6. G.R. No.

L-18703 August 28, 1922

INVOLUNTARY INSOLVENCY OF CAMPOS RUEDA & CO., S. en C.,

vs.
PACIFIC COMMERCIAL CO., ASIATIC PETROLEUM CO., and INTERNATIONAL BANKING
CORPORATION,

ROMUALDEZ, J.:

The record of this proceeding having been transmitted to this court by virtue of an appeal taken herein, a
motion was presented by the appellants praying this court that this case be considered purely a moot
question now, for the reason that subsequent to the decision appealed from, the partnership Campos
Rueda & Co., voluntarily filed an application for a judicial decree adjudging itself insolvent, which is just
what the herein petitioners and appellants tried to obtain from the lower court in this proceeding.

The motion now before us must be, and is hereby, denied even under the facts stated by the appellants in
their motion aforesaid. The question raised in this case is not purely moot one; the fact that a man was
insolvent on a certain day does not justify an inference that he was some time prior thereto.

Proof that a man was insolvent on a certain day does not justify an inference that he was on a
day some time prior thereto. Many contingencies, such as unwise investments, losing contracts,
misfortune, or accident, might happen to reduce a person from a state of solvency within a short
space of time. (Kimball vs. Dresser, 98 Me., 519; 57 Atl. Rep., 767.)

A decree of insolvency begins to operate on the date it is issued. It is one thing to adjudge Campos
Rueda & Co. insolvent in December, 1921, as prayed for in this case, and another to declare it insolvent
in July, 1922, as stated in the motion.

Turning to the merits of this appeal, we find that this limited partnership was, and is, indebted to the
appellants in various sums amounting to not less than P1,000, payable in the Philippines, which were not
paid more than thirty days prior to the date of the filing by the petitioners of the application for involuntary
insolvency now before us. These facts were sufficient established by the evidence.

The trial court denied the petition on the ground that it was not proven, nor alleged, that the members of
the aforesaid firm were insolvent at the time the application was filed; and that was said partners are
personally and solidarily liable for the consequence of the transactions of the partnership, it cannot be
adjudged insolvent so long as the partners are not alleged and proven to be insolvent. From this
judgment the petitioners appeal to this court, on the ground that this finding of the lower court is
erroneous.

The fundamental question that presents itself for decision is whether or not a limited partnership, such as
the appellee, which has failed to pay its obligation with three creditors for more than thirty days, may be
held to have committed an act of insolvency, and thereby be adjudged insolvent against its will.

Unlike the common law, the Philippine statutes consider a limited partnership as a juridical entity for all
intents and purposes, which personality is recognized in all its acts and contracts (art. 116, Code of
Commerce). This being so and the juridical personality of a limited partnership being different from that of
its members, it must, on general principle, answer for, and suffer, the consequence of its acts as such an
entity capable of being the subject of rights and obligations. If, as in the instant case, the limited
partnership of Campos Rueda & Co. Failed to pay its obligations with three creditors for a period of more
than thirty days, which failure constitutes, under our Insolvency Law, one of the acts of bankruptcy upon
which an adjudication of involuntary insolvency can be predicated, this partnership must suffer the
consequences of such a failure, and must be adjudged insolvent. We are not unmindful of the fact that
some courts of the United States have held that a partnership may not be adjudged insolvent in an
involuntary insolvency proceeding unless all of its members are insolvent, while others have maintained a
contrary view. But it must be borne in mind that under the American common law, partnerships have no
juridical personality independent from that of its members; and if now they have such personality for the
purpose of the insolvency law, it is only by virtue of general law enacted by the Congress of the United
States on July 1, 1898, section 5, paragraph (h), of which reads thus:

In the event of one or more but not all of the members of a partnership being adjudged bankrupt,
the partnership property shall not be administered in bankruptcy, unless by consent of the partner
or partners not adjudged bankrupt; but such partner or partners not adjudged bankrupt shall settle
the partnership business as expeditiously as its nature will permit, and account for the interest of
the partner or partners adjudged bankrupt.

The general consideration that these partnership had no juridical personality and the limitations
prescribed in subsection (h) above set forth gave rise to the conflict noted in American decisions, as
stated in the case of In reSamuels (215 Fed., 845), which mentions the two apparently conflicting
doctrines, citing one from In reBertenshaw (157 Fed., 363), and the other from Francis vs. McNeal (186
Fed., 481).

But there being in our insolvency law no such provision as that contained in section 5 of said Act of
Congress of July 1, 1898, nor any rule similar thereto, and the juridical personality of limited partnership
being recognized by our statutes from their formation in all their acts and contracts the decision of
American courts on this point can have no application in this jurisdiction, nor we see any reason why
these partnerships cannot be adjudged bankrupt irrespective of the solvency or insolvency of their
members, provided the partnership has, as such, committed some of the acts of insolvency provided in
our law. Under this view it is unnecessary to discuss the other points raised by the parties, although in the
particular case under consideration it can be added that the liability of the limited partners for the
obligations and losses of the partnership is limited to the amounts paid or promised to be paid into the
common fund except when a limited partner should have included his name or consented to its inclusion
in the firm name (arts. 147 and 148, Code of Commerce).

Therefore, it having been proven that the partnership Campos Rueda & Co. failed for more than thirty
days to pay its obligations to the petitioners the Pacific Commercial Co. the Asiatic Petroleum Co. and the
International Banking Corporation, the case comes under paragraph 11 of section 20 of Act No. 1956,
and consequently the petitioners have the right to a judicial decree declaring the involuntary insolvency of
said partnership.

Wherefore, the judgment appealed from is reversed, and it is adjudged that the limited partnership
Campos Rueda & Co. is and was on December 28, 1921, insolvent and liable for having failed for more
than thirty days to meet its obligations with the three petitioners herein, and it is ordered that this
proceeding be remanded to the Court of First Instance of Manila with instruction to said court to issue the
proper decrees under section 24 of Act No. 1956, and proceed therewith until its final disposition.

It is so ordered without special finding as to costs.

7. G.R. No. L-25532 February 28, 1969

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.
WILLIAM J. SUTER and THE COURT OF TAX APPEALS, respondents.

REYES, J.B.L., J.:

A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.," was formed on 30 September 1947 by
herein respondent William J. Suter as the general partner, and Julia Spirig and Gustav Carlson, as the
limited partners. The partners contributed, respectively, P20,000.00, P18,000.00 and P2,000.00 to the
partnership. On 1 October 1947, the limited partnership was registered with the Securities and Exchange
Commission. The firm engaged, among other activities, in the importation, marketing, distribution and
operation of automatic phonographs, radios, television sets and amusement machines, their parts and
accessories. It had an office and held itself out as a limited partnership, handling and carrying
merchandise, using invoices, bills and letterheads bearing its trade-name, maintaining its own books of
accounts and bank accounts, and had a quota allocation with the Central Bank.

In 1948, however, general partner Suter and limited partner Spirig got married and, thereafter, on 18
December 1948, limited partner Carlson sold his share in the partnership to Suter and his wife. The sale
was duly recorded with the Securities and Exchange Commission on 20 December 1948.

The limited partnership had been filing its income tax returns as a corporation, without objection by the
herein petitioner, Commissioner of Internal Revenue, until in 1959 when the latter, in an assessment,
consolidated the income of the firm and the individual incomes of the partners-spouses Suter and Spirig
resulting in a determination of a deficiency income tax against respondent Suter in the amount of
P2,678.06 for 1954 and P4,567.00 for 1955.

Respondent Suter protested the assessment, and requested its cancellation and withdrawal, as not in
accordance with law, but his request was denied. Unable to secure a reconsideration, he appealed to the
Court of Tax Appeals, which court, after trial, rendered a decision, on 11 November 1965, reversing that
of the Commissioner of Internal Revenue.

The present case is a petition for review, filed by the Commissioner of Internal Revenue, of the tax court's
aforesaid decision. It raises these issues:

(a) Whether or not the corporate personality of the William J. Suter "Morcoin" Co., Ltd. should be
disregarded for income tax purposes, considering that respondent William J. Suter and his wife, Julia
Spirig Suter actually formed a single taxable unit; and

(b) Whether or not the partnership was dissolved after the marriage of the partners, respondent William J.
Suter and Julia Spirig Suter and the subsequent sale to them by the remaining partner, Gustav Carlson,
of his participation of P2,000.00 in the partnership for a nominal amount of P1.00.

The theory of the petitioner, Commissioner of Internal Revenue, is that the marriage of Suter and Spirig
and their subsequent acquisition of the interests of remaining partner Carlson in the partnership dissolved
the limited partnership, and if they did not, the fiction of juridical personality of the partnership should be
disregarded for income tax purposes because the spouses have exclusive ownership and control of the
business; consequently the income tax return of respondent Suter for the years in question should have
included his and his wife's individual incomes and that of the limited partnership, in accordance with
Section 45 (d) of the National Internal Revenue Code, which provides as follows:

(d) Husband and wife. — In the case of married persons, whether citizens, residents or non-
residents, only one consolidated return for the taxable year shall be filed by either spouse to
cover the income of both spouses; ....

In refutation of the foregoing, respondent Suter maintains, as the Court of Tax Appeals held, that his
marriage with limited partner Spirig and their acquisition of Carlson's interests in the partnership in 1948 is
not a ground for dissolution of the partnership, either in the Code of Commerce or in the New Civil Code,
and that since its juridical personality had not been affected and since, as a limited partnership, as contra
distinguished from a duly registered general partnership, it is taxable on its income similarly with
corporations, Suter was not bound to include in his individual return the income of the limited partnership.
We find the Commissioner's appeal unmeritorious.

The thesis that the limited partnership, William J. Suter "Morcoin" Co., Ltd., has been dissolved by
operation of law because of the marriage of the only general partner, William J. Suter to the originally
limited partner, Julia Spirig one year after the partnership was organized is rested by the appellant upon
the opinion of now Senator Tolentino in Commentaries and Jurisprudence on Commercial Laws of the
Philippines, Vol. 1, 4th Ed., page 58, that reads as follows:

A husband and a wife may not enter into a contract of general copartnership, because under the
Civil Code, which applies in the absence of express provision in the Code of Commerce, persons
prohibited from making donations to each other are prohibited from entering
into universal partnerships. (2 Echaverri 196) It follows that the marriage of partners necessarily
brings about the dissolution of a pre-existing partnership. (1 Guy de Montella 58)

The petitioner-appellant has evidently failed to observe the fact that William J. Suter "Morcoin" Co., Ltd.
was not a universal partnership, but a particular one. As appears from Articles 1674 and 1675 of the
Spanish Civil Code, of 1889 (which was the law in force when the subject firm was organized in 1947),
a universal partnership requires either that the object of the association be all the present property of the
partners, as contributed by them to the common fund, or else "all that the partners may acquire by
their industry or work during the existence of the partnership". William J. Suter "Morcoin" Co., Ltd. was not
such a universal partnership, since the contributions of the partners were fixed sums of money,
P20,000.00 by William Suter and P18,000.00 by Julia Spirig and neither one of them was an industrial
partner. It follows that William J. Suter "Morcoin" Co., Ltd. was not a partnership that spouses were
forbidden to enter by Article 1677 of the Civil Code of 1889.

The former Chief Justice of the Spanish Supreme Court, D. Jose Casan, in his Derecho Civil, 7th Edition,
1952, Volume 4, page 546, footnote 1, says with regard to the prohibition contained in the aforesaid
Article 1677:

Los conyuges, segun esto, no pueden celebrar entre si el contrato de sociedad universal, pero o
podran constituir sociedad particular? Aunque el punto ha sido muy debatido, nos inclinamos a la
tesis permisiva de los contratos de sociedad particular entre esposos, ya que ningun precepto de
nuestro Codigo los prohibe, y hay que estar a la norma general segun la que toda persona es
capaz para contratar mientras no sea declarado incapaz por la ley. La jurisprudencia de la
Direccion de los Registros fue favorable a esta misma tesis en su resolution de 3 de febrero de
1936, mas parece cambiar de rumbo en la de 9 de marzo de 1943.

Nor could the subsequent marriage of the partners operate to dissolve it, such marriage not being one of
the causes provided for that purpose either by the Spanish Civil Code or the Code of Commerce.

The appellant's view, that by the marriage of both partners the company became a single proprietorship,
is equally erroneous. The capital contributions of partners William J. Suter and Julia Spirig were
separately owned and contributed by them before their marriage; and after they were joined in wedlock,
such contributions remained their respective separate property under the Spanish Civil Code (Article
1396):

The following shall be the exclusive property of each spouse:

(a) That which is brought to the marriage as his or her own; ....

Thus, the individual interest of each consort in William J. Suter "Morcoin" Co., Ltd. did not become
common property of both after their marriage in 1948.
It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical personality of
its own, distinct and separate from that of its partners (unlike American and English law that does not
recognize such separate juridical personality), the bypassing of the existence of the limited partnership as
a taxpayer can only be done by ignoring or disregarding clear statutory mandates and basic principles of
our law. The limited partnership's separate individuality makes it impossible to equate its income with that
of the component members. True, section 24 of the Internal Revenue Code merges registered general
co-partnerships (compañias colectivas) with the personality of the individual partners for income tax
purposes. But this rule is exceptional in its disregard of a cardinal tenet of our partnership laws, and can
not be extended by mere implication to limited partnerships.

The rulings cited by the petitioner (Collector of Internal Revenue vs. University of the Visayas, L-13554,
Resolution of 30 October 1964, and Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 504) as authority for
disregarding the fiction of legal personality of the corporations involved therein are not applicable to the
present case. In the cited cases, the corporations were already subject to tax when the fiction of their
corporate personality was pierced; in the present case, to do so would exempt the limited partnership
from income taxation but would throw the tax burden upon the partners-spouses in their individual
capacities. The corporations, in the cases cited, merely served as business conduits or alter egos of the
stockholders, a factor that justified a disregard of their corporate personalities for tax purposes. This is not
true in the present case. Here, the limited partnership is not a mere business conduit of the partner-
spouses; it was organized for legitimate business purposes; it conducted its own dealings with its
customers prior to appellee's marriage, and had been filing its own income tax returns as such
independent entity. The change in its membership, brought about by the marriage of the partners and
their subsequent acquisition of all interest therein, is no ground for withdrawing the partnership from the
coverage of Section 24 of the tax code, requiring it to pay income tax. As far as the records show, the
partners did not enter into matrimony and thereafter buy the interests of the remaining partner with the
premeditated scheme or design to use the partnership as a business conduit to dodge the tax laws.
Regularity, not otherwise, is presumed.

As the limited partnership under consideration is taxable on its income, to require that income to be
included in the individual tax return of respondent Suter is to overstretch the letter and intent of the law. In
fact, it would even conflict with what it specifically provides in its Section 24: for the appellant
Commissioner's stand results in equal treatment, tax wise, of a general copartnership (compañia
colectiva) and a limited partnership, when the code plainly differentiates the two. Thus, the code taxes the
latter on its income, but not the former, because it is in the case of compañias colectivas that the
members, and not the firm, are taxable in their individual capacities for any dividend or share of the profit
derived from the duly registered general partnership (Section 26, N.I.R.C.; Arañas, Anno. & Juris. on the
N.I.R.C., As Amended, Vol. 1, pp. 88-89).lawphi1.nêt

But it is argued that the income of the limited partnership is actually or constructively the income of the
spouses and forms part of the conjugal partnership of gains. This is not wholly correct. As pointed out in
Agapito vs. Molo 50 Phil. 779, and People's Bank vs. Register of Deeds of Manila, 60 Phil. 167, the fruits
of the wife's parapherna become conjugal only when no longer needed to defray the expenses for the
administration and preservation of the paraphernal capital of the wife. Then again, the appellant's
argument erroneously confines itself to the question of the legal personality of the limited partnership,
which is not essential to the income taxability of the partnership since the law taxes the income of even
joint accounts that have no personality of their own. 1 Appellant is, likewise, mistaken in that it assumes
that the conjugal partnership of gains is a taxable unit, which it is not. What is taxable is the "income of
both spouses" (Section 45 [d] in their individual capacities. Though the amount of income (income of the
conjugal partnership vis-a-vis the joint income of husband and wife) may be the same for a given taxable
year, their consequences would be different, as their contributions in the business partnership are not the
same.

The difference in tax rates between the income of the limited partnership being consolidated with, and
when split from the income of the spouses, is not a justification for requiring consolidation; the revenue
code, as it presently stands, does not authorize it, and even bars it by requiring the limited partnership to
pay tax on its own income.

FOR THE FOREGOING REASONS, the decision under review is hereby affirmed. No costs.

8. G.R. No. L-27010 April 30, 1969

MARLENE DAUDEN-HERNAEZ, petitioner,

vs.
HON. WALFRIDO DE LOS ANGELES, Judge of the Court of First Instance of Quezon City,
HOLLYWOOD FAR EAST PRODUCTIONS, INC., and RAMON VALENZUELA, respondents.

REYES, J.B.L., Acting C.J.:

The essential facts are the following:

Petitioner Marlene Dauden-Hernaez, a motion picture actress, had filed a complaint against herein private
respondents, Hollywood Far East Productions, Inc., and its President and General Manager, Ramon
Valenzuela, to recover P14,700.00 representing a balance allegedly due said petitioner for her services
as leading actress in two motion pictures produced by the company, and to recover damages. Upon
motion of defendants, the respondent court (Judge Walfrido de los Angeles presiding) ordered the
complaint dismissed, mainly because the "claim of plaintiff was not evidenced by any written document,
either public or private", and the complaint "was defective on its face" for violating Articles 1356 and 1358
of the Civil, Code of the Philippines, as well as for containing defective allege, petitions. Plaintiff sought
reconsideration of the dismissal and for admission of an amended complaint, attached to the motion. The
court denied reconsideration and the leave to amend; whereupon, a second motion for reconsideration
was filed. Nevertheless, the court also denied it for being pro forma, as its allegations "are, more or less,
the same as the first motion", and for not being accompanied by an affidavit of merits, and further
declared the dismissal final and unappealable. In view of the attitude of the Court of First Instance,
plaintiff resorted to this Court.

The answer sets up the defense that "the proposed amended complaint did not vary in any material
respect from the original complaint except in minor details, and suffers from the same vital defect of the
original complaint", which is the violation of Article 1356 of the Civil Code, in that the contract sued upon
was not alleged to be in writing; that by Article 1358 the writing was absolute and indispensable, because
the amount involved exceeds five hundred pesos; and that the second motion for reconsideration did not
interrupt the period for appeal, because it was not served on three days' notice.

We shall take up first the procedural question. It is a well established rule in our jurisprudence that when a
court sustains a demurrer or motion to dismiss it is error for the court to dismiss the complaint without
giving the party plaintiff an opportunity to amend his complaint if he so chooses. 1 Insofar as the first order
of dismissal (Annex D, Petition) did not provide that the same was without prejudice to amendment of the
complaint, or reserve to the plaintiff the right to amend his complaint, the said order was erroneous; and
this error was compounded when the motion to accept the amended complaint was denied in the
subsequent order of 3 October 1966 (Annex F, Petition). Hence, the petitioner-plaintiff was within her
rights in filing her so-called second motion for reconsideration, which was actually a first motion against
the refusal to admit the amended complaint.

It is contended that the second motion for reconsideration was merely pro forma and did not suspend the
period to appeal from the first order of dismissal (Annex D) because (1) it merely reiterated the first
motion for reconsideration and (2) it was filed without giving the counsel for defendant-appellee the 3
days' notice provided by the rules. This argument is not tenable, for the reason that the second motion for
reconsideration was addressed to the court' refusal to allow an amendment to the original complaint, and
this was a ground not invoked in the first motion for reconsideration. Thus, the second motion to
reconsider was really not pro forma, as it was based on a different ground, even if in its first part it set
forth in greater detail the arguments against the correctness of the first order to dismiss. And as to the
lack of 3 days' notice, the record shows that appellees had filed their opposition (in detail) to the second
motion to reconsider (Answer, Annex 4); so that even if it were true that respondents were not given the
full 3 days' notice they were not deprived of any substantial right. Therefore, the claim that the first order
of dismissal had become final and unappealable must be overruled.

It is well to observe in this regard that since a motion to dismiss is not a responsive pleading, the plaintiff-
petitioner was entitled as of right to amend the original dismissed complaint. In Paeste vs. Jaurigue 94
Phil. 179, 181, this Court ruled as follows:

Appellants contend that the lower court erred in not admitting their amended complaint and in
holding that their action had already prescribed. Appellants are right on both counts.

Amendments to pleadings are favored and should be liberally allowed in the furtherance of
justice. (Torres vs. Tomacruz, 49 Phil. 913). Moreover, under section 1 of Rule 17, Rules of
Court, a party may amend his pleading once as a matter of course, that is, without leave of court,
at any time before a responsive pleading is served. A motion to dismiss is not a "responsive
pleading". (Moran on the Rules of Court, vol. 1, 1952, ed., p. 376). As plaintiffs amended their
complaint before it was answered, the motion to admit the amendment should not have been
denied. It is true that the amendment was presented after the original complaint had been
ordered dismissed. But that order was not yet final for it was still under reconsideration.

The foregoing observations leave this Court free to discuss the main issue in this petition. Did the court
below abuse its discretion in ruling that a contract for personal services involving more than P500.00 was
either invalid of unenforceable under the last paragraph of Article 1358 of the Civil Code of the
Philippines?

We hold that there was abuse, since the ruling herein contested betrays a basic and lamentable
misunderstanding of the role of the written form in contracts, as ordained in the present Civil Code.

In the matter of formalities, the contractual system of our Civil Code still follows that of the Spanish Civil
Code of 1889 and of the "Ordenamiento de Alcala" 2 of upholding the spirit and intent of the parties over
formalities: hence, in general, contracts are valid and binding from their perfection regardless of form
whether they be oral or written. This is plain from Articles 1315 and 1356 of the present Civil Code. Thus,
the first cited provision prescribes:

ART. 1315. Contracts are perfected by mere consent, and from that moment the parties are
bound not only to the fulfillment of what has been expressly stipulated but also to all the
consequences which, according to their nature, may be in keeping with good faith, usage and
law. (Emphasis supplied)

Concordantly, the first part of Article 1356 of the Code Provides:

ART. 1356. Contracts shall be obligatory in whatever form they may have been entered into,
provided all the essential requisites for their validity are present.... (Emphasis supplied)

These essential requisites last mentioned are normally (1) consent (2) proper subject matter, and (3)
consideration or causa for the obligation assumed (Article 1318). 3 So that once the three elements exist,
the contract is generally valid and obligatory, regardless of the form, oral or written, in which they are
couched.lawphi1.nêt
To this general rule, the Code admits exceptions, set forth in the second portion of Article 1356:

However, when the law requires that a contract be in some form in order that it may be valid or
enforceable, or that a contract be proved in a certain way, that requirement is absolute and
indispensable....

It is thus seen that to the general rule that the form (oral or written) is irrelevant to the binding effect inter
partes of a contract that possesses the three validating elements of consent, subject matter, and causa,
Article 1356 of the Code establishes only two exceptions, to wit:

(a) Contracts for which the law itself requires that they be in some particular form (writing) in order to
make them valid and enforceable (the so-called solemn contracts). Of these the typical example is the
donation of immovable property that the law (Article 749) requires to be embodied in a public instrument
in order "that the donation may be valid", i.e., existing or binding. Other instances are the donation of
movables worth more than P5,000.00 which must be in writing, "otherwise the donation shall be void"
(Article 748); contracts to pay interest on loans (mutuum) that must be "expressly stipulated in writing"
(Article 1956); and the agreements contemplated by Article 1744, 1773, 1874 and 2134 of the present
Civil Code.

(b) Contracts that the law requires to be proved by some writing (memorandum) of its terms, as in those
covered by the old Statute of Frauds, now Article 1403(2) of the Civil Code. Their existence not being
provable by mere oral testimony (unless wholly or partly executed), these contracts are exceptional in
requiring a writing embodying the terms thereof for their enforceability by action in court.

The contract sued upon by petitioner herein (compensation for services) does not come under either
exception. It is true that it appears included in Article 1358, last clause, providing that "all other contracts
where the amount involved exceeds five hundred pesos must appear in writing, even a private one." But
Article 1358 nowhere provides that the absence of written form in this case will make the agreement
invalid or unenforceable. On the contrary, Article 1357 clearly indicates that contracts covered by Article
1358 are binding and enforceable by action or suit despite the absence of writing.

ART. 1357. If the law requires a document or other special form, as in the acts and contracts
enumerated in the following article, the contracting parties may compel each other to observe that
form, once the contract has been perfected. This right may be exercised simultaneously with the
action the contract. (Emphasis supplied) .

It thus becomes inevitable to conclude that both the court a quo as well as the private respondents herein
were grossly mistaken in holding that because petitioner Dauden's contract for services was not in writing
the same could not be sued upon, or that her complaint should be dismissed for failure to state a cause of
action because it did not plead any written agreement.

The basic error in the court's decision lies in overlooking that in our contractual system it is not enough
that the law should require that the contract be in writing, as it does in Article 1358. The law must further
prescribe that without the writing the contract is not valid or not enforceable by action.

WHEREFORE, the order dismissing the complaint is set aside, and the case is ordered remanded to the
court of origin for further proceedings not at variance with this decision.

Costs to be solidarity paid by private respondents Hollywood Far East Productions, Inc., and Ramon
Valenzuela.
9. G.R. No. L-33580 February 6, 1931

MAXIMILIANO SANCHO, plaintiff-appellant, vs. SEVERIANO LIZARRAGA, defendant-appellee.

ROMUALDEZ, J.:

The plaintiff brought an action for the rescission of a partnership contract between himself and the
defendant, entered into on October 15, 1920, the reimbursement by the latter of his 50,000 peso
investment therein, with interest at 12 per cent per annum form October 15, 1920, with costs, and any
other just and equitable remedy against said defendant.

The defendant denies generally and specifically all the allegations of the complaint which are
incompatible with his special defenses, cross-complaint and counterclaim, setting up the latter and asking
for the dissolution of the partnership, and the payment to him as its manager and administrator of P500
monthly from October 15, 1920, until the final dissolution, with interest, one-half of said amount to be
charged to the plaintiff. He also prays for any other just and equitable remedy.

The Court of First Instance of Manila, having heard the cause, and finding it duly proved that the
defendant had not contributed all the capital he had bound himself to invest, and that the plaintiff had
demanded that the defendant liquidate the partnership, declared it dissolved on account of the expiration
of the period for which it was constituted, and ordered the defendant, as managing partner, to proceed
without delay to liquidate it, submitting to the court the result of the liquidation together with the accounts
and vouchers within the period of thirty days from receipt of notice of said judgment, without costs.

The plaintiff appealed from said decision making the following assignments of error:

1. In holding that the plaintiff and appellant is not entitled to the rescission of the partnership contract,
Exhibit A, and that article 1124 of the Civil Code is not applicable to the present case.

2. In failing to order the defendant to return the sum of P50,000 to the plaintiff with interest from October
15, 1920, until fully paid.

3. In denying the motion for a new trial.

In the brief filed by counsel for the appellee, a preliminary question is raised purporting to show that this
appeal is premature and therefore will not lie. The point is based on the contention that inasmuch as the
liquidation ordered by the trial court, and the consequent accounts, have not been made and submitted,
the case cannot be deemed terminated in said court and its ruling is not yet appealable. In support of this
contention counsel cites section 123 of the Code of Civil Procedure, and the decision of this court in the
case of Natividad vs. Villarica (31 Phil., 172).

This contention is well founded. Until the accounts have been rendered as ordered by the trial court, and
until they have been either approved or disapproved, the litigation involved in this action cannot be
considered as completely decided; and, as it was held in said case of Natividad vs .Villarica, also with
reference to an appeal taken from a decision ordering the rendition of accounts following the dissolution
of partnership, the appeal in the instant case must be deemed premature.

But even going into the merits of the case, the affirmation of the judgment appealed from is inevitable. In
view of the lower court's findings referred to above, which we cannot revise because the parol evidence
has not been forwarded to this court, articles 1681 and 1682 of the Civil Code have been properly
applied. Owing to the defendant's failure to pay to the partnership the whole amount which he bound
himself to pay, he became indebted to it for the remainder, with interest and any damages occasioned
thereby, but the plaintiff did not thereby acquire the right to demand rescission of the partnership contract
according to article 1124 of the Code. This article cannot be applied to the case in question, because it
refers to the resolution of obligations in general, whereas article 1681 and 1682 specifically refer to the
contract of partnership in particular. And it is a well known principle that special provisions prevail over
general provisions.

By virtue of the foregoing, this appeal is hereby dismissed, leaving the decision appealed from in full
force, without special pronouncement of costs. So ordered.

10. G.R. No. L-16318 October 21, 1921

PANG LIM and BENITO GALVEZ vs. LO SENG

STREET, J.:

For several years prior to June 1, 1916, two of the litigating parties herein, namely, Lo Seng and Pang
Lim, Chinese residents of the City of Manila, were partners, under the firm name of Lo Seng and Co., in
the business of running a distillery, known as "El Progreso," in the Municipality of Paombong, in the
Province of Bulacan. The land on which said distillery is located as well as the buildings and
improvements originally used in the business were, at the time to which reference is now made, the
property of another Chinaman, who resides in Hongkong, named Lo Yao, who, in September, 1911,
leased the same to the firm of Lo Seng and Co. for the term of three years.

Upon the expiration of this lease a new written contract, in the making of which Lo Yao was represented
by one Lo Shui as attorney in fact, became effective whereby the lease was extended for fifteen years.
The reason why the contract was made for so long a period of time appears to have been that the Bureau
of Internal Revenue had required sundry expensive improvements to be made in the distillery, and it was
agreed that these improvements should be effected at the expense of the lessees. In conformity with this
understanding many thousands of pesos were expended by Lo Seng and Co., and later by Lo Seng
alone, in enlarging and improving the plant.

Among the provisions contained in said lease we note the following:

Know all men by these presents:

1. That I, Lo Shui, as attorney in fact in charge of the properties of Mr. Lo Yao of Hongkong, cede by way
of lease for fifteen years more said distillery "El Progreso" to Messrs. Pang Lim and Lo Seng (doing
business under the firm name of Lo Seng and Co.), after the termination of the previous contract,
because of the fact that they are required, by the Bureau of Internal Revenue, to rearrange, alter and
clean up the distillery.

2. That all the improvements and betterments which they may introduce, such as machinery, apparatus,
tanks, pumps, boilers and buildings which the business may require, shall be, after the termination of the
fifteen years of lease, for the benefit of Mr. Lo Yao, my principal, the buildings being considered as
improvements.

3. That the monthly rent of said distillery is P200, as agreed upon in the previous contract of September
11, 1911, acknowledged before the notary public D. Vicente Santos; and all modifications and repairs
which may be needed shall be paid for by Messrs. Pang Lim and Lo Seng.
We, Pang Lim and Lo Seng, as partners in said distillery "El Progreso," which we are at present
conducting, hereby accept this contract in each and all its parts, said contract to be effective upon the
termination of the contract of September 11, 1911.

Neither the original contract of lease nor the agreement extending the same was inscribed in the property
registry, for the reason that the estate which is the subject of the lease has never at any time been so
inscribed.

On June 1, 1916, Pang Lim sold all his interest in the distillery to his partner Lo Seng, thus placing the
latter in the position of sole owner; and on June 28, 1918, Lo Shui, again acting as attorney in fact of Lo
Yao, executed and acknowledged before a notary public a deed purporting to convey to Pang Lim and
another Chinaman named Benito Galvez, the entire distillery plant including the land used in connection
therewith. As in case of the lease this document also was never recorded in the registry of property.
Thereafter Pang Lim and Benito Galvez demanded possession from Lo Seng, but the latter refused to
yield; and the present action of unlawful detainer was thereupon initiated by Pang Lim and Benito Galvez
in the court of the justice of the peace of Paombong to recover possession of the premises. From the
decision of the justice of the peace the case was appealed to the Court of First Instance, where judgment
was rendered for the plaintiffs; and the defendant thereupon appealed to the Supreme Court.

The case for the plaintiffs is rested exclusively on the provisions of article 1571 of the Civil Code, which
reads in part as follows:

ART. 1571. The purchaser of a leased estate shall be entitled to terminate any lease in force at
the time of making the sale, unless the contrary is stipulated, and subject to the provisions of the
Mortgage Law.

In considering this provision it may be premised that a contract of lease is personally binding on all who
participate in it regardless of whether it is recorded or not, though of course the unrecorded lease creates
no real charge upon the land to which it relates. The Mortgage Law was devised for the protection of third
parties, or those who have not participated in the contracts which are by that law required to be
registered; and none of its provisions with reference to leases interpose any obstacle whatever to the
giving of full effect to the personal obligations incident to such contracts, so far as concerns the
immediate parties thereto. This is rudimentary, and the law appears to be so understood by all
commentators, there being, so far as we are aware, no authority suggesting the contrary. Thus, in the
commentaries of the authors Galindo and Escosura, on the Mortgage Law, we find the following pertinent
observation: "The Mortgage Law is enacted in aid of and in respect to third persons only; it does not affect
the relations between the contracting parties, nor their capacity to contract. Any question affecting the
former will be determined by the dispositions of the special law [i.e., the Mortgage Law], while any
question affecting the latter will be determined by the general law." (Galindo y Escosura, Comentarios a la
Legislacion Hipotecaria, vol. I, p. 461.)

Although it is thus manifest that, under the Mortgage Law, as regards the personal obligations expressed
therein, the lease in question was from the beginning, and has remained, binding upon all the parties
thereto — among whom is to be numbered Pang Lim, then a member of the firm of Lo Seng and Co. —
this does not really solve the problem now before us, which is, whether the plaintiffs herein, as
purchasers of the estate, are at liberty to terminate the lease, assuming that it was originally binding upon
all parties participating in it.

Upon this point the plaintiffs are undoubtedly supported, prima facie, by the letter of article 1571 of the
Civil Code; and the position of the defendant derives no assistance from the mere circumstance that the
lease was admittedly binding as between the parties thereto. 1awph!l.net

The words "subject to the provisions of the Mortgage Law," contained in article 1571, express a
qualification which evidently has reference to the familiar proposition that recorded instruments are
effective against third persons from the date of registration (Co-Tiongco vs. Co-Guia, 1 Phil., 210); from
whence it follows that a recorded lease must be respected by any purchaser of the estate whomsoever.
But there is nothing in the Mortgage Law which, so far as we now see, would prevent a purchaser from
exercising the precise power conferred in article 1571 of the Civil Code, namely, of terminating any lease
which is unrecorded; nothing in that law that can be considered as arresting the force of article 1571 as
applied to the lease now before us.

Article 1549 of the Civil Code has also been cited by the attorneys for the appellant as supplying authority
for the proposition that the lease in question cannot be terminated by one who, like Pang Lim, has taken
part in the contract. That provision is practically identical in terms with the first paragraph of article 23 of
the Mortgage Law, being to the effect that unrecorded leases shall be of no effect as against third
persons; and the same observation will suffice to dispose of it that was made by us above in discussing
the Mortgage Law, namely, that while it recognizes the fact that an unrecorded lease is binding on all
persons who participate therein, this does not determine the question whether, admitting the lease to be
so binding, it can be terminated by the plaintiffs under article 1571.

Having thus disposed of the considerations which arise in relation with the Mortgage Law, as well as
article 1549 of the Civil Coded — all of which, as we have seen, are undecisive — we are brought to
consider the aspect of the case which seems to us conclusive. This is found in the circumstance that the
plaintiff Pang Lim has occupied a double role in the transactions which gave rise to this litigation, namely,
first, as one of the lessees; and secondly, as one of the purchasers now seeking to terminate the lease.
These two positions are essentially antagonistic and incompatible. Every competent person is by law
bond to maintain in all good faith the integrity of his own obligations; and no less certainly is he bound to
respect the rights of any person whom he has placed in his own shoes as regards any contract previously
entered into by himself.

While yet a partner in the firm of Lo Seng and Co., Pang Lim participated in the creation of this lease, and
when he sold out his interest in that firm to Lo Seng this operated as a transfer to Lo Seng of Pang Lim's
interest in the firm assets, including the lease; and Pang Lim cannot now be permitted, in the guise of a
purchaser of the estate, to destroy an interest derived from himself, and for which he has received full
value.

The bad faith of the plaintiffs in seeking to deprive the defendant of this lease is strikingly revealed in the
circumstance that prior to the acquisition of this property Pang Lim had been partner with Lo Seng and
Benito Galvez an employee. Both therefore had been in relations of confidence with Lo Seng and in that
position had acquired knowledge of the possibilities of the property and possibly an experience which
would have enabled them, in case they had acquired possession, to exploit the distillery with profit. On
account of his status as partner in the firm of Lo Seng and Co., Pang Lim knew that the original lease had
been extended for fifteen years; and he knew the extent of valuable improvements that had been made
thereon. Certainly, as observed in the appellant's brief, it would be shocking to the moral sense if the
condition of the law were found to be such that Pang Lim, after profiting by the sale of his interest in a
business, worthless without the lease, could intervene as purchaser of the property and confiscate for his
own benefit the property which he had sold for a valuable consideration to Lo Seng. The sense of justice
recoils before the mere possibility of such eventuality.

Above all other persons in business relations, partners are required to exhibit towards each other the
highest degree of good faith. In fact the relation between partners is essentially fiduciary, each being
considered in law, as he is in fact, the confidential agent of the other. It is therefore accepted as
fundamental in equity jurisprudence that one partner cannot, to the detriment of another, apply exclusively
to his own benefit the results of the knowledge and information gained in the character of partner. Thus, it
has been held that if one partner obtains in his own name and for his own benefit the renewal of a lease
on property used by the firm, to commence at a date subsequent to the expiration of the firm's lease, the
partner obtaining the renewal is held to be a constructive trustee of the firm as to such lease. (20 R. C. L.,
878-882.) And this rule has even been applied to a renewal taken in the name of one partner after the
dissolution of the firm and pending its liquidation. (16 R. C. L., 906; Knapp vs.Reed, 88 Neb., 754; 32 L.
R. A. [N. S.], 869; Mitchell vs. Reed 61 N. Y., 123; 19 Am. Rep., 252.)

An additional consideration showing that the position of the plaintiff Pang Lim in this case is untenable is
deducible from articles 1461 and 1474 of the Civil Code, which declare that every person who sells
anything is bound to deliver and warrant the subject-matter of the sale and is responsible to the vendee
for the legal and lawful possession of the thing sold. The pertinence of these provisions to the case now
under consideration is undeniable, for among the assets of the partnership which Pang Lim transferred to
Lo Seng, upon selling out his interest in the firm to the latter, was this very lease; and while it cannot be
supposed that the obligation to warrant recognized in the articles cited would nullify article 1571, if the
latter article had actually conferred on the plaintiffs the right to terminate this lease, nevertheless said
articles (1461, 1474), in relation with other considerations, reveal the basis of an estoppel which in our
opinion precludes Pang Lim from setting up his interest as purchaser of the estate to the detriment of Lo
Seng.

It will not escape observation that the doctrine thus applied is analogous to the doctrine recognized in
courts of common law under the head of estoppel by deed, in accordance with which it is held that if a
person, having no title to land, conveys the same to another by some one or another of the recognized
modes of conveyance at common law, any title afterwards acquired by the vendor will pass to the
purchaser; and the vendor is estopped as against such purchaser from asserting such after-acquired title.
The indenture of lease, it may be further noted, was recognized as one of the modes of conveyance at
common law which created this estoppel. (8 R. C. L., 1058, 1059.)

From what has been said it is clear that Pang Lim, having been a participant in the contract of lease now
in question, is not in a position to terminate it: and this is a fatal obstacle to the maintenance of the action
of unlawful detainer by him. Moreover, it is fatal to the maintenance of the action brought jointly by Pang
Lim and Benito Galvez. The reason is that in the action of unlawful detainer, under section 80 of the Code
of Civil Procedure, the only question that can be adjudicated is the right to possession; and in order to
maintain the action, in the form in which it is here presented, the proof must show that occupant's
possession is unlawful, i. e., that he is unlawfully withholding possession after the determination of the
right to hold possession. In the case before us quite the contrary appears; for, even admitting that Pang
Lim and Benito Galvez have purchased the estate from Lo Yao, the original landlord, they are, as
between themselves, in the position of tenants in common or owners pro indiviso, according to the
proportion of their respective contribution to the purchase price. But it is well recognized that one tenant in
common cannot maintain a possessory action against his cotenant, since one is as much entitled to have
possession as the other. The remedy is ordinarily by an action for partition. (Cornista vs. Ticson, 27 Phil.,
80.) It follows that as Lo Seng is vested with the possessory right as against Pang Lim, he cannot be
ousted either by Pang Lim or Benito Galvez. Having lawful possession as against one cotenant, he is
entitled to retain it against both. Furthermore, it is obvious that partition proceedings could not be
maintained at the instance of Benito Galvez as against Lo Seng, since partition can only be effected
where the partitioners are cotenants, that is, have an interest of an identical character as among
themselves. (30 Cyc., 178-180.) The practical result is that both Pang Lim and Benito Galvez are bound
to respect Lo Seng's lease, at least in so far as the present action is concerned.

We have assumed in the course of the preceding discussion that the deed of sale under which the
plaintiffs acquired the right of Lo Yao, the owner of the fee, is competent proof in behalf of the plaintiffs. It
is, however, earnestly insisted by the attorney for Lo Seng that this document, having never been
recorded in the property registry, cannot under article 389 of the Mortgage Law, be used in court against
him because as to said instrument he is a third party. The important question thus raised is not absolutely
necessary to the decision of this case, and we are inclined to pass it without decision, not only because
the question does not seem to have been ventilated in the Court of First Instance but for the further
reason that we have not had the benefit of any written brief in this case in behalf of the appellees.

The judgment appealed from will be reversed, and the defendant will be absolved from the complaint. It is
so ordered, without express adjudication as to costs.