 of the New Civil Code
finds strong application in the case at bar in
the light of the following circumstances.
First: The purchase price for the alleged sale
with right to repurchase is unusually
inadequate. The property is a two hundred
forty (240) sq. m. lot. On said lot, the
residential house of plaintiff-appellant
stands. The property is inside a
subdivision/village. The property is situated
in Marikina which is already part of Metro
Manila. The alleged sale took place in 1991
when the value of the land had considerably
increased.
For this property, defendant-appellee pays
only a measly P200,000.00 or P833.33 per
square meter for both the land and for the
house.
Second: The disputed Memorandum of
Agreement specifically provides that plaintiff-
appellant is obliged to deliver peacefully the
possession of the property to the SECOND
PARTY within fifteen (15) days after the
expiration of the said ninety (90) day grace
period. Otherwise stated, plaintiff-appellant is
to retain physical possession of the thing
allegedly sold.
In fact, plaintiff-appellant retained possession
of the property sold as if they were still the
absolute owners. There was no provision for
maintenance or expenses, much less for
payment of rent.
Third: The apparent vendor, plaintiff-
appellant herein, continued to pay taxes on
the property sold. It is well-known that
payment of taxes accompanied by actual
possession of the land covered by the tax
declaration, constitute evidence of great
weight that a person under whose name the
real taxes were declared has a claim of right
over the land.
It is well-settled that the presence of even one
of the circumstances in Article 1602 of the
New Civil Code is sufficient to declare a
contract of sale with right to repurchase an
equitable mortgage.
Considering that plaintiff-appellant, as
vendor, was paid a price which is unusually
inadequate, has retained possession of the
subject property and has continued paying the
realty taxes over the subject property,
(circumstances mentioned in par. (1) (2) and
(5) of Article 1602 of the New Civil Code), it
must be conclusively presumed that the
transaction the parties actually entered into is
an equitable mortgage, not a sale with right to
repurchase. The factors cited are in support to
the finding that the Deed of
Sale/Memorandum of Agreement with right
to repurchase is in actuality an equitable
mortgage.
Moreover, it is undisputed that the deed of
sale with right of repurchase was executed by
reason of the loan extended by defendant-
appellee to plaintiff-appellant. The amount of
loan being the same with the amount of the
purchase price.
....
Since the real intention of the party is to
secure the payment of debt, now deemed to
be repurchase price: the transaction shall then
be considered to be an equitable mortgage.
Being a mortgage, the transaction entered into
by the parties is in the nature of a pactum
commissorium which is clearly prohibited by
Article 2088 of the New Civil Code. Article
2088 of the New Civil Code reads:
ART. 2088. The creditor cannot appropriate
the things given by way of pledge or
mortgage, or dispose of them. Any stipulation
to the contrary is null and void.
The aforequoted provision furnishes the two
elements for pactum commissorium to
exist: (1) that there should be a pledge or
mortgage wherein a property is pledged or
mortgaged by way of security for the payment
of principal obligation; and (2) that there
should be a stipulation for an automatic
appropriation by the creditor of the thing
pledged and mortgaged in the event of non-
payment of the principal obligation within the
stipulated period.
In this case, defendant-appellee in reality
extended a P200,000.00 loan to plaintiff-
appellant secured by a mortgage on the
property of plaintiff-appellant. The loan was
payable within ninety (90) days, the period
within which plaintiff-appellant can
repurchase the property. Plaintiff-appellant
will pay P230,000.00 and not P200,000.00,
the P30,000.00 excess is the interest for the
loan extended. Failure of plaintiff-appellee to
pay the P230,000,00 within the ninety (90)
days period, the property shall automatically
belong to defendant-appellee by virtue of the
deed of sale executed.
Clearly, the agreement entered into by the
parties is in the nature of pactum
commissorium. Therefore, the deed of sale
should be declared void as we hereby so
declare to be invalid, for being violative of law.
....
The petition is meritorious.
Rule 3, 2 of the Rules of Court of 1964, under
which the complaint in this case was filed,
provided that every action must be
prosecuted and defended in the name of the
real party in interest. A real party in interest is
one who would be benefited or injured by the
judgment, or who is entitled to the avails of
the suit.[7] This ruling is now embodied in Rule
3, 2 of the 1997 Revised Rules of Civil
Procedure. Any decision rendered against a
person who is not a real party in interest in
the case cannot be executed.[8] Hence, a
complaint filed against such a person should
be dismissed for failure to state a cause of
action.[9]
Under Art. 1768 of the Civil Code, a
partnership has a juridical personality
separate and distinct from that of each of the
partners. The partners cannot be held liable
for the obligations of the partnership unless it
is shown that the legal fiction of a different
juridical personality is being used for
fraudulent, unfair, or illegal purposes.[10] In
this case, private respondent has not shown
that A.C. Aguila & Sons, Co., as a separate
juridical entity, is being used for fraudulent,
unfair, or illegal purposes. Moreover, the title
to the subject property is in the name of A.C.
Aguila & Sons, Co. and the Memorandum of
Agreement was executed between private
respondent, with the consent of her late
husband, and A. C. Aguila & Sons, Co.,
represented by petitioner. Hence, it is the
partnership, not its officers or agents, which
should be impleaded in any litigation
involving property registered in its name. A
violation of this rule will result in the
dismissal of the complaint.[11] We cannot
understand why both the Regional Trial Court
and the Court of Appeals sidestepped this
issue when it was squarely raised before them
by petitioner.
Our conclusion that petitioner is not the real
party in interest against whom this action
should be prosecuted makes it unnecessary to
discuss the other issues raised by him in this
appeal.
Villareal vs Ramirez
The Facts
On July 25, 1984, Luzviminda J. Villareal,
Carmelito Jose and Jesus Jose formed a
partnership with a capital of P750,000 for the
operation of a restaurant and catering
business under the name Aquarius Food
House and Catering Services.[5] Villareal was
appointed general manager and Carmelito
Jose, operations manager.
Respondent Donaldo Efren C. Ramirez joined
as a partner in the business on September 5,
1984. His capital contribution of P250,000
was paid by his parents, Respondents Cesar
and Carmelita Ramirez.[6]
After Jesus Jose withdrew from the
partnership in January 1987, his capital
contribution of P250,000 was refunded to him
in cash by agreement of the partners.[7]
In the same month, without prior knowledge
of respondents, petitioners closed down the
restaurant, allegedly because of increased
rental. The restaurant furniture and
equipment were deposited in the respondents
house for storage.[8]
On March 1, 1987, respondent spouses wrote
petitioners, saying that they were no longer
interested in continuing their partnership or
in reopening the restaurant, and that they
were accepting the latters offer to return their
capital contribution.[9]
On October 13, 1987, Carmelita Ramirez
wrote another letter informing petitioners of
the deterioration of the restaurant furniture
and equipment stored in their house. She also
reiterated the request for the return of their
one-third share in the equity of the
partnership. The repeated oral and written
requests were, however, left unheeded.[10]
Before the Regional Trial Court (RTC) of
Makati, Branch 59, respondents subsequently
filed a Complaint[11] dated November 10,
1987, for the collection of a sum of money
from petitioners.
In their Answer, petitioners contended that
respondents had expressed a desire to
withdraw from the partnership and had called
for its dissolution under Articles 1830 and
1831 of the Civil Code; that respondents had
been paid, upon the turnover to them of
furniture and equipment worth
over P400,000; and that the latter had no
right to demand a return of their equity
because their share, together with the rest of
the capital of the partnership, had been spent
as a result of irreversible business losses.[12]
In their Reply, respondents alleged that they
did not know of any loan encumbrance on the
restaurant. According to them, if such
allegation were true, then the loans incurred
by petitioners should be regarded as purely
personal and, as such, not chargeable to the
partnership. The former further averred that
they had not received any regular report or
accounting from the latter, who had solely
managed the business. Respondents also
alleged that they expected the equipment and
the furniture stored in their house to be
removed by petitioners as soon as the latter
found a better location for the restaurant.[13]
Respondents filed an Urgent Motion for Leave
to Sell or Otherwise Dispose of Restaurant
Furniture and Equipment[14] on July 8,
1988. The furniture and the equipment stored
in their house were inventoried and appraised
at P29,000.[15] The display freezer was sold
for P5,000 and the proceeds were paid to
them.[16]
After trial, the RTC[17] ruled that the parties
had voluntarily entered into a partnership,
which could be dissolved at any
time. Petitioners clearly intended to dissolve
it when they stopped operating the
restaurant. Hence, the trial court, in its July 21,
1992 Decision, held them liable to pay.
The CA Ruling
The CA held that, although respondents had
no right to demand the return of their capital
contribution, the partnership was nonetheless
dissolved when petitioners lost interest in
continuing the restaurant business with
them. Because petitioners never gave a proper
accounting of the partnership accounts for
liquidation purposes, and because no
sufficient evidence was presented to show
financial losses, the CA computed their
liability as follows:
Consequently, since what has been proven is
only the outstanding obligation of the
partnership in the amount of P240,658.00,
although contracted by the partnership before
[respondents] have joined the partnership but
in accordance with Article 1826 of the New
Civil Code, they are liable which must have to
be deducted from the remaining capitalization
of the said partnership which is in the amount
of P1,000,000.00 resulting in the amount
of P759,342.00, and in order to get the share
of [respondents], this amount of P759,342.00
must be divided into three (3) shares or in the
amount of P253,114.00 for each share and
which is the only amount which [petitioner]
will return to [respondents] representing the
contribution to the partnership minus the
outstanding debt thereof.[19]
Hence, this Petition.[20]
Issues
On closer scrutiny, the issues are as
follows: (1) whether petitioners are liable
to respondents for the latters share in the
partnership; (2) whether the CAs
computation of P253,114 as respondents
share is correct
This Courts Ruling
The Petition has merit.
First Issue:
Share in Partnership
Both the trial and the appellate courts found
that a partnership had indeed existed, and
that it was dissolved on March 1, 1987. They
found that the dissolution took place when
respondents informed petitioners of the
intention to discontinue it because of the
formers dissatisfaction with, and loss of trust
in, the latters management of the partnership
affairs. These findings were amply supported
by the evidence on record. Respondents
consequently demanded from petitioners the
return of their one-third equity in the
partnership.
We hold that respondents have no right to
demand from petitioners the return of their
equity share. Except as managers of the
partnership, petitioners did not personally
hold its equity or assets.The partnership has a
juridical personality separate and distinct
from that of each of the partners.[23] Since the
capital was contributed to the partnership,
not to petitioners, it is the partnership that
must refund the equity of the retiring
partners.[24]
Second Issue:
What Must Be Returned?
Since it is the partnership, as a separate and
distinct entity, that must refund the shares of
the partners, the amount to be refunded is
necessarily limited to its total resources. In
other words, it can only pay out what it has in
its coffers, which consists of all its
assets. However, before the partners can be
paid their shares, the creditors of the
partnership must first be
compensated.[25] After all the creditors have
been paid, whatever is left of the partnership
assets becomes available for the payment of
the partners shares.
Evidently, in the present case, the exact
amount of refund equivalent to respondents
one-third share in the partnership cannot be
determined until all the partnership assets
will have been liquidated -- in other words,
sold and converted to cash -- and all
partnership creditors, if any, paid. The CAs
computation of the amount to be refunded to
respondents as their share was thus
erroneous.
First, it seems that the appellate court was
under the misapprehension that the total
capital contribution was equivalent to the
gross assets to be distributed to the partners
at the time of the dissolution of the
partnership. We cannot sustain the underlying
idea that the capital contribution at the
beginning of the partnership remains intact,
unimpaired and available for distribution or
return to the partners. Such idea is
speculative, conjectural and totally without
factual or legal support.
Generally, in the pursuit of a partnership
business, its capital is either increased by
profits earned or decreased by losses
sustained. It does not remain static and
unaffected by the changing fortunes of the
business. In the present case, the financial
statements presented before the trial court
showed that the business had made meager
profits.[26] However, notable therefrom is the
omission of any provision for the
depreciation[27] of the furniture and the
equipment. The amortization of the
goodwill[28] (initially valued at P500,000) is
not reflected either. Properly taking these
non-cash items into account will show that the
partnership was actually sustaining
substantial losses, which consequently
decreased the capital of the partnership. Both
the trial and the appellate courts in fact
recognized the decrease of the partnership
assets to almost nil, but the latter failed to
recognize the consequent corresponding
decrease of the capital.
Second, the CAs finding that the partnership
had an outstanding obligation in the amount
of P240,658 was not supported by
evidence. We sustain the contrary finding of
the RTC, which had rejected the contention
that the obligation belonged to the
partnership for the following reason:
x x x [E]vidence on record failed to show the
exact loan owed by the partnership to its
creditors. The balance sheet (Exh. 4) does not
reveal the total loan. The Agreement (Exh. A)
par. 6 shows an outstanding obligation
of P240,055.00 which the partnership owes to
different creditors, while the Certification
issued by Mercator Finance (Exh. 8) shows
that it was Sps. Diogenes P. Villareal and
Luzviminda J. Villareal, the former being the
nominal party defendant in the instant case,
who obtained a loan of P355,000.00 on Oct.
1983, when the original partnership was not
yet formed.
Third, the CA failed to reduce the
capitalization by P250,000, which was the
amount paid by the partnership to Jesus Jose
when he withdrew from the partnership.
Because of the above-mentioned transactions,
the partnership capital was actually
reduced. When petitioners and respondents
ventured into business together, they should
have prepared for the fact that their
investment would either grow or shrink. In
the present case, the investment of
respondents substantially dwindled. The
original amount of P250,000 which they had
invested could no longer be returned to them,
because one third of the partnership
properties at the time of dissolution did not
amount to that much.
It is a long established doctrine that the law
does not relieve parties from the effects of
unwise, foolish or disastrous contracts they
have entered into with all the required
formalities and with full awareness of what
they were doing. Courts have no power to
relieve them from obligations they have
voluntarily assumed, simply because their
contracts turn out to be disastrous deals or
unwise investments.[29]
Petitioners further argue that respondents
acted negligently by permitting the
partnership assets in their custody to
deteriorate to the point of being almost
worthless. Supposedly, the latter should have
liquidated these sole tangible assets of the
partnership and considered the proceeds as
payment of their net capital. Hence,
petitioners argue that the turnover of the
remaining partnership assets to respondents
was precisely the manner of liquidating the
partnership and fully settling the latters share
in the partnership.
We disagree. The delivery of the store
furniture and equipment to private
respondents was for the purpose of
storage. They were unaware that the
restaurant would no longer be reopened by
petitioners. Hence, the former cannot be
faulted for not disposing of the stored items to
recover their capital investment.
MARIANO P. PASCUAL and RENATO P.
DRAGON, petitioners,
vs.
THE COMMISSIONER OF INTERNAL
REVENUE and COURT OF TAX
APPEALS, respondents.
De la Cuesta, De las Alas and Callanta Law
Offices for petitioners.
The Solicitor General for respondents
GANCAYCO, J.:
FACTS: 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 to Marenir
Development Corporation, while the three
parcels of land were sold by petitioners to
Erlinda Reyes and Maria Samson. Petitioners
realized a net profit in the sale made. 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. In due
course, the respondent court by a majority
decision of March 30, 1987, 2 affirmed the
decision and action taken by respondent
commissioner with costs against petitioners.
It ruled that on the basis of the principle
enunciated in Evangelista 3 an unregistered
partnership was in fact formed by petitioners
which like a corporation was subject to
corporate income tax distinct from that
imposed on the partners.
In a separate dissenting opinion, Associate
Judge Constante Roaquin stated that
considering the circumstances of this case,
although there might in fact be a co-
ownership between the petitioners, there was
no adequate basis for the conclusion that they
thereby formed an unregistered partnership
which made "hem liable for corporate income
tax under the Tax Code.
ISSUE: Is there an unregistered partnership?
RULING:NONE
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.)
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.
ONA vs CIR
Julia Buñales died on March 23, 1944, leaving
as heirs her surviving spouse, Lorenzo T. Oña
and her five children. In 1948, Civil Case No.
4519 was instituted in the Court of First
Instance of Manila for the settlement of her
estate. Later, Lorenzo T. Oña the surviving
spouse was appointed administrator of the
estate of said deceased The administrator
submitted the project of partition, which was
approved by the Court. Because three of the
heirs, were still minors when the project of
partition was approved, Lorenzo T. Oña, their
father and administrator of the estate, filed a
petition in Civil Case No. 9637 of the Court of
First Instance of Manila for appointment as
guardian of said minors. The project of
partition shows that the heirs have undivided
one-half (1/2) interest in ten parcels of land
with a total assessed value of P87,860.00, six
houses with a total assessed value of
P17,590.00 and an undetermined amount to
be collected from the War Damage
Commission. Later, they received from said
Commission the amount of P50,000.00, more
or less. This amount was not divided among
them but was used in the rehabilitation of
properties owned by them in common. Of the
ten parcels of land aforementioned, two were
acquired after the death of the decedent with
money borrowed from the Philippine Trust
Company.
The project of partition also shows that the
estate shares equally with Lorenzo T. Oña, the
administrator thereof, in the obligation of
P94,973.00, consisting of loans contracted by
the latter with the approval of the Court
Although the project of partition was
approved by the Court no attempt was made
to divide the properties therein listed. Instead,
the properties remained under the
management of Lorenzo T. Oña who used said
properties in business by leasing or selling
them and investing the income derived
therefrom and the proceeds from the sales
thereof in real properties and securities. As a
result, petitioners' properties and
investments gradually increased.
From said investments and properties
petitioners derived such incomes as profits
from installment sales of subdivided lots,
profits from sales of stocks, dividends, rentals
and interests. The said incomes are recorded
in the books of account kept by Lorenzo T.
Oña where the corresponding shares of the
petitioners in the net income for the year are
also known. Every year, petitioners returned
for income tax purposes their shares in the
net income derived from said properties and
securities and/or from transactions involving
them. However, petitioners did not actually
receive their shares in the yearly income. The
income was always left in the hands of
Lorenzo T. Oña who, as heretofore pointed
out, invested them in real properties and
securities. On the basis of the foregoing facts,
respondent (Commissioner of Internal
Revenue) decided that petitioners formed an
unregistered partnership and therefore,
subject to the corporate income tax, pursuant
to Section 24, in relation to Section 84(b), of
the Tax Code. Petitioners protested against
the assessment and asked for reconsideration
of the ruling of respondent that they have
formed an unregistered partnership. Finding
no merit in petitioners' request, respondent
denied it.
ISSUE (1) Under the facts found by the Court
of Tax Appeals, should petitioners be
considered as co-owners of the properties
inherited by them from the deceased Julia
Buñales and the profits derived from
transactions involving the same, or, must they
be deemed to have formed an unregistered
partnership subject to tax under Sections 24
and 84(b) of the National Internal Revenue
Code?
RULING
Pondering on these questions, the first thing
that has struck the Court is that whereas
petitioners' predecessor in interest died way
back on March 23, 1944 and the project of
partition of her estate was judicially approved
as early as May 16, 1949, and presumably
petitioners have been holding their respective
shares in their inheritance since those dates
admittedly under the administration or
management of the head of the family, the
widower and father Lorenzo T. Oña, the
assessment in question refers to the later
years 1955 and 1956. We believe this point to
be important because, apparently, at the start,
or in the years 1944 to 1954, the respondent
Commissioner of Internal Revenue did treat
petitioners as co-owners, not liable to
corporate tax, and it was only from 1955 that
he considered them as having formed an
unregistered partnership. At least, there is
nothing in the record indicating that an earlier
assessment had already been made. Such
being the case, and We see no reason how it
could be otherwise, it is easily understandable
why petitioners' position that they are co-
owners and not unregistered co-partners, for
the purposes of the impugned assessment,
cannot be upheld. Truth to tell, petitioners
should find comfort in the fact that they were
not similarly assessed earlier by the Bureau of
Internal Revenue.
The Tax Court found that instead of actually
distributing the estate of the deceased among
themselves pursuant to the project of
partition approved in 1949, "the properties
remained under the management of Lorenzo
T. Oña who used said properties in business
by leasing or selling them and investing the
income derived therefrom and the proceed
from the sales thereof in real properties and
securities," as a result of which said
properties and investments steadily increased
yearly. And all these became possible because,
admittedly, petitioners never actually
received any share of the income or profits
from Lorenzo T. Oña and instead, they
allowed him to continue using said shares as
part of the common fund for their ventures,
even as they paid the corresponding income
taxes on the basis of their respective shares of
the profits of their common business as
reported by the said Lorenzo T. Oña.
It is thus incontrovertible that
petitioners did not, contrary to their
contention, merely limit themselves to
holding the properties inherited by them.
Indeed, it is admitted that during the material
years herein involved, some of the said
properties were sold at considerable profit,
and that with said profit, petitioners engaged,
thru Lorenzo T. Oña, in the purchase and sale
of corporate securities. It is likewise admitted
that all the profits from these ventures were
divided among petitioners proportionately in
accordance with their respective shares in the
inheritance. In these circumstances, it is
Our considered view that from the
moment petitioners allowed not only the
incomes from their respective shares of
the inheritance but even the inherited
properties themselves to be used by
Lorenzo T. Oña as a common fund in
undertaking several transactions or in
business, with the intention of deriving
profit to be shared by them proportionally,
such act was tantamonut to actually
contributing such incomes to a common
fund and, in effect, they thereby formed an
unregistered partnership within the
purview of the above-mentioned provisions of
the Tax Code.
It is but logical that in cases of inheritance,
there should be a period when the heirs can
be considered as co-owners rather than
unregistered co-partners within the
contemplation of our corporate tax laws
aforementioned. Before the partition and
distribution of the estate of the deceased, all
the income thereof does belong commonly to
all the heirs, obviously, without them
becoming thereby unregistered co-partners,
but it does not necessarily follow that such
status as co-owners continues until the
inheritance is actually and physically
distributed among the heirs, for it is easily
conceivable that after knowing their
respective shares in the partition, they might
decide to continue holding said shares under
the common management of the
administrator or executor or of anyone
chosen by them and engage in business on
that basis. Withal, if this were to be allowed, it
would be the easiest thing for heirs in any
inheritance to circumvent and render
meaningless Sections 24 and 84(b) of the
National Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102
Phil. 140, it was stated, among the reasons for
holding the appellants therein to be
unregistered co-partners for tax purposes,
that their common fund "was not something
they found already in existence" and that "it
was not a property inherited by them pro
indiviso," but it is certainly far fetched to argue
therefrom, as petitioners are doing here,
that ergo, in all instances where an
inheritance is not actually divided, there can
be no unregistered co-partnership. As already
indicated, for tax purposes, the co-ownership
of inherited properties is automatically
converted into an unregistered partnership
the moment the said common properties
and/or the incomes derived therefrom are
used as a common fund with intent to
produce profits for the heirs in proportion
to their respective shares in the
inheritance as determined in a project
partition either duly executed in an
extrajudicial settlement or approved by the
court in the corresponding testate or intestate
proceeding. The reason for this is simple.
From the moment of such partition, the heirs
are entitled already to their respective
definite shares of the estate and the incomes
thereof, for each of them to manage and
dispose of as exclusively his own without the
intervention of the other heirs, and,
accordingly he becomes liable individually for
all taxes in connection therewith. If after such
partition, he allows his share to be held in
common with his co-heirs under a single
management to be used with the intent of
making profit thereby in proportion to his
share, there can be no doubt that, even if no
document or instrument were executed for
the purpose, for tax purposes, at least, an
unregistered partnership is formed. This is
exactly what happened to petitioners in this
case.
In this connection, petitioners' reliance on
Article 1769, paragraph (3), of the Civil Code,
providing that: "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,"
and, for that matter, on any other provision of
said code on partnerships is unavailing.
In Evangelista, supra, this Court clearly
differentiated the concept of partnerships
under the Civil Code from that of unregistered
partnerships which are considered as
"corporations" under Sections 24 and 84(b) of
the National Internal Revenue Code. Mr.
Justice Roberto Concepcion, now Chief Justice,
elucidated on this point thus:
To begin with, the tax in question is one
imposed upon "corporations", which, strictly
speaking, are distinct and different from
"partnerships". When our Internal Revenue
Code includes "partnerships" among the
entities subject to the tax on "corporations",
said Code must allude, therefore, to
organizations which are not
necessarily "partnerships", in the technical
sense of the term. Thus, for instance, section
24 of said Code exempts from the
aforementioned tax "duly registered general
partnerships," which constitute precisely one
of the most typical forms of partnerships in
this jurisdiction. Likewise, as defined in
section 84(b) of said Code, "the term
corporation includes partnerships, no matter
how created or organized." This qualifying
expression clearly indicates that a joint
venture need not be undertaken in any of the
standard forms, or in confirmity with the
usual requirements of the law on
partnerships, in order that one could be
deemed constituted for purposes of the tax on
corporation. Again, pursuant to said section
84(b),the term "corporation" includes, among
others, "joint accounts,(cuentas en
participacion)" and "associations", none of
which has a legal personality of its own,
independent of that of its members.
Accordingly, the lawmaker could not have
regarded that personality as a condition
essential to the existence of the partnerships
therein referred to. In fact, as above stated,
"duly registered general co-partnerships" —
which are possessed of the aforementioned
personality — have been expressly excluded
by law (sections 24 and 84[b]) from the
connotation of the term "corporation." ....
HEIRS OF TAN ENG KEE, petitioners, vs.
COURT OF APPEALS and BENGUET
LUMBER COMPANY, represented by its
President TAN ENG LAY, respondents.
DECISION
DE LEON, JR., J.:
The facts are:
The amended complaint principally alleged
that after the second World War, Tan Eng Kee
and Tan Eng Lay, pooling their resources and
industry together, entered into a partnership
engaged in the business of selling lumber and
hardware and construction supplies. They
named their enterprise Benguet Lumber
which they jointly managed until Tan Eng
Kees death. Petitioners herein averred that
the business prospered due to the hard work
and thrift of the alleged partners. However,
they claimed that in 1981, Tan Eng Lay and
his children caused the conversion of the
partnership Benguet Lumber into a
corporation called Benguet Lumber Company.
The incorporation was purportedly a ruse to
deprive Tan Eng Kee and his heirs of their
rightful participation in the profits of the
business. Petitioners prayed for accounting of
the partnership assets, and the dissolution,
winding up and liquidation thereof, and the
equal division of the net assets of Benguet
Lumber.
ISSUE: Whether or not Tan Eng Kee is a
partner.
RULING
xxx xxx xxx xxx
It is obvious that there was no partnership
whatsoever. Except for a firm name, there
was no firm account, no firm letterheads
submitted as evidence, no certificate of
partnership, no agreement as to profits and
losses, and no time fixed for the duration of
the partnership. There was even no attempt
to submit an accounting corresponding to the
period after the war until Kees death in
1984. It had no business book, no written
account nor any memorandum for that matter
and no license mentioning the existence of a
partnership [citation omitted].
Also, the exhibits support the establishment of
only a proprietorship. The certification dated
March 4, 1971, Exhibit 2, mentioned co-
defendant Lay as the only registered owner of
the Benguet Lumber and Hardware. His
application for registration, effective 1954, in
fact mentioned that his business started in
1945 until 1985 (thereafter, the
incorporation). The deceased, Kee, on the
other hand, was merely an employee of the
Benguet Lumber Company, on the basis of his
SSS coverage effective 1958, Exhibit 3. In the
Payrolls, Exhibits 4 to 4-U, inclusive, for the
years 1982 to 1983, Kee was similarly listed
only as an employee; precisely, he was on the
payroll listing. In the Termination Notice,
Exhibit 5, Lay was mentioned also as the
proprietor.
xxx xxx xxx xxx
We would like to refer to Arts. 771 and 772,
NCC, that a partner [sic] may be constituted in
any form, but when an immovable is
constituted, the execution of a public
instrument becomes necessary. This is
equally true if the capitalization exceeds
P3,000.00, in which case a public instrument
is also necessary, and which is to be recorded
with the Securities and Exchange
Commission. In this case at bar, we can easily
assume that the business establishment,
which from the language of the appellees,
prospered (pars. 5 & 9, Complaint), definitely
exceeded P3,000.00, in addition to the
accumulation of real properties and to the fact
that it is now a compound. The execution of a
public instrument, on the other hand, was
never established by the appellees.
And then in 1981, the business was
incorporated and the incorporators were only
Lay and the members of his family. There is
no proof either that the capital assets of the
partnership, assuming them to be in existence,
were maliciously assigned or transferred by
Lay, supposedly to the corporation and since
then have been treated as a part of the latters
capital assets, contrary to the allegations in
pars. 6, 7 and 8 of the complaint.
These are not evidences supporting the
existence of a partnership:
1) That Kee was living in a bunk house just
across the lumber store, and then in a room in
the bunk house in Trinidad, but within the
compound of the lumber establishment, as
testified to by Tandoc; 2) that both Lay and
Kee were seated on a table and were
commanding people as testified to by the son,
Elpidio Tan; 3) that both were supervising the
laborers, as testified to by Victoria Choi; and
4) that Dionisio Peralta was supposedly being
told by Kee that the proceeds of the 80 pieces
of the G.I. sheets were added to the business.
Partnership presupposes the following
elements [citation omitted]: 1) a contract,
either oral or written. However, if it involves
real property or where the capital is
P3,000.00 or more, the execution of a contract
is necessary; 2) the capacity of the parties to
execute the contract; 3) money property or
industry contribution; 4) community of funds
and interest, mentioning equality of the
partners or one having a proportionate share
in the benefits; and 5) intention to divide the
profits, being the true test of the
partnership. The intention to join in the
business venture for the purpose of obtaining
profits thereafter to be divided, must be
established. We cannot see these elements
from the testimonial evidence of the
appellees.
As can be seen, the appellate court disputed
and differed from the trial court which had
adjudged that TAN ENG KEE and TAN ENG
LAY had allegedly entered into a joint
adventure. In this connection, we have held
that whether a partnership exists is a factual
matter; consequently, since the appeal is
brought to us under Rule 45, we cannot
entertain inquiries relative to the correctness
of the assessment of the evidence by the
court a quo.[13] Inasmuch as the Court of
Appeals and the trial court had reached
conflicting conclusions, perforce we must
examine the record to determine if the
reversal was justified.
The primordial issue here is whether Tan Eng
Kee and Tan Eng Lay were partners in
Benguet Lumber. A contract of partnership is
defined by law as one where:
xxx 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.
Two or more persons may also form a
partnership for the exercise of a profession.[14]
Thus, in order to constitute a partnership, it
must be established that (1) two or more
persons bound themselves to contribute
money, property, or industry to a common
fund, and (2) they intend to divide the profits
among themselves.[15] The agreement need
not be formally reduced into writing, since
statute allows the oral constitution of a
partnership, save in two instances: (1) when
immovable property or real rights are
contributed,[16] and (2) when the partnership
has a capital of three thousand pesos or
more.[17] In both cases, a public instrument is
required.[18] 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 the partnership.[19]
The trial court determined that Tan Eng Kee
and Tan Eng Lay had entered into a joint
adventure, which it said is akin to a particular
partnership.[20] A particular partnership is
distinguished from a joint adventure, to wit:
(a) A joint adventure (an American concept
similar to our joint accounts) is a sort of
informal partnership, with no firm name and
no legal personality. In a joint account, the
participating merchants can transact business
under their own name, and can be individually
liable therefor.
(b) Usually, but not necessarily a joint
adventure is limited to a SINGLE
TRANSACTION, although the business of
pursuing to a successful termination may
continue for a number of years; a partnership
generally relates to a continuing business of
various transactions of a certain kind.[21]
A joint adventure presupposes generally a
parity of standing between the joint co-
ventures or partners, in which each party has
an equal proprietary interest in the capital or
property contributed, and where each party
exercises equal rights in the conduct of the
business.[22] Nonetheless, in Aurbach, et. al. v.
Sanitary Wares Manufacturing Corporation,
et. al.,[23] we expressed the view that a joint
adventure may be likened to a particular
partnership, thus:
The legal concept of a joint adventure is of
common law origin. It has no precise legal
definition, but it has been generally
understood to mean an organization formed
for some temporary purpose. (Gates v.
Megargel, 266 Fed. 811 [1920]) It is hardly
distinguishable from the partnership, since
their elements are similar-community of
interest in the business, sharing of profits and
losses, and a mutual right of control. (Blackner
v. McDermott, 176 F. 2d. 498, [1949];
Carboneau v. Peterson, 95 P.2d., 1043 [1939];
Buckley v. Chadwick, 45 Cal. 2d. 183, 288 P.2d.
12 289 P.2d. 242 [1955]). The main
distinction cited by most opinions in common
law jurisdiction is that the partnership
contemplates a general business with some
degree of continuity, while the joint adventure
is formed for the execution of a single
transaction, and is thus of a temporary
nature. (Tufts v. Mann. 116 Cal. App. 170, 2 P.
2d. 500 [1931]; Harmon v. Martin, 395 Ill. 595,
71 NE 2d. 74 [1947]; Gates v. Megargel 266
Fed. 811 [1920]). This observation is not
entirely accurate in this jurisdiction, since
under the Civil Code, a partnership may be
particular or universal, and a particular
partnership may have for its object a specific
undertaking. (Art. 1783, Civil Code). It would
seem therefore that under Philippine law, a
joint adventure is a form of partnership and
should thus be governed by the law of
partnerships. The Supreme Court has
however recognized a distinction between
these two business forms, and has held that
although a corporation cannot enter into a
partnership contract, it may however engage
in a joint adventure with others. (At p. 12,
Tuazon v. Bolaos, 95 Phil. 906 [1954])
(Campos and Lopez-Campos Comments, Notes
and Selected Cases, Corporation Code 1981).
Undoubtedly, the best evidence would have
been the contract of partnership itself, or the
articles of partnership but there is none. The
alleged partnership, though, was never
formally organized. In addition, petitioners
point out that the New Civil Code was not yet
in effect when the partnership was allegedly
formed sometime in 1945, although the
contrary may well be argued that nothing
prevented the parties from complying with
the provisions of the New Civil Code when it
took effect on August 30, 1950. But all that is
in the past. The net effect, however, is that we
are asked to determine whether a partnership
existed based purely on circumstantial
evidence. A review of the record persuades us
that the Court of Appeals correctly reversed
the decision of the trial court. The evidence
presented by petitioners falls short of the
quantum of proof required to establish a
partnership.
Unfortunately for petitioners, Tan Eng Kee has
passed away. Only he, aside from Tan Eng
Lay, could have expounded on the precise
nature of the business relationship between
them. In the absence of evidence, we cannot
accept as an established fact that Tan Eng Kee
allegedly contributed his resources to a
common fund for the purpose of establishing
a partnership. The testimonies to that effect
of petitioners witnesses is directly
controverted by Tan Eng Lay. It should be
noted that it is not with the number of
witnesses wherein preponderance lies;[24] the
quality of their testimonies is to be
considered. None of petitioners witnesses
could suitably account for the beginnings of
Benguet Lumber Company, except perhaps for
Dionisio Peralta whose deceased wife was
related to Matilde Abubo.[25] He stated that
when he met Tan Eng Kee after the liberation,
the latter asked the former to accompany him
to get 80 pieces of G.I. sheets supposedly
owned by both brothers.[26] Tan Eng Lay,
however, denied knowledge of this meeting or
of the conversation between Peralta and his
brother.[27] Tan Eng Lay consistently testified
that he had his business and his brother had
his, that it was only later on that his said
brother, Tan Eng Kee, came to work for
him. Be that as it may, co-ownership or co-
possession (specifically here, of the G.I.
sheets) is not an indicium of the existence of a
partnership.[28]
Besides, it is indeed odd, if not unnatural,
that despite the forty years the partnership
was allegedly in existence, Tan Eng Kee never
asked for an accounting. The essence of a
partnership is that the partners share in the
profits and losses.[29] Each has the right to
demand an accounting as long as the
partnership exists.[30] We have allowed a
scenario wherein [i]f excellent relations exist
among the partners at the start of the
business and all the partners are more
interested in seeing the firm grow rather than
get immediate returns, a deferment of sharing
in the profits is perfectly plausible.[31] But in
the situation in the case at bar, the deferment,
if any, had gone on too long to be plausible. A
person is presumed to take ordinary care of
his concerns.[32] As we explained in another
case:
In the first place, plaintiff did not furnish the
supposed P20,000.00 capital. In the second
place, she did not furnish any help or
intervention in the management of the
theatre. In the third place, it does not appear
that she has even demanded from defendant
any accounting of the expenses and earnings of
the business. Were she really a partner, her first
concern should have been to find out how the
business was progressing, whether the expenses
were legitimate, whether the earnings were
correct, etc. She was absolutely silent with
respect to any of the acts that a partner should
have done; all that she did was to receive her
share of P3,000.00 a month, which cannot be
interpreted in any manner than a payment for
the use of the premises which she had leased
from the owners. Clearly, plaintiff had always
acted in accordance with the original letter of
defendant of June 17, 1945 (Exh. A), which
shows that both parties considered this offer
as the real contract between them.[33] [italics
supplied]
A demand for periodic accounting is evidence
of a partnership.[34] During his lifetime, Tan
Eng Kee appeared never to have made any
such demand for accounting from his brother,
Tang Eng Lay.
This brings us to the matter of Exhibits 4 to 4-
U for private respondents, consisting of
payrolls purporting to show that Tan Eng Kee
was an ordinary employee of Benguet
Lumber, as it was then called. The
authenticity of these documents was
questioned by petitioners, to the extent that
they filed criminal charges against Tan Eng
Lay and his wife and children. As aforesaid,
the criminal cases were dismissed for
insufficiency of evidence. Exhibits 4 to 4-U in
fact shows that Tan Eng Kee received sums as
wages of an employee. In connection
therewith, Article 1769 of the Civil Code
provides:
In determining whether a partnership exists,
these rules shall apply:
(1) Except as provided by Article 1825,
persons who are not partners as to each other
are not partners as to third persons;
(2) Co-ownership or co-possession does not of
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
which the returns are derived;
(4) The receipt by a person of a share of the
profits of a business is prima facie evidence
that he is a partner in the business, but no
such inference shall be drawn if such profits
were received in payment:
(a) As a debt by installment or otherwise;
(b) As wages of an employee or rent to a
landlord;
(b) As an annuity to a widow or
representative of a deceased partner;
(d) As interest on a loan, though the amount
of payment vary with the profits of the
business;
(e) As the consideration for the sale of a
goodwill of a business or other property by
installments or otherwise.
In the light of the aforequoted legal provision,
we conclude that Tan Eng Kee was only an
employee, not a partner. Even if the payrolls
as evidence were discarded, petitioners would
still be back to square one, so to speak, since
they did not present and offer evidence that
would show that Tan Eng Kee received
amounts of money allegedly representing his
share in the profits of the
enterprise.Petitioners failed to show how
much their father, Tan Eng Kee, received, if
any, as his share in the profits of Benguet
Lumber Company for any particular
period. Hence, they failed to prove that Tan
Eng Kee and Tan Eng Lay intended to divide
the profits of the business between
themselves, which is one of the essential
features of a partnership.
Nevertheless, petitioners would still want us
to infer or believe the alleged existence of a
partnership from this set of
circumstances: that Tan Eng Lay and Tan Eng
Kee were commanding the employees; that
both were supervising the employees; that
both were the ones who determined the price
at which the stocks were to be sold; and that
both placed orders to the suppliers of the
Benguet Lumber Company. They also point
out that the families of the brothers Tan Eng
Kee and Tan Eng Lay lived at the Benguet
Lumber Company compound, a privilege not
extended to its ordinary employees.
However, private respondent counters that:
Petitioners seem to have missed the point in
asserting that the above enumerated powers
and privileges granted in favor of Tan Eng
Kee, were indicative of his being a partner in
Benguet Lumber for the following reasons:
(i) even a mere supervisor in a company,
factory or store gives orders and directions to
his subordinates. So long, therefore, that an
employees position is higher in rank, it is not
unusual that he orders around those lower in
rank.
(ii) even a messenger or other trusted
employee, over whom confidence is reposed
by the owner, can order materials from
suppliers for and in behalf of Benguet
Lumber. Furthermore, even a partner does
not necessarily have to perform this particular
task. It is, thus, not an indication that Tan Eng
Kee was a partner.
(iii) although Tan Eng Kee, together with his
family, lived in the lumber compound and this
privilege was not accorded to other
employees, the undisputed fact remains
that Tan Eng Kee is the brother of Tan Eng
Lay.Naturally, close personal relations existed
between them. Whatever privileges Tan Eng
Lay gave his brother, and which were not
given the other employees, only proves the
kindness and generosity of Tan Eng Lay
towards a blood relative.
(iv) and even if it is assumed that Tan Eng Kee
was quarrelling with Tan Eng Lay in
connection with the pricing of stocks, this
does not adequately prove the existence of a
partnership relation between them. Even
highly confidential employees and the owners
of a company sometimes argue with respect to
certain matters which, in no way indicates
that they are partners as to each other.[35]
In the instant case, we find private
respondents arguments to be well-taken.
Where circumstances taken singly may be
inadequate to prove the intent to form a
partnership, nevertheless, the collective effect
of these circumstances may be such as to
support a finding of the existence of the
parties intent.[36] Yet, in the case at bench,
even the aforesaid circumstances when taken
together are not persuasive indicia of a
partnership. They only tend to show that Tan
Eng Kee was involved in the operations of
Benguet Lumber, but in what capacity is
unclear. We cannot discount the likelihood
that as a member of the family, he occupied a
niche above the rank-and-file employees. He
would have enjoyed liberties otherwise
unavailable were he not kin, such as his
residence in the Benguet Lumber Company
compound. He would have moral, if not actual,
superiority over his fellow employees,
thereby entitling him to exercise powers of
supervision. It may even be that among his
duties is to place orders with suppliers. Again,
the circumstances proffered by petitioners do
not provide a logical nexus to the conclusion
desired; these are not inconsistent with the
powers and duties of a manager, even in a
business organized and run as informally as
Benguet Lumber Company.
ADRIANO ARBES, ET AL., plaintiffs-
appellees,
vs.
VICENTE POLISTICO, ET AL., defendants-
. association are included as plaintiffs or
VILLAMOR, J.:
This is an action to bring about liquidation of
the funds and property of the association
called "Turnuhan Polistico & Co." The
plaintiffs were members or shareholders, and
the defendants were designated as president-
treasurer, directors and secretary of said
association.
It is well to remember that this case is now
brought before the consideration of this court
for the second time. The first one was when
the same plaintiffs appeared from the order of
the court below sustaining the defendant's
demurrer, and requiring the former to amend
their complaint within a period, so as to
include all the members of "Turnuhan
Polistico & Co.," either as plaintiffs or as a
defendants. This court held then that in an
action against the officers of a voluntary
association to wind up its affairs and enforce
an accounting for money and property in their
possessions, it is not necessary that all
members of the association be made parties
to the action. (Borlasa vs. Polistico, 47 Phil.,
345.) The case having been remanded to the
court of origin, both parties amend,
respectively, their complaint and their
answer, and by agreement of the parties, the
court appointed Amadeo R. Quintos, of the
Insular Auditor's Office, commissioner to
examine all the books, documents, and
accounts of "Turnuhan Polistico & Co.," and to
receive whatever evidence the parties might
desire to present.
The defendants objected to the
commissioner's report, but the trial court,
having examined the reasons for the
objection, found the same sufficiently
explained in the report and the evidence, and
accepting it, rendered judgment, holding that
the association "Turnuhan Polistico & Co." is
unlawful, and sentencing the defendants
jointly and severally to return the amount of
P24,607.80, as well as the documents showing
the uncollected credits of the association, to
the plaintiffs in this case, and to the rest of the
members of the said association represented
by said plaintiffs, with costs against the
defendants.
The defendants assigned several errors as
grounds for their appeal, but we believe they
can all be reduced to two points, to wit: (1)
That not all persons having an interest in this
defendants; (2) that the objection to the
commissioner's report should have been
admitted by the court below.
As to the first point, the decision on the case of
Borlasa vs. Polistico, supra, must be followed.
With regard to the second point, despite the
praiseworthy efforts of the attorney of the
defendants, we are of opinion that, the trial
court having examined all the evidence
touching the grounds for the objection and
having found that they had been explained
away in the commissioner's report, the
conclusion reached by the court below,
accepting and adopting the findings of fact
contained in said report, and especially those
referring to the disposition of the
association's money, should not be disturbed.
In Tan Dianseng Tan Siu Pic vs. Echauz Tan
Siuco (5 Phil., 516), it was held that the
findings of facts made by a referee appointed
under the provisions of section 135 of the
Code of Civil Procedure stand upon the same
basis, when approved by the Court, as findings
made by the judge himself. And in Kriedt vs. E.
C. McCullogh & Co.(37 Phil., 474), the court
held: "Under section 140 of the Code of Civil
Procedure it is made the duty of the court to
render judgment in accordance with the
report of the referee unless the court shall
unless for cause shown set aside the report or
recommit it to the referee. This provision
places upon the litigant parties of the duty of
discovering and exhibiting to the court any
error that may be contained therein." The
appellants stated the grounds for their
objection. The trial examined the evidence
and the commissioner's report, and accepted
the findings of fact made in the report. We
find no convincing arguments on the
appellant's brief to justify a reversal of the
trial court's conclusion admitting the
commissioner's findings.
There is no question that "Turnuhan
Polistico & Co." is an unlawful partnership
(U.S. vs. Baguio, 39 Phil., 962), but the
appellants allege that because it is so,
some charitable institution to whom the
partnership funds may be ordered to be
turned over, should be included, as a party
defendant. The appellants refer to article
1666 of the Civil Code, which provides:
A partnership must have a lawful object, and
must be established for the common benefit of
the partners.
When the dissolution of an unlawful
partnership is decreed, the profits shall be
given to charitable institutions of the domicile
of the partnership, or, in default of such, to
those of the province.
Appellant's contention on this point is
untenable. According to said article, no
charitable institution is a necessary party in
the present case of determination of the rights
of the parties. The action which may arise
from said article, in the case of unlawful
partnership, is that for the recovery of the
amounts paid by the member from those in
charge of the administration of said
partnership, and it is not necessary for the
said parties to base their action to the
existence of the partnership, but on the fact
that of having contributed some money to the
partnership capital. And hence, the charitable
institution of the domicile of the partnership,
and in the default thereof, those of the
province are not necessary parties in this
case. The article cited above permits no action
for the purpose of obtaining the earnings
made by the unlawful partnership, during its
existence as result of the business in which it
was engaged, because for the purpose, as
Manresa remarks, the partner will have to
base his action upon the partnership contract,
which is to annul and without legal existence
by reason of its unlawful object; and it is self
evident that what does not exist cannot be a
cause of action. Hence, paragraph 2 of the
same article provides that when the
dissolution of the unlawful partnership is
decreed, the profits cannot inure to the
benefit of the partners, but must be given to
some charitable institution.
We deem in pertinent to quote Manresa's
commentaries on article 1666 at length, as a
clear explanation of the scope and spirit of the
provision of the Civil Code which we are
concerned. Commenting on said article
Manresa, among other things says:
When the subscriptions of the members have
been paid to the management of the
partnership, and employed by the latter in
transactions consistent with the purposes of
the partnership may the former demand the
return of the reimbursement thereof from the
manager or administrator withholding them?
Apropos of this, it is asserted: If the
partnership has no valid existence, if it is
considered juridically non-existent, the
contract entered into can have no legal effect;
and in that case, how can it give rise to an
action in favor of the partners to judicially
demand from the manager or the
administrator of the partnership capital, each
one's contribution?
The authors discuss this point at great length,
but Ricci decides the matter quite clearly,
dispelling all doubts thereon. He holds that
the partner who limits himself to demanding
only the amount contributed by him need not
resort to the partnership contract on which to
base his action. And he adds in explanation
that the partner makes his contribution,
which passes to the managing partner for the
purpose of carrying on the business or
industry which is the object of the
partnership; or in other words, to breathe the
breath of life into a partnership contract with
an objection forbidden by law. And as said
contrast does not exist in the eyes of the
law, the purpose from which the contribution
was made has not come into existence, and
the administrator of the partnership holding
said contribution retains what belongs to
others, without any consideration; for which
reason he is not bound to return it and he who
has paid in his share is entitled to recover it.
But this is not the case with regard to profits
earned in the course of the partnership,
because they do not constitute or represent
the partner's contribution but are the result of
the industry, business or speculation which is
the object of the partnership, and therefor, in
order to demand the proportional part of the
said profits, the partner would have to base
his action on the contract which is null and
void, since this partition or distribution of the
profits is one of the juridical effects thereof.
Wherefore considering this contract as non-
existent, by reason of its illicit object, it cannot
give rise to the necessary action, which must
be the basis of the judicial complaint.
Furthermore, it would be immoral and unjust
for the law to permit a profit from an industry
prohibited by it.
Hence the distinction made in the second
paragraph of this article of this Code,
providing that the profits obtained by
unlawful means shall not enrich the partners,
but shall upon the dissolution of the
partnership, be given to the charitable
institutions of the domicile of the partnership,
or, in default of such, to those of the province.
This is a new rule, unprecedented by our law,
introduced to supply an obvious deficiency of
the former law, which did not describe the
purpose to which those profits denied the
partners were to be applied, nor state what to
be done with them.
The profits are so applied, and not the
contributions, because this would be an
excessive and unjust sanction for, as we have
seen, there is no reason, in such a case, for
depriving the partner of the portion of the
capital that he contributed, the circumstances
of the two cases being entirely different.
Our Code does not state whether, upon the
dissolution of the unlawful partnership, the
amounts contributed are to be returned by
the partners, because it only deals with the
disposition of the profits; but the fact that said
contributions are not included in the disposal
prescribed profits, shows that in
consequences of said exclusion, the general
law must be followed, and hence the partners
should reimburse the amount of their
respective contributions. Any other solution is
immoral, and the law will not consent to the
latter remaining in the possession of the
manager or administrator who has refused to
return them, by denying to the partners the
action to demand them. (Manresa,
Commentaries on the Spanish Civil Code, vol.
XI, pp. 262-264)
The judgment appealed from, being in
accordance with law, should be, as it is
hereby, affirmed with costs against the
appellants; provided, however, the defendants
shall pay the legal interest on the sum of
P24,607.80 from the date of the decision of
the court, and provided, further, that the
defendants shall deposit this sum of money
and other documents evidencing uncollected
credits in the office of the clerk of the trial
court, in order that said court may distribute
them among the members of said association,
upon being duly identified in the manner that
it may deem proper. So ordered.
Gatchalian vs. CIR
FACTS
The plaintiff brought this action to recover
from the defendant Collector of Internal
Revenue the sum of P1,863.44, with legal
interest thereon, which they paid under
protest by way of income tax.
3. That immediately thereafter but prior to
December 15, 1934, plaintiffs purchased, in
the ordinary course of business, from one of
the duly authorized agents of the National
Charity Sweepstakes Office one ticket bearing
No. 178637 for the sum of two pesos (P2) and
that the said ticket was registered in the name
of Jose Gatchalian and Company;
4. That as a result of the drawing of the
sweepstakes on December 15, 1934, the
above-mentioned ticket bearing No. 178637
won one of the third prizes in the amount of
P50,000 and that the corresponding check
covering the above-mentioned prize of
P50,000 was drawn by the National Charity
Sweepstakes Office in favor of Jose Gatchalian
& Company against the Philippine National
Bank, which check was cashed during the
latter part of December, 1934 by Jose
Gatchalian & Company;
5. That on December 29, 1934, Jose Gatchalian
was required by income tax examiner Alfredo
David to file the corresponding income tax
return covering the prize won by Jose
Gatchalian & Company and that on December
29, 1934, the said return was signed by Jose
Gatchalian, a copy of which return is enclosed
as Exhibit A and made a part hereof;
6. That on January 8, 1935, the defendant
made an assessment against Jose Gatchalian &
Company requesting the payment of the sum
of P1,499.94 to the deputy provincial
treasurer of Pulilan, Bulacan, giving to said
Jose Gatchalian & Company until January 20,
1935 within which to pay the said amount of
P1,499.94, a copy of which letter marked
Exhibit B is enclosed and made a part hereof;
7. That on January 20, 1935, the plaintiffs,
through their attorney, sent to defendant a
reply, a copy of which marked Exhibit C is
attached and made a part hereof, requesting
exemption from payment of the income tax to
which reply there were enclosed fifteen (15)
separate individual income tax returns filed
separately by each one of the plaintiffs, copies
of which returns are attached and marked
Exhibit D-1 to D-15, respectively, in order of
their names listed in the caption of this case
and made parts hereof; a statement of sale
signed by Jose Gatchalian showing the amount
put up by each of the plaintiffs to cover up the
attached and marked as Exhibit E and made a
part hereof; and a copy of the affidavit signed
by Jose Gatchalian dated December 29, 1934
is attached and marked Exhibit F and made
part thereof;
8. That the defendant in his letter dated
January 28, 1935, a copy of which marked
Exhibit G is enclosed, denied plaintiffs'
request of January 20, 1935, for exemption
from the payment of tax and reiterated his
demand for the payment of the sum of
P1,499.94 as income tax and gave plaintiffs
until February 10, 1935 within which to pay
the said tax;
9. That in view of the failure of the plaintiffs to
pay the amount of tax demanded by the
defendant, notwithstanding subsequent
demand made by defendant upon the
plaintiffs through their attorney on March 23,
1935, a copy of which marked Exhibit H is
enclosed, defendant on May 13, 1935 issued a
warrant of distraint and levy against the
property of the plaintiffs, a copy of which
warrant marked Exhibit I is enclosed and
made a part hereof;
10. That to avoid embarrassment arising from
the embargo of the property of the plaintiffs,
the said plaintiffs on June 15, 1935, through
Gregoria Cristobal, Maria C. Legaspi and Jesus
Legaspi, paid under protest the sum of
P601.51 as part of the tax and penalties to the
municipal treasurer of Pulilan, Bulacan, as
evidenced by official receipt No. 7454879
which is attached and marked Exhibit J and
made a part hereof, and requested defendant
that plaintiffs be allowed to pay under protest
the balance of the tax and penalties by
monthly installments;
11. That plaintiff's request to pay the balance
of the tax and penalties was granted by
defendant subject to the condition that
plaintiffs file the usual bond secured by two
solvent persons to guarantee prompt payment
of each installments as it becomes due;
12. That on July 16, 1935, plaintiff filed a
bond, a copy of which marked Exhibit K is
enclosed and made a part hereof, to guarantee
the payment of the balance of the alleged tax
liability by monthly installments at the rate of
P118.70 a month, the first payment under
protest to be effected on or before July 31,
1935;
13. That on July 16, 1935 the said plaintiffs
formally protested against the payment of the
sum of P602.51, a copy of which protest is
attached and marked Exhibit L, but that
defendant in his letter dated August 1, 1935
overruled the protest and denied the request
for refund of the plaintiffs;
14. That, in view of the failure of the plaintiffs
to pay the monthly installments in accordance
with the terms and conditions of bond filed by
them, the defendant in his letter dated July 23,
1935, copy of which is attached and marked
Exhibit M, ordered the municipal treasurer of
Pulilan, Bulacan to execute within five days
the warrant of distraint and levy issued
against the plaintiffs on May 13, 1935;
15. That in order to avoid annoyance and
embarrassment arising from the levy of their
property, the plaintiffs on August 28, 1936,
through Jose Gatchalian, Guillermo Tapia,
Maria Santiago and Emiliano Santiago, paid
under protest to the municipal treasurer of
Pulilan, Bulacan the sum of P1,260.93
representing the unpaid balance of the income
tax and penalties demanded by defendant as
evidenced by income tax receipt No. 35811
which is attached and marked Exhibit N and
made a part hereof; and that on September 3,
1936, the plaintiffs formally protested to the
defendant against the payment of said amount
and requested the refund thereof, copy of
which is attached and marked Exhibit O and
made part hereof; but that on September 4,
1936, the defendant overruled the protest and
denied the refund thereof; copy of which is
attached and marked Exhibit P and made a
part hereof; and
16. That plaintiffs demanded upon defendant
the refund of the total sum of one thousand
eight hundred and sixty three pesos and forty-
four centavos (P1,863.44) paid under protest
by them but that defendant refused and still
refuses to refund the said amount
notwithstanding the plaintiffs' demands.
17. The parties hereto reserve the right to
present other and additional evidence if
necessary.
ISSUE: (1) Whether the plaintiffs formed a
partnership, or merely a community of
property without a personality of its own; in
the first case it is admitted that the
partnership thus formed is liable for the
payment of income tax, whereas if there was
merely a community of property, they are
exempt from such payment;
RULING
There is no doubt that if the plaintiffs merely
formed a community of property the latter is
exempt from the payment of income tax under
the law. But according to the stipulation facts
the plaintiffs organized a partnership of a civil
nature because each of them put up money to
buy a sweepstakes ticket for the sole purpose
of dividing equally the prize which they may
win, as they did in fact in the amount of
P50,000 (article 1665, Civil Code). The
partnership was not only formed, but upon
the organization thereof and the winning of
the prize, Jose Gatchalian personally appeared
in the office of the Philippines Charity
Sweepstakes, in his capacity as co-partner, as
such collection the prize, the office issued the
check for P50,000 in favor of Jose Gatchalian
and company, and the said partner, in the
same capacity, collected the said check. All
these circumstances repel the idea that the
plaintiffs organized and formed a community
of property only.
Having organized and constituted a
partnership of a civil nature, the said entity is
the one bound to pay the income tax which
the defendant collected under the aforesaid
section 10 (a) of Act No. 2833, as amended by
section 2 of Act No. 3761. There is no merit in
plaintiff's contention that the tax should be
prorated among them and paid individually,
resulting in their exemption from the tax.
In view of the foregoing, the appealed decision
is affirmed, with the costs of this instance to
the plaintiffs appellants. So ordered.
OSCAR ANGELES and EMERITA
ANGELES, petitioners, vs. THE HON.
SECRETARY OF JUSTICE and FELINO
MERCADO, respondents.
FACTS On 19 November 1996, the Angeles
spouses filed a criminal complaint for estafa
under Article 315 of the Revised Penal Code
against Mercado before the Provincial
Prosecution Office. Mercado is the brother-
in-law of the Angeles spouses, being
married to Emerita Angeles sister Laura.
In their affidavits, the Angeles spouses
claimed that in November 1992, Mercado
convinced them to enter into a contract of
antichresis,[5] colloquially known
as sanglaang-perde, covering eight parcels
of land (subject land) planted with fruit-
bearing lanzones trees located in Nagcarlan,
Laguna and owned by Juana Suazo. The
contract of antichresis was to last for five
years with P210,000 as consideration. As
the Angeles spouses stay in Manila during
weekdays and go to Laguna only on
weekends, the parties agreed that Mercado
would administer the lands and complete the
necessary paperwork.[6]
After three years, the Angeles spouses
asked for an accounting from Mercado.
Mercado explained that the subject land
earned P46,210 in 1993, which he used to
buy more lanzones trees. Mercado also
reported that the trees bore no fruit in 1994.
Mercado gave no accounting for 1995. The
Angeles spouses claim that only after this
demand for an accounting did they discover
that Mercado had put the contract
of sanglaang-perde over the subject land
under Mercado and his spouses
names.[7] The relevant portions of the
contract of sanglaang-perde, signed by
Juana Suazo alone, read:
xxx
In his counter-affidavit, Mercado denied
the Angeles spouses allegations. Mercado
claimed that there exists an industrial
partnership, colloquially known as sosyo
industrial, between him and his spouse as
industrial partners and the Angeles spouses
as the financiers. This industrial partnership
had existed since 1991, before the contract
of antichresis over the subject land. As the
years passed, Mercado used his and his
spouses earnings as part of the capital in
the business transactions which he entered
into in behalf of the Angeles spouses. It was
their practice to enter into business
transactions with other people under the
name of Mercado because the Angeles
spouses did not want to be identified as the
financiers.
Mercado attached bank receipts
showing deposits in behalf of Emerita
Angeles and contracts under his name for
the Angeles spouses. Mercado also
attached the minutes of the barangay
conciliation proceedings held on 7
September 1996. During the barangay
conciliation proceedings, Oscar Angeles
stated that there was a written sosyo
industrial agreement: capital would come
from the Angeles spouses while the profit
would be divided evenly between Mercado
and the Angeles spouses.[9]
 ISSUE: Whether a Partnership Indeed, the Angeles spouses admit to
Existed facts that prove the existence of a
partnership: a contract showing a sosyo
Between Mercado and the Angeles industrial or industrial partnership,
Spouses contribution of money and industry to a
common fund, and division of profits
between the Angeles spouses and Mercado.
RULING The Angeles spouses allege
that they had no partnership with Mercado.
The Angeles spouses rely on Articles 1771
to 1773 of the Civil Code, which state that:

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 requirements 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.

The Angeles spouses position that

there is no partnership because of the lack
of a public instrument indicating the same
and a lack of registration with the Securities
and Exchange Commission (SEC) holds no
water. First, the Angeles spouses
contributed money to the partnership and
not immovable property. Second, mere
failure to register the contract of partnership
with the SEC does not invalidate a contract
that has the essential requisites of a
partnership. The purpose of registration of
the contract of partnership is to give notice
to third parties. Failure to register the
contract of partnership does not affect the
liability of the partnership and of the partners
to third persons. Neither does such failure to
register affect the partnerships juridical
personality. A partnership may exist even if
the partners do not use the words partner or
partnership.