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G.R. No.

97212 June 30, 1993

BENJAMIN YU, petitioner,

FU, respondents.

Jose C. Guico for petitioner.

Wilfredo Cortez for private respondents.


Petitioner Benjamin Yu was formerly the Assistant General Manager of the marble quarrying and
export business operated by a registered partnership with the firm name of "Jade Mountain Products
Company Limited" ("Jade Mountain"). The partnership was originally organized on 28 June 1984
with Lea Bendal and Rhodora Bendal as general partners and Chin Shian Jeng, Chen Ho-Fu and Yu
Chang, all citizens of the Republic of China (Taiwan), as limited partners. The partnership business
consisted of exploiting a marble deposit found on land owned by the Sps. Ricardo and Guillerma
Cruz, situated in Bulacan Province, under a Memorandum Agreement dated 26 June 1984 with the
Cruz spouses. 1 The partnership had its main office in Makati, Metropolitan Manila.

Benjamin Yu was hired by virtue of a Partnership Resolution dated 14 March 1985, as Assistant
General Manager with a monthly salary of P4,000.00. According to petitioner Yu, however, he
actually received only half of his stipulated monthly salary, since he had accepted the promise of the
partners that the balance would be paid when the firm shall have secured additional operating funds
from abroad. Benjamin Yu actually managed the operations and finances of the business; he had
overall supervision of the workers at the marble quarry in Bulacan and took charge of the
preparation of papers relating to the exportation of the firm's products.

Sometime in 1988, without the knowledge of Benjamin Yu, the general partners Lea Bendal and
Rhodora Bendal sold and transferred their interests in the partnership to private respondent Willy Co
and to one Emmanuel Zapanta. Mr. Yu Chang, a limited partner, also sold and transferred his
interest in the partnership to Willy Co. Between Mr. Emmanuel Zapanta and himself, private
respondent Willy Co acquired the great bulk of the partnership interest. The partnership now
constituted solely by Willy Co and Emmanuel Zapanta continued to use the old firm name of Jade
Mountain, though they moved the firm's main office from Makati to Mandaluyong, Metropolitan
Manila. A Supplement to the Memorandum Agreement relating to the operation of the marble quarry
was entered into with the Cruz spouses in February of 1988. 2 The actual operations of the business
enterprise continued as before. All the employees of the partnership continued working in the business,
all, save petitioner Benjamin Yu as it turned out.

On 16 November 1987, having learned of the transfer of the firm's main office from Makati to
Mandaluyong, petitioner Benjamin Yu reported to the Mandaluyong office for work and there met
private respondent Willy Co for the first time. Petitioner was informed by Willy Co that the latter had
bought the business from the original partners and that it was for him to decide whether or not he
was responsible for the obligations of the old partnership, including petitioner's unpaid salaries.
Petitioner was in fact not allowed to work anymore in the Jade Mountain business enterprise. His
unpaid salaries remained unpaid. 3
On 21 December 1988. Benjamin Yu filed a complaint for illegal dismissal and recovery of unpaid
salaries accruing from November 1984 to October 1988, moral and exemplary damages and
attorney's fees, against Jade Mountain, Mr. Willy Co and the other private respondents. The
partnership and Willy Co denied petitioner's charges, contending in the main that Benjamin Yu was
never hired as an employee by the present or new partnership. 4

In due time, Labor Arbiter Nieves Vivar-De Castro rendered a decision holding that petitioner had
been illegally dismissed. The Labor Arbiter decreed his reinstatement and awarded him his claim for
unpaid salaries, backwages and attorney's fees. 5

On appeal, the National Labor Relations Commission ("NLRC") reversed the decision of the Labor
Arbiter and dismissed petitioner's complaint in a Resolution dated 29 November 1990. The NLRC
held that a new partnership consisting of Mr. Willy Co and Mr. Emmanuel Zapanta had bought the
Jade Mountain business, that the new partnership had not retained petitioner Yu in his original
position as Assistant General Manager, and that there was no law requiring the new partnership to
absorb the employees of the old partnership. Benjamin Yu, therefore, had not been illegally
dismissed by the new partnership which had simply declined to retain him in his former managerial
position or any other position. Finally, the NLRC held that Benjamin Yu's claim for unpaid wages
should be asserted against the original members of the preceding partnership, but these though
impleaded had, apparently, not been served with summons in the proceedings before the Labor
Arbiter. 6

Petitioner Benjamin Yu is now before the Court on a Petition for Certiorari, asking us to set aside
and annul the Resolution of the NLRC as a product of grave abuse of discretion amounting to lack or
excess of jurisdiction.

The basic contention of petitioner is that the NLRC has overlooked the principle that a partnership
has a juridical personality separate and distinct from that of each of its members. Such independent
legal personality subsists, petitioner claims, notwithstanding changes in the identities of the partners.
Consequently, the employment contract between Benjamin Yu and the partnership Jade Mountain
could not have been affected by changes in the latter's membership. 7

Two (2) main issues are thus posed for our consideration in the case at bar: (1) whether the
partnership which had hired petitioner Yu as Assistant General Manager had been extinguished and
replaced by a new partnerships composed of Willy Co and Emmanuel Zapanta; and (2) if indeed a
new partnership had come into existence, whether petitioner Yu could nonetheless assert his rights
under his employment contract as against the new partnership.

In respect of the first issue, we agree with the result reached by the NLRC, that is, that the legal
effect of the changes in the membership of the partnership was the dissolution of the old partnership
which had hired petitioner in 1984 and the emergence of a new firm composed of Willy Co and
Emmanuel Zapanta in 1987.

The applicable law in this connection of which the NLRC seemed quite unaware is found in the
Civil Code provisions relating to partnerships. Article 1828 of the Civil Code provides as follows:

Art. 1828. The dissolution of a partnership is the change in the relation of the
partners caused by any partner ceasing to be associated in the carrying on as
distinguished from the winding up of the business. (Emphasis supplied)

Article 1830 of the same Code must also be noted:

Art. 1830. Dissolution is caused:

(1) without violation of the agreement between the partners;

xxx xxx xxx

(b) by the express will of any partner, who must act in

good faith, when no definite term or particular
undertaking is specified;

xxx xxx xxx

(2) in contravention of the agreement between the

partners, where the circumstances do not permit a
dissolution under any other provision of this article, by
the express will of any partner at any time;

xxx xxx xxx

(Emphasis supplied)

In the case at bar, just about all of the partners had sold their partnership interests (amounting to
82% of the total partnership interest) to Mr. Willy Co and Emmanuel Zapanta. The record does not
show what happened to the remaining 18% of the original partnership interest. The acquisition of
82% of the partnership interest by new partners, coupled with the retirement or withdrawal of the
partners who had originally owned such 82% interest, was enough to constitute a new partnership.

The occurrence of events which precipitate the legal consequence of dissolution of a partnership do
not, however, automatically result in the termination of the legal personality of the old partnership.
Article 1829 of the Civil Code states that:

[o]n dissolution the partnership is not terminated, but continues until the winding up
of partnership affairs is completed.

In the ordinary course of events, the legal personality of the expiring partnership persists for the
limited purpose of winding up and closing of the affairs of the partnership. In the case at bar, it is
important to underscore the fact that the business of the old partnership was simply continued by the
new partners, without the old partnership undergoing the procedures relating to dissolution and
winding up of its business affairs. In other words, the new partnership simply took over the business
enterprise owned by the preceeding partnership, and continued using the old name of Jade
Mountain Products Company Limited, without winding up the business affairs of the old partnership,
paying off its debts, liquidating and distributing its net assets, and then re-assembling the said assets
or most of them and opening a new business enterprise. There were, no doubt, powerful tax
considerations which underlay such an informal approach to business on the part of the retiring and
the incoming partners. It is not, however, necessary to inquire into such matters.

What is important for present purposes is that, under the above described situation, not only the
retiring partners (Rhodora Bendal, et al.) but also the new partnership itself which continued the
business of the old, dissolved, one, are liable for the debts of the preceding partnership. In Singson,
et al. v. Isabela Saw Mill, et al, 8 the Court held that under facts very similar to those in the case at bar, a
withdrawing partner remains liable to a third party creditor of the old partnership. 9 The liability of the new
partnership, upon the other hand, in the set of circumstances obtaining in the case at bar, is established
in Article 1840 of the Civil Code which reads as follows:

Art. 1840. In the following cases creditors of the dissolved partnership

are also creditors of the person or partnership continuing the business:

(1) When any new partner is admitted into an existing partnership, or when any
partner retires and assigns (or the representative of the deceased partner assigns)
his rights in partnership property to two or more of the partners, or to one or more of
the partners and one or more third persons, if the business is continued without
liquidation of the partnership affairs;

(2) When all but one partner retire and assign (or the representative of a deceased
partner assigns) their rights in partnership property to the remaining partner,
who continues the business without liquidation of partnership affairs, either alone or
with others;

(3) When any Partner retires or dies and the business of the dissolved partnership is
continued as set forth in Nos. 1 and 2 of this Article, with the consent of the retired
partners or the representative of the deceased partner, but without any assignment
of his right in partnership property;

(4) When all the partners or their representatives assign their rights in partnership
property to one or more third persons who promise to pay the debts and who
continue the business of the dissolved partnership;

(5) When any partner wrongfully causes a dissolution and remaining partners
continue the business under the provisions of article 1837, second paragraph, No.
2, either alone or with others, and without liquidation of the partnership affairs;

(6) When a partner is expelled and the remaining partners continue the business
either alone or with others without liquidation of the partnership affairs;

The liability of a third person becoming a partner in the partnership continuing the
business, under this article, to the creditors of the dissolved partnership shall be
satisfied out of the partnership property only, unless there is a stipulation to the

When the business of a partnership after dissolution is continued under any

conditions set forth in this article the creditors of the retiring or deceased partner or
the representative of the deceased partner, have a prior right to any claim of the
retired partner or the representative of the deceased partner against the person or
partnership continuing the business on account of the retired or deceased partner's
interest in the dissolved partnership or on account of any consideration promised for
such interest or for his right in partnership property.

Nothing in this article shall be held to modify any right of creditors to set assignment
on the ground of fraud.

xxx xxx xxx

(Emphasis supplied)

Under Article 1840 above, creditors of the old Jade Mountain are also creditors of the new Jade
Mountain which continued the business of the old one without liquidation of the partnership affairs.
Indeed, a creditor of the old Jade Mountain, like petitioner Benjamin Yu in respect of his claim for
unpaid wages, is entitled to priority vis-a-vis any claim of any retired or previous partner insofar as
such retired partner's interest in the dissolved partnership is concerned. It is not necessary for the
Court to determine under which one or mare of the above six (6) paragraphs, the case at bar would
fall, if only because the facts on record are not detailed with sufficient precision to permit such
determination. It is, however, clear to the Court that under Article 1840 above, Benjamin Yu is
entitled to enforce his claim for unpaid salaries, as well as other claims relating to his employment
with the previous partnership, against the new Jade Mountain.

It is at the same time also evident to the Court that the new partnership was entitled to appoint and
hire a new general or assistant general manager to run the affairs of the business enterprise take
over. An assistant general manager belongs to the most senior ranks of management and a new
partnership is entitled to appoint a top manager of its own choice and confidence. The non-retention
of Benjamin Yu as Assistant General Manager did not therefore constitute unlawful termination, or
termination without just or authorized cause. We think that the precise authorized cause for
termination in the case at bar was redundancy. 10 The new partnership had its own new General
Manager, apparently Mr. Willy Co, the principal new owner himself, who personally ran the business of
Jade Mountain. Benjamin Yu's old position as Assistant General Manager thus became superfluous or
redundant. 11 It follows that petitioner Benjamin Yu is entitled to separation pay at the rate of one month's
pay for each year of service that he had rendered to the old partnership, a fraction of at least six (6)
months being considered as a whole year.

While the new Jade Mountain was entitled to decline to retain petitioner Benjamin Yu in its employ,
we consider that Benjamin Yu was very shabbily treated by the new partnership. The old partnership
certainly benefitted from the services of Benjamin Yu who, as noted, previously ran the whole marble
quarrying, processing and exporting enterprise. His work constituted value-added to the business
itself and therefore, the new partnership similarly benefitted from the labors of Benjamin Yu. It is
worthy of note that the new partnership did not try to suggest that there was any cause consisting of
some blameworthy act or omission on the part of Mr. Yu which compelled the new partnership to
terminate his services. Nonetheless, the new Jade Mountain did not notify him of the change in
ownership of the business, the relocation of the main office of Jade Mountain from Makati to
Mandaluyong and the assumption by Mr. Willy Co of control of operations. The treatment (including
the refusal to honor his claim for unpaid wages) accorded to Assistant General Manager Benjamin
Yu was so summary and cavalier as to amount to arbitrary, bad faith treatment, for which the new
Jade Mountain may legitimately be required to respond by paying moral damages. This Court,
exercising its discretion and in view of all the circumstances of this case, believes that an indemnity
for moral damages in the amount of P20,000.00 is proper and reasonable.

In addition, we consider that petitioner Benjamin Yu is entitled to interest at the legal rate of six
percent (6%) per annum on the amount of unpaid wages, and of his separation pay, computed from
the date of promulgation of the award of the Labor Arbiter. Finally, because the new Jade Mountain
compelled Benjamin Yu to resort to litigation to protect his rights in the premises, he is entitled to
attorney's fees in the amount of ten percent (10%) of the total amount due from private respondent
Jade Mountain.

WHEREFORE, for all the foregoing, the Petition for Certiorari is GRANTED DUE COURSE, the
Comment filed by private respondents is treated as their Answer to the Petition for Certiorari, and the
Decision of the NLRC dated 29 November 1990 is hereby NULLIFIED and SET ASIDE. A new
Decision is hereby ENTERED requiring private respondent Jade Mountain Products Company
Limited to pay to petitioner Benjamin Yu the following amounts:

(a) for unpaid wages which, as found by the Labor Arbiter, shall be
computed at the rate of P2,000.00 per month multiplied by thirty-six
(36) months (November 1984 to December 1987) in the total amount
of P72,000.00;

(b) separation pay computed at the rate of P4,000.00 monthly pay

multiplied by three (3) years of service or a total of P12,000.00;

(c) indemnity for moral damages in the amount of P20,000.00;

(d) six percent (6%) per annum legal interest computed on items (a)
and (b) above, commencing on 26 December 1989 and until fully
paid; and

(e) ten percent (10%) attorney's fees on the total amount due from
private respondent Jade Mountain.

Costs against private respondents.


[G.R. No. 110782. September 25, 1998]


PHILIPPINES, respondents.


Before this Court is the petition for review of the Decision of respondent Court of
Appeals[1] dismissing petitioners appeal in CA-G.R. CR No. 11960; and affirming her conviction
as well as the sentence imposed on her by the Regional Trial Court of Malolos, Bulacan, in
Criminal Case No. 1395-M-88[2] as follows:
WHEREFORE . . . the [c]ourt finds the accused Irma Idos guilty beyond
reasonable doubt and is hereby sentenced to suffer the penalty of
imprisonment of six (6) months and to pay a fine of P135,000.00 and to pay
private complainant Eddie Alarilla the amount of the check in question
of P135,000.00 at 12% interest from the time of the filing of the [i]nformation
(August 10, 1988) until said amount has been fully paid.
Elevated from the Third Division[3] of this Court, the case was accepted for resolution en
banc on the initial impression that here, a constitutional question might be involved.[4] It was
opined that petitioners sentence, particularly six months imprisonment, might be in violation of
the constitutional guarantee against imprisonment for non-payment of a debt.[5]
A careful consideration of the issues presented in the petition as well as the comments
thereon and the findings of fact by the courts below in the light of applicable laws and precedents
convinces us, however, that the constitutional dimension need not be reached in order to resolve
those issues adequately. For, as herein discussed, the merits of the petition could be determined
without delving into aspects of the cited constitutional guarantee vis--vis provisions of
the Bouncing Checks Law (Batas Pambansa Blg. 22). There being no necessity therefor, we lay
aside discussions of the constitutional challenge to said law in deciding this petition.
The petitioner herein, Irma L. Idos, is a businesswoman engaged in leather tanning. Her
accuser for violation of B.P. 22 is her erstwhile supplier and business partner, the complainant
below, Eddie Alarilla.
As narrated by the Court of Appeals, the background of this case is as follows:
The complainant Eddie Alarilla supplied chemicals and rawhide to the
accused-appellant Irma L. Idos for use in the latters business of manufacturing
leather. In 1985, he joined the accused-appellants business and formed with
her a partnership under the style Tagumpay Manufacturing, with offices in
Bulacan and Cebu City.
However, the partnership was short lived. In January, 1986 the parties agreed
to terminate their partnership. Upon liquidation of the business the partnership
had as of May 1986 receivables and stocks worth P1,800,000.00. The
complainants share of the assets was P900,000.00 to pay for which the
accused-appellant issued the following postdated checks, all drawn against
Metrobank Branch in Mandaue, Cebu:


1) 103110295 8-15-86 P135,828.87

2) 103110294 P135,828.87
3) 103115490 9-30-86 P135,828.87
4) 103115491 10-30-86 P126,656.01

The complainant was able to encash the first, second, and fourth checks, but
the third check (Exh. A) which is the subject of this case, was dishonored on
October 14, 1986 for insufficiency of funds.The complainant demanded
payment from the accused-appellant but the latter failed to pay. Accordingly,
on December 18, 1986, through counsel, he made a formal demand for
payment. (Exh. B) In a letter dated January 2, 1987, the accused-appellant
denied liability. She claimed that the check had been given upon demand of
complainant in May 1986 only as assurance of his share in the assets of the
partnership and that it was not supposed to be deposited until the stocks had
been sold.
Complainant then filed his complaint in the Office of the Provincial Fiscal of
Bulacan which on August 22, 1988 filed an information for violation of BP
Blg. 22 against accused-appellant.
Complainant denied that the checks issued to him by accused-appellant were
subject to the disposition of the stocks and the collection of receivables of the
business. But the accused-appellant insisted that the complainant had known
that the checks were to be funded from the proceeds of the sale of the stocks
and the collection of receivables. She claimed that the complainant himself
asked for the checks because he did not want to continue in the tannery
business and had no use for a share of the stocks. (TSN, p. 7, April 14,
1991; id., pp. 8-9, Nov. 13, 1989; id., pp. 12, 16, 20, Feb. 14, 1990; id., p. 14,
June 4, 1990).
On February 15, 1992, the trial court rendered judgment finding the accused-
appellant guilty of the crime charged. The accused-appellants motion for
annulment of the decision and for reconsideration was denied by the trial court
in its order dated April 12, 1991.[6]
Herein respondent court thereafter affirmed on appeal the decision of the trial
court. Petitioner timely moved for a reconsideration, but this was subsequently denied by
respondent court in its Resolution[7] dated June 11, 1993. Petitioner has now appealed to us by
way of a petition for certiorari under Rule 45 of the Rules of Court.
During the pendency of this petition, this Court by a resolution[8] dated August 30, 1993,
took note of the compromise agreement executed between the parties, regarding the civil aspect
of the case, as manifested by petitioner in a Motion to Render Judgment based on Compromise
Agreement[9]filed on August 5, 1993. After submission of the Comment[10] by the Solicitor
General, and the Reply[11] by petitioner, this case was deemed submitted for decision.
Contending that the Court of Appeals erred in its affirmance of the trial courts decision,
petitioner cites the following reasons to justify the review of her case:

1. The Honorable Court of Appeals has decided against the innocence of the
accused based on mere probabilities which, on the contrary, should have
warranted her acquittal on reasonable doubt. Even then, the conclusion of the
trial court is contrary to the evidence on record, including private complainants
judicial admission that there was no consideration for the check.
2. The Honorable Court of Appeals has confused and merged into one the legal
concepts of dissolution, liquidation and termination of a partnership and, on the
basis of such misconception of the law, disregarded the fact of absence of
consideration of the check and convicted the accused.

3. While this appeal was pending, the parties submitted for the approval of the
Honorable Court a compromise agreement on the civil liability. The accused
humbly submits that this supervening event, which by its terms puts to rest any
doubt the Court of Appeals had entertained against the defense of lack of
consideration, should have a legal effect favorable to the accused, considering
that the dishonored check constitutes a private transaction between partners
which does not involve the public interest, and considering further that the
offense is not one involving moral turpitude.

4. The Honorable Court of Appeals failed to appreciate the fact that the accused
had warned private complainant that the check was not sufficiently funded,
which should have exonerated the accused pursuant to the ruling in the recent
case of Magno vs. Court of Appeals, 210 SCRA 471, which calls for a more
flexible and less rigid application of the Bouncing Checks law.[12]

For a thorough consideration of the merits of petitioners appeal, we find pertinent and
decisive the following issues:

1. Whether respondent court erred in holding that the subject check was issued by
petitioner to apply on account or for value, that is, as part of the consideration of a
buy-out of said complainants interest in the partnership, and not merely as a
commitment on petitioners part to return the investment share of complainant, along
with any profit pertaining to said share, in the partnership.

2. Whether the respondent court erred in concluding that petitioner issued the subject
check knowing at the time of issue that she did not have sufficient funds in or credit
with the drawee bank and without communicating this fact of insufficiency of funds to
the complainant.

Both inquiries boil down into one ultimate issue: Did the respondent court err in affirming
the trial courts judgment that she violated Batas Pambansa Blg. 22?
Considering that penal statutes are strictly construed against the state and liberally in favor
of the accused, it bears stressing that for an act to be punishable under the B.P. 22, it must come
clearly within both the spirit and the letter of the statute.[13] Otherwise, the act has to be declared
outside the laws ambit and a plea of innocence by the accused must be sustained.
The relevant provisions of B.P. 22 state that:
SECTION 1. Checks without sufficient funds. Any person who makes or draws and
issues any check to apply on account or for value, knowing at the time of issue that he
does not have sufficient funds in or credit with the drawee bank for the payment of
such check in full upon its presentment, which check is subsequently dishonored by
the drawee bank for insufficiency of funds or credit or would have been dishonored
for the same reason had not the drawer, without any valid reason, ordered the bank to
stop payment, shall be punished by imprisonment of not less than thirty days but not
more than one (1) year or by a fine of not less than but not more than double the
amount of the check which fine shall in no case exceed Two hundred thousand pesos,
or both such fine and imprisonment at the discretion of the court.

The same penalty shall be imposed upon any person who having sufficient funds in or
credit with the drawee bank when he makes or draws and issues a check, shall fail to
keep sufficient funds or to maintain a credit or to cover the full amount of the check if
presented within a period of ninety (90) days from the date appearing thereon, for
which reason it is dishonored by the drawee bank.

Where the check is drawn by a corporation, company or entity, the person or persons
who actually signed the check in behalf of such drawer shall be liable under this Act.

SECTION 2. Evidence of knowledge of insufficient funds. The making, drawing and

issuance of a check payment of which is refused by the drawee because of insufficient
funds in or credit with such bank, when presented within ninety (90) days from the
date of the check, shall be prima facie evidence of knowledge of such insufficiency of
funds or credit unless such maker or drawer pays the holder thereof the amount due
thereon, or makes arrangements for payment in full by the drawee of such check
within five (5) banking days after receiving notice that such check has not been paid
by the drawee. (Underscoring supplied)

As decided by this Court, the elements of the offense penalized under B.P. 22, are as
follows: (1) the making, drawing and issuance of any check to apply to account or for value; (2)
the knowledge of the maker, drawer or issuer that at the time of issue he does not have sufficient
funds in or credit with the drawee bank for the payment of such check in full upon its
presentment; and (3) subsequent dishonor of the check by the drawee bank
for insufficiency of funds or credit or dishonor for the same reason had not the drawer, without
any valid cause, ordered the bank to stop payment.[14]
In the present case, with regard to the first issue, evidence on record would show that the
subject check was to be funded from receivables to be collected and goods to be sold by the
partnership, and only when such collection and sale were realized.[15] Thus, there is sufficient
basis for the assertion that the petitioner issued the subject check (Metrobank Check No.
103115490 dated October 30, 1986, in the amount of P135,828.87) to evidence only
complainants share or interest in the partnership, or at best, to show her commitment that when
receivables are collected and goods are sold, she would give to private complainant the net
amount due him representing his interest in the partnership. It did not involve a debt of or any
account due and payable by the petitioner.
Two facts stand out. Firstly, three of four checks were properly encashed by complainant;
only one (the third) was not. But eventually even this one was redeemed by petitioner. Secondly,
even private complainant admitted that there was no consideration whatsoever for the issuance of
the check, whose funding was dependent on future sales of goods and receipts of payment of
account receivables.
Now, it could not be denied that though the parties petitioners and complainant had agreed
to dissolve the partnership, such agreement did not automatically put an end to the partnership,
since they still had to sell the goods on hand and collect the receivables from debtors. In short,
they were still in the process of winding up the affairs of the partnership, when the check in
question was issued.
Under the Civil Code, the three final stages of a partnership are (1) dissolution; (2) winding-
up; and (3) termination. These stages are distinguished, to wit:

(1) Dissolution Defined

Dissolution is the change in the relation of the partners caused by any

partner ceasing to be associated in the carrying on of the business
(Art. 1828). It is that point of time the partners cease to carry on the
business together. [Citation omitted]

(2) Winding Up Defined

Winding up is the process of settling business affairs after dissolution.

(NOTE: Examples of winding up: the paying of previous

obligations; the collecting of assets previously demandable; even
new business if needed to wind up, as the contracting with a
demolition company for the demolition of the garage used in a used
car partnership.)

(3) Termination Defined

Termination is the point in time after all the partnership affairs have
been wound up.[16] [Citation omitted] (Underscoring supplied.)
These final stages in the life of a partnership are recognized under the Civil Code that
explicitly declares that upon dissolution, the partnership is not terminated, to wit:

Art. 1828. The dissolution of a partnership is the change in the relation of the partners
caused by any partner ceasing to be associated in the carrying on as distinguished
from the winding up of the business.
Art. 1829. On dissolution the partnership is not terminated, but continues until the
winding up of partnership affairs is completed. (Underscoring supplied.)

The best evidence of the existence of the partnership, which was not yet terminated (though
in the winding up stage), were the unsold goods and uncollected receivables, which were
presented to the trial court. Since the partnership has not been terminated, the petitioner and
private complainant remained as co-partners. The check was thus issued by the petitioner to
complainant, as would a partner to another, and not as payment from a debtor to a creditor.
The more tenable view, one in favor of the accused, is that the check was issued merely to
evidence the complainants share in the partnership property, or to assure the latter that he would
receive in time his due share therein. The alternative view that the check was in consideration of
a buy out is but a theory, favorable to the complainant, but lacking support in the record; and
must necessarily be discarded.
For there is nothing on record which even slightly suggests that petitioner ever became
interested in acquiring, much less keeping, the shares of the complainant. What is very clear
therefrom is that the petitioner exerted her best efforts to sell the remaining goods and to collect
the receivables of the partnership, in order to come up with the amount necessary to satisfy the
value of complainants interest in the partnership at the dissolution thereof. To go by accepted
custom of the trade, we are more inclined to the view that the subject check was issued merely to
evidence complainants interest in the partnership.Thus, we are persuaded that the check was not
intended to apply on account or for value; rather it should be deemed as having been drawn
without consideration at the time of issue.
Absent the first element of the offense penalized under B.P. 22, which is the making,
drawing and issuance of any check to apply on account or for value, petitioners issuance of the
subject check was not an act contemplated in nor made punishable by said statute.
As to the second issue, the Solicitor General contends that under the Bouncing Checks Law,
the elements of deceit and damage are not essential or required to constitute a violation
thereof. In his view, the only essential element is the knowledge on the part of the maker or
drawer of the check of the insufficiency of his/her funds at the time of the issuance of said check.
The Bouncing Checks Law makes the mere act of issuing a bad or worthless check a special
offense punishable by law. Malice or intent in issuing the worthless check is immaterial, the
offense being malum prohibitum,[17] so goes the argument for the public respondents.
But of course this could not be an absolute proposition without descending to absurdity. For
if a check were issued by a kidnap victim to a kidnapper for ransom, it would be absurd to hold
the drawer liable under B.P. 22, if the check is dishonored and unpaid. That would go against
public policy and common sense.
Public respondents further contend that since petitioner issued the check in favor of
complainant Alarilla and when notified that it was returned for insufficiency of funds, failed to
make good the check, then petitioner is liable for violation of B.P. 22.[18] Again, this matter could
not be all that simple. For while the makers knowledge of the insufficiency of funds is legally
presumed from the dishonor of his checks for insufficiency of funds,[19] this presumption is
In the instant case, there is only a prima facie presumption which did not preclude the
presentation of contrary evidence.[20] In fact, such contrary evidence on two points could be
gleaned from the record concerning (1) lack of actual knowledge of insufficiency of funds; and
(2) lack of adequate notice of dishonor.
Noteworthy for the defense, knowledge of insufficiency of funds or credit in the drawee
bank for the payment of a check upon its presentment is an essential element of the offense.[21] It
must be proved, particularly where the prima facie presumption of the existence of this element
has been rebutted. The prima facie presumption arising from the fact of drawing, issuing or
making a check, the payment of which was subsequently refused for insufficiency of funds is,
moreover, not sufficient proof of guilt by the issuer.
In the case of Nieva v. Court of Appeals,[22] it was held that the subsequent dishonor of the
subject check issued by accused merely engendered the prima facie presumption that she knew
of the insufficiency of funds, but did not render the accused automatically guilty under B.P.

The prosecution has a duty to prove all the elements of the crime, including the acts
that give rise to the prima facie presumption; petitioner, on the other hand, has a right
to rebut the prima facie presumption.Therefore, if such knowledge of insufficiency of
funds is proven to be actually absent or non-existent, the accused should not be held
liable for the offense defined under the first paragraph of Section 1 of B.P.
22. Although the offense charged is a malum prohibitum, the prosecution is not
thereby excused from its responsibility of proving beyond reasonable doubt all the
elements of the offense, one of which is knowledge of the insufficiency of funds.

Section 1 of B.P. 22 specifically requires that the person in making, drawing or issuing the
check, be shown that he knows at the time of issue, that he does not have sufficient funds in or
credit with the drawee bank for the payment of such check in full upon its presentment.
In the case at bar, as earlier discussed, petitioner issued the check merely to evidence the
proportionate share of complainant in the partnership assets upon its dissolution. Payment of that
share in the partnership was conditioned on the subsequent realization of profits from the unsold
goods and collection of the receivables of the firm. This condition must be satisfied or complied
with before the complainant can actually encash the check. The reason for the condition is that
petitioner has no independent means to satisfy or discharge the complainants share, other than by
the future sale and collection of the partnership assets. Thus, prior to the selling of the goods and
collecting of the receivables, the complainant could not, as of yet, demand his proportionate
share in the business. This situation would hold true until after the winding up, and subsequent
termination of the partnership. For only then, when the goods were already sold and receivables
paid that cash money could be availed of by the erstwhile partners.
Complainant did not present any evidence that petitioner signed and issued four checks
actually knowing that funds therefor would be insufficient at the time complainant would present
them to the drawee bank. For it was uncertain at the time of issuance of the checks whether the
unsold goods would have been sold, or whether the receivables would have been collected by the
time the checks would be encashed. As it turned out, three were fully funded when presented to
the bank; the remaining one was settled only later on.
Since petitioner issued these four checks without actual knowledge of the insufficiency of
funds, she could not be held liable under B.P. 22 when one was not honored right away. For it is
basic doctrine that penal statutes such as B.P. 22 must be construed with such strictness as to
carefully safeguard the rights of the defendant x x x.[24] The element of knowledge of
insufficiency of funds has to be proved by the prosecution; absent said proof, petitioner could not
be held criminally liable under that law. Moreover, the presumption of prima facie knowledge of
such insufficiency in this case was actually rebutted by petitioners evidence.
Further, we find that the prosecution also failed to prove adequate notice of dishonor of the
subject check on petitioners part, thus precluding any finding of prima facie evidence of
knowledge of insufficiency of funds. There is no proof that notice of dishonor was actually sent
by the complainant or by the drawee bank to the petitioner. On this point, the record is bereft of
evidence to the contrary.
But in fact, while the subject check initially bounced, it was later made good by
petitioner. In addition, the terms of the parties compromise agreement, entered into during the
pendency of this case, effectively invalidates the allegation of failure to pay or to make
arrangement for the payment of the check in full. Verily, said compromise agreement constitutes
an arrangement for the payment in full of the subject check.
The absence of notice of dishonor is crucial in the present case. As held by this Court in
prior cases:

Because no notice of dishonor was actually sent to and received by the petitioner,
the prima facie presumption that she knew about the insufficiency of funds cannot
apply. Section 2 of B.P. 22 clearly provides that this presumption arises not from the
mere fact of drawing, making and issuing a bum check; there must also be a showing
that, within five banking days from receipt of the notice of dishonor, such maker or
drawer failed to pay the holder of the check the amount due thereon or to make
arrangement for its payment in full by the drawee of such check.[25] [Underscoring

The absence of a notice of dishonor necessarily deprives an accused an opportunity to

preclude a criminal prosecution. Accordingly, procedural due process clearly enjoins
that a notice of dishonor be actually served on petitioner. Petitioner has a right to
demand and the basic postulates of fairness require that the notice of dishonor be
actually sent to and received by her to afford her the opportunity to avert prosecution
under B.P. 22.[26]

Further, what militates strongly against public respondents stand is the fact that petitioner
repeatedly notified the complainant of the insufficiency of funds. Instructive is the following
pronouncement of this Court in Magno v. Court of Appeals:
Furthermore, the element of knowing at the time of issue that he does not have
sufficient funds in or credit with the drawee bank for the payment of such check in
full upon its presentment, which check is subsequently dishonored by the drawee bank
for insufficiency of funds or credit or would have been dishonored for the same reason
x x x is inversely applied in this case. From the very beginning, petitioner never hid
the fact that he did not have the funds with which to put up the warranty deposit and
as a matter of fact, he openly intimated this to the vital conduit of the transaction, Joey
Gomez, to whom petitioner was introduced by Mrs. Teng. It would have been
different if this predicament was not communicated to all the parties he dealt with
regarding the lease agreement the financing of which was covered by L.S. Finance

In the instant case, petitioner intimated to private complainant the possibility that funds
might be insufficient to cover the subject check, due to the fact that the partnerships goods were
yet to be sold and receivables yet to be collected.
As Magno had well observed:

For all intents and purposes, the law was devised to safeguard the interest of the
banking system and the legitimate public checking account user. It did not intend to
shelter or favor nor encourage users of the system to enrich themselves through
manipulations and circumvention of the noble purpose and objective of the law. Least
should it be used also as a means of jeopardizing honest-to-goodness transactions with
some color of get-rich scheme to the prejudice of well-meaning businessmen who are
the pillars of society.


Thus, it behooves upon a court of law that in applying the punishment imposed upon
the accused, the objective of retribution of a wronged society, should be directed
against the actual and potential wrongdoers. In the instant case, there is no doubt that
petitioners four (4) checks were used to collateralize an accommodation, and not to
cover the receipt of an actual account or credit for value as this was absent, and
therefore petitioner should not be punished for mere issuance of the checks in
question. Following the aforecited theory, in petitioners stead the potential wrongdoer,
whose operation could be a menace to society, should not be glorified by convicting
the petitioner.[28]

Under the circumstances obtaining in this case, we find the petitioner to have issued the
check in good faith, with every intention of abiding by her commitment to return, as soon as
able, the investments of complainant in the partnership. Evidently, petitioner issued the check
with benign considerations in mind, and not for the purpose of committing fraud, deceit, or
violating public policy
To recapitulate, we find the petition impressed with merit. Petitioner may not be held liable
for violation of B.P. 22 for the following reasons: (1) the subject check was not made, drawn and
issued by petitioner in exchange for value received as to qualify it as a check on account or for
value; (2) there is no sufficient basis to conclude that petitioner, at the time of issue of the check,
had actual knowledge of the insufficiency of funds; and (3) there was no notice of dishonor of
said check actually served on petitioner, thereby depriving her of the opportunity to pay or make
arrangements for the payment of the check, to avoid criminal prosecution.
Having resolved the foregoing principal issues, and finding the petition meritorious, we no
longer need to pass upon the validity and legality or necessity of the purported compromise
agreement on civil liability between the petitioner and the complainant.
WHEREFORE, the instant petition is hereby GRANTED AND THE PETITIONER
ACQUITTED. The Decision of the respondent Court of Appeals in CA-G.R. CR No. 11960 is
hereby REVERSED and the Decision of Regional Trial Court in Criminal Case No. 1395-M-88
is hereby SET ASIDE.
Narvasa, C.J., Regalado, Davide, Jr., Romero, Bellosillo, Melo, Puno, Vitug, Kapunan,
Panganiban, Martinez, and Purisima, JJ., concur.
Mendoza, J., no part, being ponente of appealed decision.

G.R. No. 17024 March 24, 1922

DOMINGO BEARNEZA, plaintiff-appelle,

BALBINO DEQUILLA, defendant-appellant.

C. Lozano and Cecilio I. Lim for appellant.

Montinola, Montinola & Hontiveros for appellee.


In the year 1903, Balbino Dequilla, the herein defendant, and Perpetua Bearneza formed a
partnership for the purpose of exploiting a fish pond situated in the barrio of Talisay, municipality of
Barotac Nuevo, Province of Iloilo, Perpetua obligating herself to contribute to the payment of the
expenses of the business, which obligation she made good, and both agreeing to divide the profits
between themselves, which they had been doing until the death of the said Perpetua in the year

The deceased left a will in one of the clauses of which she appointed Domingo Bearnez, the herein
plaintiff, as her heir to succeed to all her rights and interests in the fish pond in question.

Demand having been made upon Balbino Dequilla by Domingo Bearneza for the delivery of the part
of the fish pond belonging to his decedent, Perpetua, and delivery having been refused, Domingo
Bearneza brought this action to recover said part of the fish pond belonging to his decedent,
Perpetua, and delivery having been refused, Domingo Bearneza brought this action recover said
part of the fish pond and one-half of the profits received by the defendant from the fish pond from the
year 1913 to 1919, as damages (the amended complaint was filed on April 12, 1920), amounting,
according to plaintiff, to the sum of thirteen thousand one hundred pesos (13,100).

In his answer, the defendant denies generally and specifically the allegations of the complaint, and
alleges, as special defense, that "the formation of the supposed partnership between the plaintiff and
the defendant for the exploitation of the aforesaid fish pond was not carried into effect, on account of
the plaintiff having refused to defray the expenses of reconstruction and exploitation of said fish
pond." As another special defense, the defendant alleges "that in the event that the court should
hold the plaintiff to be entitled to the undivided one-half of the fish pond, claimed in the complaint,
the plaintiff's action has prescribed, the time for bringing the same having elapsed."

Proceedings having been held as usual, the court below rendered judgment, declaring the plaintiff
owner of one-half of the fish pond, which was composed of the portions known as "Alimango" and
"Dalusan," but without awarding him any of the damages claimed by him, the same not having been
proven, in the opinion of the court, and ordering the defendant to pay the costs.

From this judgment the defendant appeals, making various assignments of error. The plaintiff did not
appeal from that part of the judgment denying his claim for damages; hence the only question we
are called upon to decide is whether or not the plaintiff has any right to maintain an action for the
recovery of one-half of the said fish pond.

The partnership formed by Perpetua Bearneza and Balbino Dequilla, as to the existence of which
the proof contained in the record is conclusive and there is no dispute, was of a civil nature. It was a
particular partnership, as defined in article 1678 of the Civil Code, it having had for its subject-matter
a specified thing, to with, the exploitation of the aforementioned fish pond. Although, as the trial court
says in its decision, the defendant, in his letters to Perpetua or her husband, makes reference to the
fish pond, calling it "our," or "your fish pond," this reference cannot be held to include the land on
which the said fish pond was built. It has not been proven that Perpetua Bearneza participated in the
ownership of said land, and Exhibits 2 and 3 of the defendant show that he has been paying, as
exclusive owner of the fish pond, the land tax thereon, although in Exhibit X he says that the said
land belongs to the State. The conclusion, therefore, from the evidence is that the land on which the
fish pond was constructed did not constitute a part of the subject- matter of the aforesaid

Now, this partnership not having been organized in the form of a mercantile partnership, and,
therefore, the provisions of the Code of Commerce not being applicable thereto (article 1670 of the
Civil Code), it was dissolved by the death of Perpetua Bearneza, and falls under the provisions of
article 1700, subsection 3, of the same Code, and not under the exception established in the last
paragraph of said article 1700 of the Civil Code.

Neither can it be maintained that the partnership continued to exist after the death of Perpetua,
inasmuch as it does not appear that any stipulation to that effect has ever been made by her and the
defendant, pursuant to the provisions of article 1704 of the Code last cited.

The partnership having been dissolved by the death of Perpetua Bearneza, its subsequent legal
status was that of a partnership in liquidation, and the only rights inherited by her testamentary heir,
the herein plaintiff, were those resulting from the said liquidation in favor of the deceased partner,
and nothing more. Before this liquidation is made, which up to the present has not been effected, it is
impossible to determine what rights or interests, if any, the deceased had, the partnership bond
having been dissolved.
There is no sufficient ground for holding that a community of property existed between the plaintiff
and the defendant, it not being known whether the deceased still had any interest in the partnership
property which could have been transmitted by will to the plaintiff. There being no community of
property, article 395 of the Civil Code cited by the plaintiff in support of his contention can have no
application to the case at bar.

Neither can it be said that the partnership continued between the plaintiff and the defendant. It is true
that the latter's act in requiring the heirs of Perpetua to contribute to the payment of the expenses of
exploitation of the aforesaid fishing industry was an attempt to continue the partnership, but it is also
true that neither the said heirs collectively, nor the plaintiff individually, took any action in response to
that requirement, nor made any promise to that effect, and therefore no new contract of partnership

We find that the plaintiff has not sufficiently shown his right of action.

The judgment appealed from is modified, the same being affirmed insofar as it denies the plaintiff's
claim for damages, and reversed insofar as it declares the said plaintiff owner of one-half of the fish
pond, "Alimango" and "Dalusan," here in dispute.

No special finding as to costs is made. So ordered.

Araullo, C.J., Malcolm, Avancea, Villamor, Ostrand and Johns, JJ., concur.

G.R. No. L-11840 July 26, 1960


GOQUIOLAY, plaintiffs-appellants,
WASHINGTON Z. SYCIP, ET AL., defendants-appellees.

Jose C. Colayco, Manuel O. Chan and Padilla Law Offices for appellants.
Sycip, Quisumbing, Salazar and Associates for appellees.

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

Direct appeal from the decision of the Court of First Instance of Davao (the amount involved being
more than P200,00) dismissing the plaintiffs-appellants' complaint.

From the stipulation of facts of the parties and the evidence on record, it would appear that on May
29, 1940, Tan Sin An and Antonio C. Goquiolay", entered into a general commercial partnership
under the partnership name "Tan Sin An and Antonio C. Goquiolay", for the purpose in dealing in
real state. The partnership had a capital of P30,000.00, P18,000.00 of which was contributed by
Goquiolay and P12,000.00 by Tan Sin An. The agreement lodge upon Tan Sin An the sole
management of the partnership affairs, stipulating that

III. The co-partnership shall be composed of said Tan Sin An as sole managing and partner
(sic), and Antonio C. Goquiolay as co-partner.
IV. Vhe affairs of co-partnership shall be managed exclusively by the managing and partner
(sic) or by his authorized agent, and it is expressly stipulated that the managing and partner
(sic) may delegate the entire management of the affairs of the co-partnership by irrevocable
power of attorney to any person, firm or corporation he may select upon such terms as
regards compensation as he may deem proper, and vest in such persons, firm or corporation
full power and authority, as the agent of the co-partnership and in his name, place and stead
to do anything for it or on his behalf which he as such managing and partner (sic) might do or
cause to be done.

V. The co-partner shall have no voice or participation in the management of the affairs of the
co-partnership; but he may examine its accounts once every six (6) months at any time
during ordinary business hours, and in accordance with the provisions of the Code of
Commerce. (Article of Co-Partnership).

The lifetime of the partnership was fixed at ten (10) years and also that

In the event of the death of any of the partners at any time before the expiration of said term,
the co-partnership shall not be dissolved but will have to be continued and the deceased
partner shall be represented by his heirs or assigns in said co-partnership (Art. XII, Articles of

However, the partnership could be dissolved and its affairs liquidated at any time upon mutual
agreement in writing of the partners (Art. XIII, articles of Co-Partnership).

On May 31, 1940, Antonio Goquiolay executed a general power of attorney to this effect:

That besides the powers and duties granted the said Tan Sin An by the articles of co-
partnership of said co-partnership "Tan Sin An and Antonio Goquiolay", that said Tan Sin An
should act as the Manager for said co-partnership for the full period of the term for which
said co-partnership was organized or until the whole period that the said capital of
P30,000.00 of the co-partnership should last, to carry on to the best advantage and interest
of the said co-partnership, to make and execute, sign, seal and deliver for the co-partnership,
and in its name, all bills, bonds, notes, specialties, and trust receipts or other instruments or
documents in writing whatsoever kind or nature which shall be necessary to the proper
conduction of the said businesses, including the power to mortgage and pledge real and
personal properties, to secure the obligation of the co-partnership, to buy real or personal
properties for cash or upon such terms as he may deem advisable, to sell personal or real
properties, such as lands and buildings of the co-partnership in any manner he may deem
advisable for the best interest of said co-partnership, to borrow money on behalf of the co-
partnership and to issue promissory notes for the repayment thereof, to deposit the funds of
the co-partnership in any local bank or elsewhere and to draw checks against funds so
deposited ... .

On May 29, 1940, the plaintiff partnership "Tan Sin An and Goquiolay" purchased the three (3)
parcels of land, known as Lots Nos. 526, 441 and 521 of the Cadastral Survey of Davao, subject-
matter of the instant litigation, assuming the payment of a mortgage obligation of P25,000.00,
payable to "La Urbana Sociedad Mutua de Construccion y Prestamos" for a period of ten (10) years,
with 10% interest per annum. Another 46 parcels were purchased by Tan Sin An in his individual
capacity, and he assumed payment of a mortgage debt thereon for P35,000.00 with interest. The
downpayment and the amortization were advanced by Yutivo and Co., for the account of the
On September 25, 1940, the two separate obligations were consolidated in an instrument executed
by the partnership and Tan Sin An, whereby the entire 49 lots were mortgaged in favor of the "Banco
Hipotecario de Filipinas" (as successor to "La Urbana") and the covenantors bound themselves to
pay, jointly and severally, the remaining balance of their unpaid accounts amounting to P52,282.80
within eight 8 years, with 8% annual interest, payable in 96 equal monthly installments.

On June 26, 1942, Tan Sin An died, leaving as surviving heirs his widow, Kong Chai Pin, and four
minor children, namely: Tan L. Cheng, Tan L. Hua, Tan C. Chiu and Tan K. Chuan. Defendant Kong
Chai Pin was appointed administratrix of the intestate estate of her deceased husband.

In the meantime, repeated demands for payment were made by the Banco Hipotecario on the
partnership and on Tan Sin An. In March, 1944, the defendant Sing Yee and Cuan, Co., Inc., upon
request of defendant Yutivo Sans Hardware Co., paid the remaining balance of the mortgage debt,
and the mortgage was cancelled.

Then in 1946, Yutivo Sons Hardware Co. and Sing Yee and Cuan Co., Inc. filed their claims in the
intestate proceedings of Tan Sin An for P62,415.91 and P54,310.13, respectively, as alleged
obligations of the partnership "Tan Sin An and Antonio C. Goquiolay" and Tan Sin An, for advances,
interest and taxes paid in amortizing and discharging their obligations to "La Urbana" and the "Banco
Hipotecario". Disclaiming knowledge of said claims at first, Kong Chai Pin later admitted the claims
in her amended answer and they were accordingly approved by the Court.

On March 29, 1949, Kong Chai Pin filed a petition with the probate court for authority to sell all the
49 parcels of land to Washington Z, Sycip and Betty Y. Lee, for the purpose preliminary of settling
the aforesaid debts of Tan Sin An and the partnership. Pursuant to a court order of April 2, 1949, the
administratrix executed on April 4, 1949, a deed of sale1 of the 49 parcels of land to the defendants
Washington Sycip and Betty Lee in consideration of P37,000.00 and of vendees' assuming
payments of the claims filed by Yutivo Sons Hardware Co. and Sing Yee and Cuan Co., Inc. Later, in
July, 1949, defendants Sycip and Betty Lee executed in favor of the Insular Development Co., Inc. a
deed of transfer covering the said 49 parcels of land.

Learning about the sale to Sycip and Lee, the surviving partner Antonio Goquiolay filed, on or about
July 25, 1949, a petition in the intestate proceedings seeking to set aside the order of the probate
court approving the sale in so far as his interest over the parcels of land sold was concerned. In its
order of December 29, 1949, the probate court annulled the sale executed by the administratrix with
respect to the 60% interest of Antonio Goquiolay over the properties sold. Kong Chai Pin appealed
to the Court of Appeals, which court later certified the case to us (93 Phil., 413; 49 Off. Gaz. [7]
2307). On June 30, 1953, we rendered decision setting aside the orders of the probate court
complained of and remanding the case for new trial, due to the non-inclusion
of indispensable parties. Thereafter, new pleadings were filed.

The second amended complaint in the case at bar prays, among other things, for the annulment of
the sale in favor of Washington Sycip and Betty Lee, and their subsequent conveyance in favor of
Insular Development Co., Inc., in so far as the three (3) lots owned by the plaintiff partnership are
concerned. The answer averred the validity of the sale by Kong Chai Pin as successor partner, in
lieu of the late Tan Sin An. After hearing, the complaint was dismissed by the lower court in its
decision dated October 30, 1956; hence, this appeal taken directly to us by the plaintiffs, as the
amount involved is more than P200,000.00. Plaintiffs-appellants assign as errors that

I The lower court erred in holding that Kong Chai Pin became the managing partner of the
partnership upon the death of her husband, Tan Sin An, by virtue of the articles of
Partnership executed between Tan Sin An and Antonio Goquiolay, and the general power of
attorney granted by Antonio Goquiolay.

II The lower court erred in holding that Kong Chai Pin could act alone as sole managing
partner in view of the minority of the other heirs.

III The lower court erred in holding that Kong Chai Pin was the only heir qualified to act as
managing partner.

IV The lower court erred in holding that Kong Chai Pin had authority to sell the partnership
properties by virtue of the articles of partnership and the general power of attorney granted to
Tan Sin An in order to pay the partnership indebtedness.

V The lower court erred in finding that the partnership did not pay its obligation to the
Banco Hipotecario.

VI The lower court erred in holding that the consent of Antonio Goquiolay was not
necessary to consummate the sale of the partnership properties.

VII The lower court erred in finding that Kong Chai Pin managed the business of the
partnership after the death of her husband, and that Antonio Goquiolay knew it.

VIII The lower court erred in holding that the failure of Antonio Goquiolay to oppose the
management of the partnership by Kong Chai Pin estops him now from attacking the validity
of the sale of the partnership properties.

IX The lower court erred in holding that the buyers of the partnership properties acted in
good faith.

X The lower court erred in holding that the sale was not fraudulent against the partnership
and Antonio Goquiolay.

XI The lower court erred in holding that the sale was not only necessary but beneficial to
the partnership.

XII The lower court erred in dismissing the complaint and in ordering Antonio Goquiolay to
pay the costs of suit.

There is a merit in the contention that the lower court erred in holding that the widow, Kong Chai Pin,
succeeded her husband, Tan Sin An, in the sole management of the partnership, upon the latter's
death. While, as we previously stated in our narration of facts, the Articles of Co-Partnership and the
power of attorney executed by Antonio Goquiolay, conferred upon Tan Sin An the exclusive
management of the business, such power, premised as it is upon trust and confidence, was a mere
personal right that terminated upon Tan's demise. The provision in the articles stating that "in the
event of death of any one of the partners within the 10-year term of the partnership, the deceased
partner shall be represented by his heirs", could not have referred to the managerial right given to
Tan Sin An; more appropriately, it related to the succession in the proprietary interest of each
partner. The covenant that Antonio Goquiolay shall have no voice or participation in the
management of the partnership, being a limitation upon his right as a general partner, must be held
coextensive only with Tan's right to manage the affairs, the contrary not being clearly apparent.
Upon the other hand, consonant with the articles of co-partnership providing for the continuation of
the firm notwithstanding the death of one of the partners, the heirs of the deceased, by never
repudiating or refusing to be bound under the said provision in the articles, became individual
partners with Antonio Goquiolay upon Tan's demise. The validity of like clauses in partnership
agreements is expressly sanctioned under Article 222 of the Code of Commerce.2

Minority of the heirs is not a bar to the application of that clause in the articles of co-partnership (2
Vivante, Tratado de Derecho Mercantil, 493; Planiol, Traite Elementaire de Droit Civil, English
translation by the Louisiana State Law Institute, Vol. 2, Pt. 2, p. 177).

Appellants argue, however, that since the "new" members' liability in the partnership was limited
merely to the value of the share or estate left by the deceased Tan Sin An, they became no more
than limited partners and, as such, were disqualified from the management of the business under
Article 148 of the Code of Commerce. Although ordinarily, this effect follows from the continuance of
the heirs in the partnership,3 it was not so with respect to the widow Kong Chai Pin, who, by her
affirmative actions, manifested her intent to be bound by the partnership agreement not only as a
limited but as a general partner. Thus, she managed and retained possession of the partnership
properties and was admittedly deriving income therefrom up to and until the same were sold to
Washington Sycip and Betty Lee. In fact, by executing the deed of sale of the parcels of land in
dispute in the name of the partnership, she was acting no less than as a managing partner. Having
thus preferred to act as such, she could be held liable for the partnership debts and liabilities as a
general partner, beyond what she might have derived only from the estate of her deceased husband.
By allowing her to retain control of the firm's property from 1942 to 1949, plaintiff estopped himself to
deny her legal representation of the partnership, with the power to bind it by the proper contracts.

The question now arises as to whether or not the consent of the other partners was necessary to
perfect the sale of the partnership properties to Washington Sycip and Betty Lee. The answer is, we
believe, in the negative. Strangers dealing with a partnership have the right to assume, in the
absence of restrictive clauses in the co-partnership agreement, that every general partner has power
to bind the partnership, specially those partners acting with ostensible authority. And so, we held in
one case:

. . . Third persons, like the plaintiff, are not bound in entering into a contract with any of the
two partners, to ascertain whether or not this partner with whom the transaction is made has
the consent of the other partner. The public need not make inquiries as to the agreements
had between the partners. Its knowledge is enough that it is contracting with the partnership
which is represented by one of the managing partners.

"There is a general presumption that each individual partner is an agent for the firm and that
he has authority to bind the firm in carrying on the partnership transactions." [Mills vs. Riggle,
112 Pac., 617]

"The presumption is sufficient to permit third persons to hold the firm liable on transactions
entered into by one of the members of the firm acting apparently in its behalf and within the
scope of his authority." [Le Roy vs. Johnson, 7 U.S. Law, Ed., 391] (George Litton vs. Hill &
Ceron, et al., 67 Phil., 513-514).

We are not unaware of the provision of Article 129 of the Code of Commerce to the effect that

If the management of the general partnership has not been limited by special agreement to
any of the members, all shall have the power to take part in the direction and management of
the common business, and the members present shall come to an agreement for all
contracts or obligations which may concern the association. (Emphasis supplied)

but this obligation is one imposed by law on the partners among themselves, that does not
necessarily affect the validity of the acts of a partner, while acting within the scope of the ordinary
course of business of the partnership, as regards third persons without notice. The latter may
rightfully assume that the contracting partner was duly authorized to contract for and in behalf of the
firm and that, furthermore, he would not ordinarily act to the prejudice of his co-partners. The regular
course of business procedure does not require that each time a third person contracts with one of
the managing partners, he should inquire as to the latter's authority to do so, or that he should first
ascertain whether or not the other partners had given their consent thereto. In fact, Article 130 of the
same Code of Commerce provides that even if a new obligation was contracted against the express
will of one of the managing partners, "it shall not be annulled for such reason, and it shall produce its
effects without prejudice to the responsibility of the member or members who contracted it, for the
damages they may have caused to the common fund."

Cesar Vivante (2 Tratado de Derecho Mercantil, pp. 114-115) points out:

367. Primera hipotesis. A falta de pactos especiales, la facultad de administrar

corresponde a cada socio personalmente. No hay que esperar ciertamente concordia con
tantas cabezas, y para cuando no vayan de acuerdo, la disciplina del Codigo no ofrece un
sistema eficaz que evite los inconvenientes. Pero, ante el silencio del contrato, debia quiza
el legislador privar de la administracion a uno de los socios en beneficio del otro? Seria una
arbitrariedad. Debera quiza declarar nula la Sociedad que no haya elegido Administrador? El
remedio seria peor que el mal. Debera, tal vez, pretender que todos los socios concurran en
todo acto de la Sociedad? Pero este concurso de todos habria reducido a la impotencia la
administracion, que es asunto d todos los dias y de todas horas. Hubieran sido
disposiciones menos oportunas que lo adoptado por el Codigo, el cual se confia al espiritu
de reciproca confianza que deberia animar la colaboracion de los socios, y en la ley
inflexible de responsabilidad que implica comunidad en los intereses de los mismos.

En esta hipotesis, cada socio puede ejercer todos los negocios comprendidos en el contrato
social sin dar de ello noticia a los otros, porque cada uno de ellos ejerce la administracion en
la totalidad de sus relaciones, salvo su responsabilidad en el caso de una administracion
culpable. Si debiera dar noticia, el beneficio de su simultania actividad, frecuentemente
distribuida en lugares y en tiempos diferentes, se echaria a perder. Se objetara el que de
esta forma, el derecho de oposicion de cada uno de los socios puede quedar frustrado. Pero
se puede contestar que este derecho de oposicion concedido por la ley como un remedio
excepcional, debe subordinarse al derecho de ejercer el oficio de Administrador, que el
Codigo concede sin limite: "se presume que los socios se han concedido reciprocamente la
facultad de administrar uno para otro." Se haria precipitar esta hipotesis en la otra de una
administracion colectiva (art. 1,721, Codigo Civil) y se acabaria con pedir el consentimiento,
a lo menos tacito, de todos los socios lo que el Codigo excluye ........, si se obligase al
socio Administrador a dar noticia previa del negocio a los otros, a fin de que pudieran
oponerse si no consintieran.

Commenting on the same subject, Gay de Montella (Codigo de Comercio, Tomo II, 147-148) opines:

Para obligar a las Compaias enfrente de terceros (art. 128 del Codigo), no es bastante que
los actos y contratos hayan sido ejecutados por un socio o varios en nombre colectivo, sino
que es preciso el concurso de estos dos elementos, uno, que el socio o socios tengan
reconocida la facultad de administrar la Compaia, y otro, que el acto o contrato haya sido
ejecutado en nombre de la Sociedad y usando de su firma social. Asi se que toda obligacion
contraida bajo la razon social, se presume contraida por la Compaia. Esta presunion es
impuesta por motivos de necesidad practica. El tercero no puede cada vez que trata con la
Compaia, inquirir si realmente el negocio concierne a la Sociedad. La presuncion es juris
tantum y no juris et de jure, de modo que si el gerente suscribe bajo la razon social una
obligacion que no interesa a la Sociedad, este podra rechazar la accion del tercero
probando que el acreedor conocia que la obligacion no tenia ninguna relacion con ella. Si
tales actos y contratos no comportasen la concurrencia de ambos elementos, seria nulos y
podria decretarse la responsabilidad civil o penal contra sus autores.

En el caso que tales actos o contratos hayan sido tacitamente aprobados por la Compaia,
o contabilizados en sus libros, si el acto o contrato ha sido convalidado sin protesta y se
trata de acto o contrato que ha producido beneficio social, tendria plena validez, aun cuando
le faltase algunos o ambos de aquellos requisitos antes sealados.

Cuando los Estatutos o la escritura social no contienen ninguna clausula relativa al

nombramiento o designacion de uno o mas de un socio para administrar la Compaia (art.
129 del Codigo) todos tienen por un igual el derecho de concurir a la decision y manejo de
los negocios comunes. . . .

Although the partnership under consideration is a commercial partnership and, therefore, to be

governed by the Code of Commerce, the provisions of the old Civil Code may give us some light on
the right of one partner to bind the partnership. States Art. 1695 thereof:

Should no agreement have been made with respect to the form of management, the
following rules shall be observed:

1. All the partners shall be considered agents, and whatever any one of the may do
individually shall bind the partnership; but each one may oppose any act of the others before
it has become legally binding.

The records fail to disclose that appellant Goquiolay made any opposition to the sale of the
partnership realty to Washington Z. Sycip and Betty Lee; on the contrary, it appears that he
(Goquiolay) only interposed his objections after the deed of conveyance was executed and approved
by the probate court, and, consequently, his opposition came too late to be effective.

Appellants assails the correctness of the amounts paid for the account of the partnership as found
by the trial court. This question, however, need not be resolved here, as in the deed of conveyance
executed by Kong Chai Pin, the purchasers Washington Sycip and Betty Lee assumed, as part
consideration of the purchase, the full claims of the two creditors, Sing Yee and Cuan Co., Inc. and
Yutivo Sons Hardware Co.

Appellants also question the validity of the sale covering the entire firm realty, on the ground that it,
in effect, threw the partnership into dissolution, which requires consent of all the partners. This view
is untenable. That the partnership was left without the real property it originally had will not work its
dissolution, since the firm was not organized to exploit these precise lots but to engage in buying
and selling real estate, and "in general real estate agency and brokerage business". Incidentally, it is
to be noted that the payment of the solidary obligation of both the partnership and the late Tan Sin
An, leaves open the question of accounting and contribution between the co-debtors, that should be
ventilated separately.
Lastly, appellants point out that the sale of the partnership properties was only a fraudulent device
by the appellees, with the connivance of Kong Chai Pin, to ease out Antonio Goquiolay from the
partnership. The "devise", according to the appellants, started way back sometime in 1945, when
one Yu Khe Thai sounded out Antonio Goquiolay on the possibility of selling his share in the
partnership; and upon his refusal to sell, was followed by the filing of the claims of Yutivo Sons
Hardware Co. and Sing Yee and Cuan Co., Inc. in the intestate estate proceedings of Tan Sin An.
As creditors of Tan Sin An and the plaintiff partnership (whose liability was alleged to be joint and
several), Yutivo Sons Hardware Co., and Sing Yee Cuan Co., Inc. had every right to file their claims
in the intestate proceedings. The denial of the claims at first by Kong Chai Pin ( for lack of sufficient
knowledge) negatives any conspiracy on her part in the alleged fraudulent scheme, even if she
subsequently decided to admit their validity after studying the claims and finding it best to admit the
same. It may not be amiss to remark that the probate court approved the questioned claims.

There is complete failure of proof, moreover, that the price for which the properties were sold was
unreasonably low, or in any way unfair, since appellants presented no evidence of the market value
of the lots as of the time of their sale to appellees Sycip and Lee. The alleged value of P31,056.58 in
May of 1955 is no proof of the market value in 1949, specially because in the interval, the new
owners appear to have converted the land into a subdivision, which they could not do without
opening roads and otherwise improving the property at their own expense. Upon the other hand,
Kong Chai Pin hardly had any choice but to execute the questioned sale, as it appears that the
partnership had neither cash nor other properties with which to pay its obligations. Anyway, we
cannot consider seriously the inferences freely indulged in by the appellants as allegedly indicating
fraud in the questioned transactions, leading to the conveyance of the lots in dispute to the appellee
Insular Development Co., Inc.

Wherefore, finding no reversible error in the appealed judgment, we affirm the same, with costs
against appellant Antonio Goquiolay.

Padilla, Montemayor, Bautista Angelo, Labrador, Concepcion, Endencia, Barrera, and Gutierrez
David, JJ., concur.


December 10, 1963

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

The matter now pending is the appellant's motion for reconsideration of our main decision, wherein
we have upheld the validity of the sale of the lands owned by the partnership Goquiolay & Tan Sin
An, made in 1949 by the widow of the managing partner, Tan Sin An (executed in her dual capacity
of Administratrix of her husband's estate and as partner, in lieu of the husband), in favor of buyers
Washington Sycip and Betty Lee for the following consideration:

Cash paid P37,000.00

Debts assumed by purchase:
To Yutivo 62,415.91
To Sing Yee Cuan & 54,310.13
TOTAL P153,726.04
Appellant Goquiolay, in his motion for reconsideration, insists that, contrary to our holding, Kong
Chai Pin, widow of the deceased partner Tan Sin An, never became more than a limited partner,
incapacitated by law to manage the affairs of the partnership; that the testimony of her witnesses
Young and Lim belies that she took over administration of the partnership property; and that, in any
event, the sale should be set aside because it was executed with the intent to defraud appellant of
his share in the properties sold.

Three things must be always held in mind in the discussion of this motion to reconsider, being basic
and beyond controversy:

(a) That we are dealing here with the transfer of partnership property by one partner, acting in behalf
of the firm, to a stranger. There is no question between partners inter se, and this aspects of the
case was expressly reserved in the main decision of 26 July 1960;

(b) That the partnership was expressly organized "to engage in real estate business, either
by buying and selling real estate". The Article of co-partnership, in fact, expressly provided that:

IV. The object and purpose of the co-partnership are as follows:

1. To engage in real estate business, either by buying and selling real estates; to subdivide
real estates into lots for the purpose of leasing and selling them.;

(c) That the properties sold were not part of the contributed capital (which was in cash) but land
precisely acquired to be sold, although subject a mortgage in favor of the original owners, from
whom the partnership had acquired them.

With these points firmly in mind, let us turn to the points insisted upon by appellant.

It is first averred that there is "not one iota evidence" that Kong Chai Pin managed and retained
possession of the partnership properties. Suffice it to point out that appellant Goquiolay himself
admitted that

. . . Mr. Yu Eng Lai asked me if I can just let Mrs. Kong Chai Pin continue to manage the
properties (as) she had no other means of income. Then I said, because I wanted to help
Mrs. Kong Chai Pin, she could just do it and besides I am not interested in agricultural
lands. I allowed her to take care of the properties in order to help her and because I believe
in God and I wanted to help her.

Q. So the answer to my question is you did not take any steps?

A. I did not.

Q. And this conversation which you had with Mrs. Yu Eng Lai was few months after 1945?

A. In the year 1945. (Emphasis supplied)

The appellant subsequently ratified this testimony in his deposition of 30 June 1956, page 8-9,
wherein he sated:

that plantation was being occupied at that time by the widow, Mrs. Tan Sin An, and of course
they are receiving quite a lot of benefit from that plantation.
Discarding the self-serving expressions, these admissions of Goquiolay are certainly entitled to
greater weight than those of Hernando Young and Rufino Lim, having been made against the party's
own interest.

Moreover, the appellant's reference to the testimony of Hernando Young, that the witness found the
properties "abandoned and undeveloped", omits to mention that said part of the testimony started
with the question:

Now, you said that about 1942 or 1943 you returned to Davao. Did you meet Mrs. Kong Chai
Pin there in Davao at that time?

Similarly, the testimony of Rufino Lim, to the effect that the properties of the partnership were
undeveloped, and the family of the widow (Kong Chai Pin) did not receive any income from the
partnership properties, was given in answer to the question:

According to Mr. Goquiolay, during the Japanese occupation Tan Sin An and his family lived
on the plantation of the partnership and derived their subsistence from that plantation. What
can you say to that? (Dep. 19 July 1956, p. 8)

And also

What can you say so to the development of these other properties of the partnership which
you saw during the occupation?" (Dep., p. 13, Emphasis supplied)

to which witness gave the following answer:

I saw the properties in Mamay still undeveloped. The third property which is in Tigatto is
about eleven (11) hectares and planted with abaca seedlings planted by Mr. Sin An. When I
went there with Hernando Young we saw all the abaca destroyed. The place was occupied
by the Japanese Army. They planted camotes and vegetables to feed the Japanese Army.
Of course they never paid any money to Tan Sin An or his family. (Dep., Lim. pp. 13-14.)
(Emphasis supplied)

Plainly, Both Young and Lim's testimonies do not belie, or contradict, Goquiolay's admission that he
told Mr. Yu Eng Lai that the widow "could just do it" (i e., continue to manage the properties.
Witnesses Lim and Young referred to the period of Japanese occupation; but Goquiolay's authority
was, in fact, given to the widow in 1945, after the occupation.

Again, the disputed sale by the widow took place in 1949. That Kong Chai Pin carried out no acts of
management during the Japanese occupation (1942-1944) does not mean that she did not do so
from 1945 to 1949.

We thus fine that Goquiolay did not merely rely on reports from Lim and Young; he actually
manifested his willingness that the widow should manage the partnership properties. Whether or not
she complied with this authority is a question between her and the appellant, and is not here
involved. But the authority was given, and she did have it when she made the questioned sale,
because it has never revoked.

It is argued that the authority given by Goquiolay to the widow Kong Chai Pin was only
to manage the property, and that it did not include the power to alienate, citing Article 1713 of the
Civil Code of 1889. What this argument overlooks is that the widow was not a mere agent, because
she had become a partner upon her husband's death, as expressly provided by the articles of co-
partnership. Even more, granting that by succession to her husband, Tan Sin An, the widow only a
became the limited partner, Goquiolay's authorization to manage the partnership property was proof
that he considered and recognized her has general partner, at least since 1945. The reason is plain:
Under the law (Article 148, last paragraph, Code of Commerce), appellant could not empower the
widow, if she were only a limited partner, to administer the properties of the firm, even as a mere

Limited partners may not perform any act of administration with respect to the interests of the
co-partnership, not even in the capacity agents of the managing partners.(Emphasis

By seeking authority to manage partnership property, Tan Sin An's widow showed that she desired
to be considered a general partner. By authorizing the widow to manage partnership property (which
a limited partner could not be authorized to do), Goquiolay recognized her as such partner, and is
now in estoppel to deny her position as a general partner, with authority to administer and alienate
partnership property.

Besides, as we pointed out in our main decision, the heir ordinarily (and we did not
say "necessarily") becomes a limited partner for his own protection, because he would normally
prefer to avoid any liability in excess of the value of the estate inherited so as not to jeopardize his
personal assets. But this statutory limitation of responsibility being designed to protect the heir, the
latter may disregard it and instead elect to become a collective or general partner, with all the rights
and privileges of one, and answering for the debts of the firm not only with the inheritance bud also
with the heir's personal fortune. This choice pertains exclusively to the heir, and does not require the
assent of the surviving partner.

It must be remembered that the articles of co-partnership here involved expressly stipulated that:

In that event of the death of any of the partners at any time before the expiration of said term,
the co-partnership shall not be dissolved but will have to be continued and the deceased
partner shall be represented by his heirs or assigns in said co-partnership" (Art. XII, Articles
of Co-Partnership).

The Articles did not provide that the heirs of the deceased would be merely limited partner; on the
contrary they expressly stipulated that in case of death of either partner "the co-partnership ... will
have to be continued" with the heirs or assigns. It certainly could not be continued if it were to be
converted from a general partnership into a limited partnership, since the difference between the two
kinds of associations is fundamental; and specially because the conversion into a limited association
would leave the heirs of the deceased partner without a share in the management. Hence, the
contractual stipulation does actually contemplate that the heirs would become general
partners rather than limited ones.

Of course, the stipulation would not bind the heirs of the deceased partner should they refuse to
assume personal and unlimited responsibility for the obligations of the firm. The heirs, in other
words, can not be compelled to become general partners against their wishes. But because they are
not so compellable, it does not legitimately follow that they may not voluntarily choose to become
general partners, waiving the protective mantle of the general laws of succession. And in the latter
event, it is pointless to discuss the legality of any conversion of a limited partner into a general one.
The heir never was a limited partner, but chose to be, and became, a general partner right at the
It is immaterial that the heirs name was not included in the firm name, since no conversion of status
is involved, and the articles of co-partnership expressly contemplated the admission of the partner's
heirs into the partnership.

It must never be overlooked that this case involves the rights acquired by strangers, and does not
deal with the rights arising between partners Goquiolay and the widow of Tan Sin An. The issues
between the partners inter se were expressly reversed in our main decision. Now, in determining
what kind of partner the widow of partner Tan Sin An had elected to become, strangers had to be
guided by her conduct and actuations and those of appellant Goquiolay. Knowing that by law a
limited partner is barred from managing the partnership business or property, third parties (like the
purchasers) who found the widow possessing and managing the firm property with the acquiescense
(or at least without apparent opposition) of the surviving partners were perfectly justified in assuming
that she had become a general partner, and, therefore, in negotiating with her as such a partner,
having authority to act for, and in behalf of, the firm. This belief, be it noted, was shared even by the
probate court that approved the sale by the widow of the real property standing in the partnership
name. That belief was fostered by the very inaction of appellant Goquiolay. Note that for seven long
years, from partner Tan Sin An's death in 1942 to the sale in 1949, there was more than ample time
for Goquiolay to take up the management of these properties, or at least ascertain how its affairs
stood. For seven years Goquiolay could have asserted his alleged rights, and by suitable notice in
the commercial registry could have warned strangers that they must deal with him alone, as sole
general partner. But he did nothing of the sort, because he was not interested (supra), and he did
not even take steps to pay, or settle, the firm debts that were overdue since before the outbreak of
the last war. He did not even take steps, after Tan Sin An died, to cancel, or modify, the provisions of
the partnership articles that he (Goquiolay) would have no intervention in the management of the
partnership. This laches certainly contributed to confirm the view that the widow of Tan Sin An had,
or was given, authority to manage and deal with the firm's properties, apart from the presumption
that a general partner dealing with partnership property has the requisite authority from his co-
partners (Litton vs. Hill and Ceron, et al., 67 Phil., 513; quoted in our main decision, p. 11).

The stipulation in the articles of partnership that any of the two managing partners may
contract and sign in the name of the partnership with the consent of the other, undoubtedly
creates an obligation between the two partners, which consists in asking the other's consent
before contracting for the partnership. This obligation of course is not imposed upon a third
person who contracts with the partnership. Neither is it necessary for the third person to
ascertain if the managing partner with whom he contracts has previously obtained the
consent of the other. A third person may and has a right to presume that the partner with
whom he contracts has, in the ordinary and natural course of business, the consent of his co-
partner; for otherwise he would not enter into the contract. The third person would naturally
not presume that the partner with whom he enters into the transaction is violating the articles
of partnership, but on the contrary, is acting in accordance therewith. And this finds support
in the legal presumption that the ordinary course of business has been followed (No. 18,
section 334, Code of Civil Procedure), and that the law has been obeyed (No. 31, section
334). This last presumption is equally applicable to contracts which have the force of law
between the parties. (Litton vs. Hill & Ceron, et al., 67 Phil., 509, 516) (Emphasis supplied)

It is next urged that the widow, even as a partner, had no authority to sell the real estate of the firm.
This argument is lamentably superficial because it fails to differentiate between real estate acquired
and held as stock-in-trade and real state held merely as business site (Vivante's "taller o banco
social") for the partnership. Where the partnership business is to deal in merchandise and goods,
i.e., movable property, the sale of its real property (immovables) is not within the ordinary powers of
a partner, because it is not in line with the normal business of the firm. But where the express and
avowed purpose of the partnership is to buy and sell real estate (as in the present case), the
immovables thus acquired by the firm form part of its stock-in-trade, and the sale thereof is in
pursuance of partnership purposes, hence within the ordinary powers of the partner. This distinction
is supported by the opinion of Gay de Montella1, in the very passage quoted in the appellant's motion
for reconsideration:

La enajenacion puede entrar en las facultades del gerente: cuando es conforme a los fines
sociales. Pero esta facultad de enajenar limitada a las ventas conforme a los fines sociales,
viene limitada a los objetos de comecio o a los productos de la fabrica para explotacion de
los cuales se ha constituido la Sociedad. Ocurrira una cosa parecida cuando el objeto de la
Sociedad fuese la compra y venta de inmuebles, en cuyo caso el gerente estaria facultado
para otorgar las ventas que fuere necesario. (Montella) (Emphasis supplied)

The same rule obtains in American law.

In Rosen vs. Rosen, 212 N. Y. Supp. 405, 406, it was held:

a partnership to deal in real estate may be created and either partner has the legal right to
sell the firm real estate

In Chester vs. Dickerson, 54 N. Y. 1, 13 Am. Rep. 550:

And hence, when the partnership business is to deal in real estate, one partner has ample
power, as a general agent of the firm, to enter into an executory contract for the sale of real

And in Rovelsky vs. Brown, 92 Ala. 522, 9 South 182, 25 Am. St., Rep. 83:

If the several partners engaged in the business of buying and selling real estate can not bind
the firm by purchases or sales of such property made in the regular course of business, then
they are incapable of exercising the essential rights and powers of general partners and their
association is not really a partnership at all, but a several agency.

Since the sale by the widow was in conformity with the express objective of the partnership, "to
engage * * * in buying and selling real estate" (Art IV, No. 1, Articles of Copartnership), it can not be
maintained that the sale was made in excess of her powers as general partner.

Considerable stress is laid by appellant in the ruling of the Supreme Court of Ohio in McGrath, et
al., vs. Cowen, et al., 49 N. E., 338. But the facts of that case are vastly different from the one before
us. In the McGrath case, the Court expressly found that:

The firm was then, and for some time had been, insolvent, in the sense that its property was
insufficient to pay its debts, though it still had good credit, and was actively engaged in the
prosecution of its business. On that day, which was Saturday, the plaintiff caused to be
prepared, ready for execution, the four chattel mortgages in question, which cover all the
tangible property then belonging to the firm, including the counters, shelving, and other
furnishings and fixtures necessary for, and used in carrying on, its business, and signed the
same in this form: "In witness whereof, the said Cowen & McGrath, a firm, and Owen
McGrath, surviving partner of said firm, and Owen McGrath, individually, have here-unto set
their hands, this 20th day of May, A. D. 1893. Cowen & McGrath, by Owen McGrath. Owen
McGrath, Surviving partner of Cowen & McGrath. Owen McGrath" At the same time,
the plaintiff had prepared, ready for filing, the petition for the dissolution of the partnership
and appointment of a receiver, which he subsequently filed, as hereinafter stated. On the day
the mortgages were signed, they were placed in the hands of the mortgagees, which was the
first intimation to them that there was any intention to make then. At that time none of the
claims secured by the mortgages were due, except, it may be, a small part of one of them,
and none of the creditors to whom the mortgages were made had requested security, or
were pressing for the payment of their debts. ... The mortgages appear to be without a
sufficient condition of defeasance, and contain a stipulation authorizing the mortgagees to
take immediate possession of the property, which they did as soon as the mortgages were
filed, through the attorney who then represented them, as well as the plaintiff; and the stores
were at once closed, and possession delivered by them to the receiver appointed upon the
filing of the petition. The avowed purpose of the plaintiff in the course pursued by him, was to
terminate the partnership, place its property beyond the control of the firm, and insure the
preference of the mortgages, all of which was known to them at the time: ... . (Cas cit., p.
343, Emphasis supplied)

It is natural that from these facts the Supreme Court of Ohio should draw the conclusion that
conveyances were made with intent to terminate the partnership, and that they were not within the
powers of McGrath as partner. But there is no similarly between those acts and the sale by the
widow of Tan Sin An. In the McGrath case, the sale included even the fixtures used in the business,
in our case, the lands sold were those acquired to be sold. In the McGrath case, none of the
creditors were pressing for payment; in our case, the creditors had been unpaid for more than seven
years, and their claims had been approved by the probate court for payment. In the McGrath case,
the partnership received nothing beyond the discharge of its debts; in the present case, not only
were its debts assumed by the buyers, but the latter paid, in addition, P37,000.00 in cash to the
widow, to the profit of the partnership. Clearly, the McGrath ruling is not applicable.

We will now turn to the question to fraud. No direct evidence of it exists; but appellant points out, as
indicia thereof, the allegedly low price paid for the property, and the relationship between the buyers,
the creditors of the partnership, and the widow of Tan Sin An.

First, as to the price: As already noted, this property was actually sold for a total of P153,726.04, of
which P37,000.00 was in cash, and the rest in partnership debts assumed by the purchaser. These
debts (P62,415.91 to Yutivo, and P54,310.13 to Sing Yee Cuan & Co.) are not questioned; they
were approved by the Court, and its approval is now final. The claims were, in fact, for the balance
on the original purchase price of the land sold (due first to La Urbana, later to the Banco Hipotecario)
plus accrued interests and taxes, redeemed by the two creditors-claimants. To show that the price
was inadequate, appellant relies on the testimony of the realtor Mata, who in 1955, six years after
the sale in question, asserted that the land was worth P312,000.00. Taking into account the
continued rise of real estate values since liberation, and the fact that the sale in question was
practically a forced sale because the partnership had no other means to pay its legitimate debts, this
evidence certainly does not show such "gross inadequacy" as to justify rescission of the sale. If at
the time of the sale (1949 the price of P153,726.04 was really low, how is it that appellant was not
able to raise the amount, even if the creditor's representative, Yu Khe Thai, had already warned him
four years before (1946) that the creditors wanted their money back, as they were justly entitled to?

It is argued that the land could have been mortgaged to raise the sum needed to discharge the
debts. But the lands were already mortgaged, and had been mortgaged since 1940, first to La
Urbana, and then to the Banco Hipotecario. Was it reasonable to expect that other persons would
loan money to the partnership when it was unable even to pay the taxes on the property, and the
interest on the principal since 1940? If it had been possible to find lenders willing to take a chance
on such a bad financial record, would not Goquiolay have taken advantage of it? But the fact is clear
on the record that since liberation until 1949 Goquiolay never lifted a finger to discharge the debts of
the partnership. Is he entitled now to cry fraud after the debts were discharged with no help from
With regard to the relationship between the parties, suffice it to say that the Supreme Court has
ruled that relationship alone is not a badge of fraud (Oria Hnos. vs. McMicking, 21 Phil., 243; also
Hermandad de Smo. Nombre de Jesus vs. Sanchez, 40 Off. Gaz., 1685). There is no evidence that
the original buyers, Washington Sycip and Betty Lee, were without independent means to purchase
the property. That the Yutivos should be willing to extend credit to them, and not to appellant, is
neither illegal nor immoral; at the very least, these buyers did not have a record of inveterate
defaults like the partnership "Tan Sin An & Goquiolay".

Appellant seeks to create the impression that he was the victim of a conspiracy between the Yutivo
firm and their component members. But no proof is adduced. If he was such a victim, he could have
easily defeated the conspirators by raising money and paying off the firm's debts between 1945 and
1949; but he did; he did not even care to look for a purchaser of the partnership assets. Were it true
that the conspiracy to defraud him arose (as he claims) because of his refusal to sell the lands when
in 1945 Yu Khe Thai asked him to do so, it is certainly strange that the conspirators should wait 4
years, until 1949, to have the sale effected by the widow of Tan Sin An, and that the sale should
have been routed through the probate court taking cognizance of Tan Sin An's estate, all of which
increased the risk that the supposed fraud should be detected.

Neither was there any anomaly in the filing of the claims of Yutivo and Sing Yee Cuan & Co., (as
subrogees of the Banco Hipotecario) in proceedings for the settlement of the estate of Tan Sin An.
This for two reasons: First, Tan Sin An and the partnership "Tan Sin An & Goquiolay"
were solidary (joint and several) debtors (Exhibit "N" mortgage to the Banco Hipotecario), and Rule
87, section 6, is to the effect that:

Where the obligation of the decedent is joint and several with another debtor, the claim shall
be filed against the decedent as if he were the only debtor, without prejudice to the right of
the estate to recover contribution from the other debtor. (Emphasis supplied)

Secondly, the solidary obligation was guaranteed by a mortgage on the properties of the partnership
and those of Tan Sin An personally, and a mortgage in indivisible, in the sense that each and every
parcel under mortgage answers for the totality of the debt (Civ. Code of 1889, Article 1860; New Civil
Code, Art. 2089).

A final and conclusive consideration. The fraud charged not being one used to obtain a party's
consent to a contract (i.e., not being deceit or dolus in contrahendo), if there is fraud at all, it can only
be a fraud of creditors that gives rise to a rescission of the offending contract. But by express
provision of law (Article 1294, Civil Code of 1889; Article 1383, New Civil Code), "the action for
rescission is subsidiary; it can not be instituted except when the party suffering damage has no other
legal means to obtain reparation for the same". Since there is no allegation, or evidence, that
Goquiolay can not obtain reparation from the widow and heirs of Tan Sin An, the present suit to
rescind the sale in question is not maintenable, even if the fraud charged actually did exist.

Premises considered, the motion for reconsideration is denied.

Bengzon, C. J., Padilla, Concepcion, Barrera, and Dizon, JJ., concur.

G.R. No. L-18707 December 9, 1922

PO YENG CHEO, plaintiff-appellee,
LIM KA YAM, defendant-appellant.

F. R. Feria and Romualdez Bros. for appellant.

Quintin Llorente and Carlos C. Viana for appellee.


By the amended complaint in this action, the present plaintiff, Po Yeng Cheo, alleged sole owner of
a business formerly conducted in the City of Manila under the style of Kwong Cheong, as managing
partner in said business and to recover from him its properties and assets. The defendant having
died during the pendency of the cause in the court below and the death suggested of record, his
administrator, one Lim Yock Tock, was required to appear and make defense.

In a decision dated July 1, 1921, the Honorable C. A. Imperial, presiding in the court below, found
that the plaintiff was entitled to an accounting from Lim Ka Yam, the original defendant, as manager
of the business already reffered to, and he accordingly required Lim Yock Tock, as administrator, to
present a liquidation of said business within a stated time. This order bore no substantial fruit, for the
reason that Lim Yock Tock personally knew nothing about the aforesaid business (which had ceased
operation more than ten years previously) and was apparently unable to find any books or
documents that could shed any real light on its transaction. However, he did submit to the court a
paper written by Lim Ka Yam in life purporting to give, with vague and uncertain details, a history of
the formation of the Kwong Cheong Tay and some account of its disruption and cessation from
business in 1910. To this narrative was appended a statement of assets and liabilities, purporting to
show that after the business was liquidate, it was actually debtor to Lim Ka Yam to the extent of
several thousand pesos. Appreciating the worthlessness of this so-called statement, and all parties
apparently realizing that nothing more was likely to be discovered by further insisting on an
accounting, the court proceeded, on December 27, 1921, to render final judgment in favor of the

The decision made on this occasion takes as its basis the fact stated by the court in its earlier
decision of July 1, 1921, which may be briefly set fourth as follows:

The plaintiff, Po Yeng Cheo, is the sole heir of one Po Gui Yao, deceased, and as such Po Yeng
Cheo inherited the interest left by Po Gui Yao in a business conducted in Manila under the style of
Kwong Cheong Tay. This business had been in existence in Manila for many years prior to 1903, as
a mercantile partnership, with a capitalization of P160,000, engaged in the import and export trade;
and after the death of Po Gui Yao the following seven persons were interested therein as partners in
the amounts set opposite their respective names, to wit: Po Yeng Cheo, P60,000; Chua Chi Yek,
P50,000; Lim Ka Yam, P10,000; Lee Kom Chuen, P10,000; Ley Wing Kwong, P10,000; Chan Liong
Chao, P10,000; Lee Ho Yuen, P10,000. The manager of Kwong Cheong Tay, for many years prior
of its complete cessation from business in 1910, was Lim Ka Yam, the original defendant herein.

Among the properties pertaining to Kwong Cheong Tay and consisting part of its assets were ten
shares of a total par value of P10,000 in an enterprise conducted under the name of Yut Siong Chyip
Konski and certain shares to the among of P1,000 in the Manila Electric Railroad and Light
Company, of Manila.
In the year 1910 (exact date unstated) Kwong Cheong Tay ceased to do business, owing principally
to the fact that the plaintiff ceased at that time to transmit merchandise from Hongkong, where he
then resided. Lim Ka Yam appears at no time to have submitted to the partners any formal
liquidation of the business, though repeated demands to that effect have been made upon him by
the plaintiff.

In view of the facts above stated, the trial judge rendered judgment in favor of the plaintiff, Po Yeng
Cheo, to recover of the defendant Lim Yock Tock, as administrator of Lim Ka Yam, the sum of sixty
thousand pesos (P60,000), constituting the interest of the plaintiff in the capital of Kwong Cheong
Tay, plus the plaintiff's proportional interest in shares of the Yut Siong Chyip Konski and Manila
Electric Railroad and Light Company, estimated at P11,000, together with the costs. From this
judgment the defendant appealed.

In beginning our comment on the case, it is to be observed that this court finds itself strictly
circumscribed so far as our power of review is concerned, to the facts found by the trial judge, for the
plaintiff did not appeal from the decision of the court below in so far as it was unfavorable to him, and
the defendant, as appellant, has not caused a great part of the oral testimony to be brought up. It
results, as stated, that we must accept the facts as found by the trial judge; and our review must be
limited to the error, or errors, if any, which may be apparent upon the face of the appealed decision,
in relation with the pleadings of record.

Proceeding then to consider the appealed decision in relation with the facts therein stated and other
facts appearing in the orders and proceedings in the cause, it is quite apparent that the judgment
cannot be sustained. In the first place, it was erroneous in any event to give judgment in favor of the
plaintiff to the extent of his share of the capital of Kwong Cheong Tay. The managing partner of a
mercantile enterprise is not a debtor to the shareholders for the capital embarked by them in the
business; and he can only be made liable for the capital when, upon liquidation of the business,
there are found to be assets in his hands applicable to capital account. That the sum of one hundred
and sixty thousand pesos (P160,000) was embarked in this business many years ago reveals
nothing as to the condition of the capital account at the time the concern ceased to do business; and
even supposing--as the court possibly did--that the capital was intact in 1908, this would not prove it
was intact in 1910 when the business ceased to be a going concern; for in that precise interval of
time the capital may have been diminished or dissipated from causes in no wise chargeable to the
negligence or misfeasance of the manager.

Again, so far as appears from the appealed decision, the only property pertaining to Kwong Cheong
Tay at the time this action was brought consisted of shares in the two concerns already mentioned of
the total par value of P11,000. Of course, if these shares had been sold and converted into money,
the proceeds, if not needed to pay debts, would have been distributable among the various persons
in interest, that is, among the various shareholders, in their respective proportions. But under the
circumstances revealed in this case, it was erroneous to give judgment in favor of the plaintiff for his
aliquot part of the par value of said shares. It is elementary that one partner, suing alone, cannot
recover of the managing partner the value of such partner's individual interest; and a liquidation of
the business is an essential prerequisite. It is true that in Lichauco vs. Lichauco (33 Phil., 350), this
court permitted one partner to recover of the manager the plaintiff's aliquot part of the proceeds of
the business, then long since closed; but in that case the affairs of the defunct concern had been
actually liquidate by the manager to the extent that he had apparently converted all its properties into
money and had pocketed the same--which was admitted;--and nothing remained to be done except
to compel him to pay over the money to the persons in interest. In the present case, the shares
referred to--constituting the only assets of Kwong Cheong Tay--have not been converted into ready
money and doubtless still remain in the name of Kwong Cheong Tay as owner. Under these
circumstances it is impossible to sustain a judgment in favor of the plaintiff for his aliquot part of the
par value of said shares, which would be equivalent to allowing one of several coowners to recover
from another, without process of division, a part of an undivided property.

Another condition will be noted as present in this case which in our opinion is fatal to the
maintenance of the appealed judgment. This is that, after the death of the original defendant, Lim Ka
Yam, the trial court allowed the action to proceed against Lim Yock Tock, as his administrator, and
entered judgment for a sum of money against said administrator as the accounting party,--
notwithstanding the insistence of the attorneys for the latter that the action should be discontinued in
the form in which it was then being prosecuted. The error of the trial court in so doing can be readily
demonstrated from more than one point of view.

In the first place, it is well settled that when a member of a mercantile partnership dies, the duty of
liquidating its affair devolves upon the surviving member, or members, of the firm, not upon the legal
representative of the deceased partner. (Wahl vs. Donaldson Sim & Co., 5 Phil., 11; Sugo and
Shibata vs. Green, 6 Phil., 744) And the same rule must be equally applicable to a civil partnership
clothed with the form of a commercial association (art. 1670, Civil Code; Lichauco vs. Lichauco, 33
Phil., 350) Upon the death of Lim Ka Yam it therefore became the duty of his surviving associates to
take the proper steps to settle the affairs of the firm, and any claim against him, or his estate, for a
sum of money due to the partnership by reason of any misappropriation of its funds by him, or for
damages resulting from his wrongful acts as manager, should be prosecuted against his estate in
administration in the manner pointed out in sections 686 to 701, inclusive, of the Code of Civil
Procedure. Moreover, when it appears, as here, that the property pertaining to Kwong Cheong Tay,
like the shares in the Yut Siong Chyip Konski and the Manila Electric Railroad and Light Company,
are in the possession of the deceased partner, the proper step for the surviving associates to take
would be to make application to the court having charge to the administration to require the
administrator to surrender such property.

But, in the second place, as already indicated, the proceedings in this cause, considered in the
character of an action for an accounting, were futile; and the court, abandoning entirely the effort to
obtain an accounting, gave judgment against the administrator upon the supposed liability of his
intestate to respond for the plaintiff's proportionate share of the capital and assets. But of course the
action was not maintainable in this aspect after the death of the defendant; and the motion to
discontinue the action as against the administrator should have been granted.

The judgment must be reversed, and the defendant will be absolved from the complaint; but it will be
understood that this order is without prejudice to any proceeding which may be undertaken by the
proper person or persons in interest to settle the affairs of Kwong Cheong Tay and in connection
therewith to recover from the administrator of Lim Ka Yam the shares in the two concerns mentioned
above. No special pronouncement will be made as to costs of either. So ordered.

Araullo, C. J., Johnson, Malcolm, Avancea, and Villamor, JJ., concur.

Ostrand, J., concurs in the result.
Johns, and Romualdez, JJ., took no part in the decision of this case.

G.R. No. L-14606 April 28, 1960

LAGUNA TRANSPORTATION CO., INC., petitioner-appellant,

SOCIAL SECURITY SYSTEM, respondent-appellee.
Yatco & Yatco for appellant.
Solicitor General Edilberto Barot, Solicitor Camilo Quiason and Crispin Baizas for appellee.


On January 24, 1958, petitioner Laguna Transportation Co., Inc. filed with the Court of First Instance
of Laguna petition praying that an order be issued by the court declaring that it is not bound to
register as a member of respondent Social Security System and, therefore, not obliged to pay to the
latter the contributions required under the Social Security Act.1 To this petition, respondent filed its
answer on February 11, 1958 praying for its dismissal due to petitioner's failure to exhaust
administrative remedies, and for a declaration that petitioner is covered by said Act, since the latter's
business has been in operation for at least 2 years prior to September 1, 1957.

On February 11, 1958, respondent filed a motion for preliminary hearing on its defense that
petitioner failed to exhaust administrative remedies. When the case was called for preliminary
hearing, it was postponed by agreement of the parties. Subsequently, it was set for trial. On the date
of the trial, the parties agreed to present, in lieu of any other evidence, a stipulation of facts, which
they did on May 27, 1958, as follows:

1. That petitioner is a domestic corporation duly organized and existing under the laws of the
Philippines, with principal place of business at Bian, Laguna;

2. That respondent is an agency created under Republic Act No. 1161, as amended by
Republic Act No. 1792, with the principal place of business at the new GSIS Bldg., corner
Arroceros and Concepcion Streets, Manila, where it may be served with summons;

3. That respondent has served notice upon the petitioner requiring it to register as member of
the System and to remit the premiums due from all the employees of the petitioner and the
contribution of the latter to the System beginning the month of September, 1957;

4. That sometime in 1949, the Bian Transportation Co., a corporation duly registered with
the Securities and Exchange Commission, sold part of the lines and equipment it operates to
Gonzalo Mercado, Artemio Mercado, Florentino Mata and Dominador Vera Cruz;

5. That after the sale, the said vendees formed an unregistered partnership under the name
of Laguna Transportation Company which continued to operate the lines and equipment
bought from the Bian Transportation Company, in addition to new lines which it was able to
secure from the Public Service Commission;

6. That the original partners forming the Laguna Transportation Company, with the addition
of two new members, organized a corporation known as the Laguna Transportation
Company, Inc., which was registered with the Securities and Exchange Commission on June
20, 1956, and which corporation is the plaintiff now in this case;

7. That the incorporators of the Laguna Transportation Company, Inc., and their
corresponding shares are as follows:

Name No. of Amount Amount

Shares Subscribed Paid

Dominador Cruz 333 shares P33,300.00 P9,160.81

Maura Mendoza 333 shares 33,300.00 9,160.81

Gonzalo Mercado 66 shares 6,600.00 1,822.49

Artemio Mercado 94 shares 9,400.00 2,565.90

Florentino Mata 110 shares 11,000.00 3,021.54

Sabina Borja 64 shares 6,400.00 1,750.00

1,000 shares P100,000.00 P27,481.55

8. That the corporation continued the same transportation business of the unregistered

9. That the plaintiff filed on August 30, 1957 an Employee's Data Record . . . and a
supplemental Information Sheet . . .;

10. That prior to November 11, 1957, plaintiff requested for exemption from coverage by the
System on the ground that it started operation only on June 20, 1956, when it was registered
with the Securities and Exchange Commission but on November 11, 1957, the Social
Security System notified plaintiff that it was covered;

11. On November 14, 1957, plaintiff through counsel sent a letter to the Social Security
System contesting the claim of the System that plaintiff was covered, . . .

12. On November 27, 1957, Carlos Sanchez, Manager of the Production Department of the
respondent System for and in behalf of the Acting Administrator, informed plaintiff that
plaintiff's business has been in actual operation for at least two years, . . .

On the basis of the foregoing stipulation of facts, the court, on August 15, 1958, rendered a decision
the dispositive part of which reads:

Wherefore, the Court is of the opinion and so declares that the petitioner was an employer
engaged in business as common carrier which had been in operation for at least two years
prior to the enactment of Republic Act No. 1161, as amended by Republic Act 1792 and by
virtue thereof, it was subject to compulsory coverage under said law. . . .

From this decision, petitioner appealed directly to us, raising purely questions of law.

Petitioner claims that the lower court erred in holding that it is an employer engaged in business as a
common carrier which had been in operation for at least 2 years prior to the enactment of the Social
Security Act and, therefore, subject to compulsory coverage thereunder.

Section 9 of the Social Security Act, in part, provides:

SEC. 9 Compulsory Coverage. Coverage in the System shall be compulsory upon all
employees between the ages of sixteen and sixty years, inclusive, if they have been for at
least six months in the service of an employer who is a member of the System. Provided,
That the Commission may not compel any employer to become a member of the System
unless he shall have been in operation for at least two years . . . . (Italics supplied.).
It is not disputed that the Laguna Transportation Company, an unregistered partnership composed
of Gonzalo Mercado, Artemio Mercado, Florentina Mata, and Dominador Vera Cruz, commenced the
operation of its business as a common carrier on April 1, 1949. These 4 original partners, with 2
others (Maura Mendoza and Sabina Borja) later converted the partnership into a corporate entity, by
registering its articles of incorporation with the Securities and Exchange Commission on June 20,
1956. The firm name "Laguna Transportation Company" was not altered, except with the addition of
the word "Inc." to indicate that petitioner was duly incorporated under existing laws. The corporation
continued the same transportation business of the unregistered partnership, using the same lines
and equipment. There was, in effect, only a change in the form of the organization of the entity
engaged in the business of transportation of passengers. Hence, said entity as an employer
engaged in business, was already in operation for at least 3 years prior to the enactment of the
Social Security Act on June 18, 1954 and for at least two years prior to the passage of the
amendatory act on June 21, 1957. Petitioner argues that, since it was registered as a corporation
with the Securities and Exchange Commission only on June 20, 1956, it must be considered to have
been in operation only on said date. While it is true that a corporation once formed is conferred a
juridical personality separate and district from the persons composing it, it is but a legal fiction
introduced for purposes of convenience and to subserve the ends of justice. The concept cannot be
extended to a point beyond its reasons and policy, and when invoked in support of an end
subversive of this policy, will be disregarded by the courts. (13 Am. Jur. 160.)

If any general rule can be laid down, in the present state of authority, it is that a corporation
will be looked upon as a legal entity as a general rule, and until sufficient reason to the
contrary appears; but, when the motion of legal entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime, the law will regard the corporation as an
association of persons. (1 Fletcher Cyclopedia Corporations [Perm. Ed.] 135-136; U.S.
Milwaukee Refrigeration Transit Co., 142 Fed. 247, cited in Koppel Philippines, Inc. vs.
Yatco, 43 Off. Gaz., 4604.)

To adopt petitioner's argument would defeat, rather than promote, the ends for which the Social
Security Act was enacted. An employer could easily circumvent the statute by simply changing his
form of organization every other year, and then claim exemption from contribution to the System as
required, on the theory that, as a new entity, it has not been in operation for a period of at least 2
years. the door to fraudulent circumvention of the statute would, thereby, be opened.

Moreover, petitioner admitted that as an employer engaged in the business of a common carrier, its
operation commenced on April 1, 1949 while it was a partnership and continued by the corporation
upon its formation on June 20, 1956. Unlike in the conveyance made by the Bian Transportation
Company to the partners Gonzalo Mercado, Artemio Mercado, Florentino Mata, and Dominador
Vera Cruz, no mention whatsoever is made either in the pleadings or in the stipulation of facts that
the lines and equipment of the unregistered partnership had been sold and transferred to the
corporation, petitioner herein. This omission, to our mind, clearly indicates that there was, in fact, no
transfer of interest, but a mere change in the form of the organization of the employer engaged in the
transportation business, i.e., from an unregistered partnership to that of a corporation. As a rule,
courts will look to the substance and not to the form.(Colonial Trust Co. vs. Montolo Eric Works, 172
Fed. 310; Metropolitan Holding Co. vs. Snyder, 79 F. 2d 263, 103 A.L.R. 612; Arnold vs. Willits, et
al., 44 Phil., 634; 1 Fletcher Cyclopedia Corporations [Perm. Ed.] 139-140.)

Finally, the weight of authority supports the view that where a corporation was formed by, and
consisted of members of a partnership whose business and property was conveyed and transferred
to the corporation for the purpose of continuing its business, in payment for which corporate capital
stock was issued, such corporation is presumed to have assumed partnership debts, and is prima
facie liable therefor. (Stowell vs. Garden City News Corps., 57 P. 2d 12; Chicago Smelting &
Refining Corp. vs. Sullivan, 246 IU, App. 538; Ball vs. Bross., 83 June 19, N.Y. Supp. 692.) The
reason for the rule is that the members of the partnership may be said to have simply put on a new
coat, or taken on a corporate cloak, and the corporation is a mere continuation of the partnership. (8
Fletcher Cyclopedia Corporations [Perm. Ed.] 402-411.)

Wherefore, finding no error in the judgment of the court a quo, the same is hereby affirmed, with
costs against petitioner-appellant. So ordered.

Paras, C. J., Bengzon, Montemayor, Bautista Angelo, Labrador, Concepcion and Gutierrez, David,
JJ., concur.

G.R. No. L-6304 December 29, 1953

SERGIO V. SISON, plaintiff-appellant,

HELEN J. MCQUAID, defendant-appellee.

Manansala and Manansala for appellant.

J.C. Orendain for appllee.


On March 28, 1951, plaintiff brought an action in the Court of First Instance of Manila against
defendant, alleging that during the year 1938 the latter borrowed from him various sums of money,
aggregating P2,210, to enable her to pay her obligation to the Bureau of Forestry and to add to her
capital in her lumber business, receipt of the amounts advanced being acknowledged in a document,
Exhibit A, executed by her on November 10, 1938 and attached to the complaint; that as defendant
was not able to pay the loan in 1938, as she had promised, she proposed to take in plaintiff as a
partner in her lumber business, plaintiff to contribute to the partnership the said sum of P2,210 due
him from defendant in addition to his personal services; that plaintiff agreed to defendant's proposal
and, as a result, there was formed between them, under the provisions of the Civil Code, a
partnership in which they were to share alike in the income or profits of the business, each to get
one-half thereof; that in accordance with said contract, plaintiff, together with defendant, rendered
services to the partnership without compensation from June 15, 1938 to December, 1941; that
before the last World War, the partnership sold to the United States Army 230,000 board feet of
lumber for P13,800, for the collection of which sum defendant, as manager of the partnership, filed
the corresponding claim with the said army after the war; that the claim was "finally" approved and
the full amount paid the complaint does not say when but defendant has persistently refused to
deliver one-half of it, or P6,900, to plaintiff notwithstanding repeated demands, investing the whole
sum of P13,800 for her own benefit. Plaintiff, therefore, prays for judgment declaring the existence of
the alleged partnership and requiring the defendant to pay him the said sum of P6,900, in addition to
damages and costs.

Notified of the action, defendant filed a motion to dismiss on the grounds that plaintiff's action had
already prescribed, that plaintiff's claim was not provable under the Statute of Frauds, and that the
complaint stated no cause of action. Sustaining the first ground, the court dismissed the case,
whereupon, plaintiff appealed to the Court of Appeals; but that court has certified the case here on
the ground that the appeal involved only questions of law.
It is not clear from the allegations of the complaint just when plaintiff's cause of action accrued.
Consequently, it cannot be determined with certainty whether that action has already prescribed or
not. Such being the case, the defense of prescription can not be sustained on a mere motion to
dismiss based on what appears on the face of the complaint.

But though the reason given for the order of dismissal be untenable, we find that the said order
should be upheld on the ground that the complaint states no cause of action, which is also one of the
grounds on which defendant's motion to dismiss was based. Plaintiff seeks to recover from
defendant one-half of the purchase price of lumber sold by the partnership to the United States
Army. But his complaint does not show why he should be entitled to the sum he claims. It does not
allege that there has been a liquidation of the partnership business and the said sum has been found
to be due him as his share of the profits. The proceeds from the sale of a certain amount of lumber
cannot be considered profits until costs and expenses have been deducted. Moreover, the profits of
the business cannot be determined by taking into account the result of one particular transaction
instead of all the transactions had. Hence, the need for a general liquidation before a member of a
partnership may claim a specific sum as his share of the profits.

In view of the foregoing, the order of dismissal is affirmed, but on the ground that the complaint
states no cause of action and without prejudice to the filing of an action for accounting or liquidation
should that be what plaintiff really wants. Without costs in this instance.

Paras, C.J., Pablo, Bengzon, Padilla, Tuason, Jugo, Bautista Angelo and Labrador, JJ., concur.

G.R. No. L-17526 June 30, 1962

GREGORIO MAGDUSA, ET AL., petitioners,

GERUNDIO ALBARAN, ET AL., respondents.

Montenegro, Madayag, Viola and Hernandez, Olimpio R. Epis, David C. Ocangas and Bonifacio M.
Belderol for petitioners.
Lozano, Soria, Muana, Ruiz and Morales for respondents.

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

Appeal from a decision of the Court of Appeals (G.R. No. 24248-R) reversing a judgment of the
Court of First Instance of Bohol and ordering appellant Gregorio Magdusa to pay to appellees, by
way of refund of their shares as partners, the following amounts: Gerundio Albaran, P8,979.10;
Pascual Albaran, P5,394.78; Zosimo Albaran, P1,979.28; and Telesforo Bebero, P3,020.27; plus
legal interests from the filing of the complaint, and costs.

The Court of Appeals found that appellant and appellees, together with various other persons, had
verbally formed a partnership de facto, for the sale of general merchandise in Surigao, Surigao, to
which appellant contributed P2,000 as capital, and the others contributed their labor, under the
condition that out of the net profits of the business 25% would be added to the original capital, and
the remaining 75% would be divided among the members in proportion to the length of service of
each. Sometime in 1953 and 1954, the appellees expressed their desire to withdraw from the
partnership, and appellant thereupon made a computation to determine the value of the partners'
shares to that date. The results of the computation were embodied in the document Exhibit "C",
drawn in the handwriting of appellant. Appellees thereafter made demands upon appellant for
payment, but appellant having refused, they filed the initial complaint in the court below. Appellant
defended by denying any partnership with appellees, whom he claimed to be mere employees of his.

The Court of First Instance of Bohol refused to give credence to Exhibit "C", and dismissed the
complaint on the ground that the other were indispensable parties but hid not been impleaded. Upon
appeal, the Court of Appeals reversed, with the result noted at the start of this opinion.

Gregorio Magdusa then petitioned for a review of the decision, and we gave it due course. 1w ph1.t

The main argument of appellant is that the appellees' action can not be entertained, because in the
distribution of all or part of a partnership's assets, all the partners have no interest and are
indispensable parties without whose intervention no decree of distribution can be validly entered.
This argument was considered and answered by the Court of Appeals in the following words:

We now come to the last issue involved. While finding that some amounts are due the
plaintiffs, the lower court withheld an award in their favor, reasoning that a judgment ordering
the defendant to pay might affect the rights of other partners who were not made parties in
this case. The reason cited by the lower court does not constitute a legal impediment to a
judgment for the plaintiffs in this case. This is not an action for a dissolution of a partnership
and winding up of its affairs or liquidation of its assets in which the interest of other partners
who are not brought into the case may be affected. The action of the plaintiffs is one for the
recovery of a sum of money with Gregorio Magdusa as the principal defendant. The
partnership, with Gregorio Magdusa as managing partner, was brought into the case as an
alternative defendant only. Plaintiffs' action was based on the allegation, substantiated in
evidence, that Gregorio Magdusa, having taken delivery of their shares, failed and refused
and still fails and refuses to pay them their claims. The liability, therefore, is personal to
Gregorio Magdusa, and the judgment should be against his sole interest, not against the
partnership's although the judgment creditors may satisfy the judgment against the interest
of Gregorio Magdusa in the partnership subject to the condition imposed by Article 1814 of
the Civil Code.

We do not find the preceding reasoning tenable. A partner's share can not be returned without first
dissolving and liquidating the partnership (Po Yeng Cheo vs. Lim Ka Yam, 44 Phil. 177), for the
return is dependent on the discharge of the creditors, whose claims enjoy preference over those of
the partners; and it is self-evident that all members of the partnership are interested in his assets
and business, and are entitled to be heard in the matter of the firm's liquidation and the distribution of
its property. The liquidation Exhibit "C" is not signed by the other members of the partnership
besides appellees and appellant; it does not appear that they have approved, authorized, or ratified
the same, and, therefore, it is not binding upon them. At the very least, they are entitled to be heard
upon its correctness.

In addition, unless a proper accounting and liquidation of the partnership affairs is first had, the
capital shares of the appellees, as retiring partners, can not be repaid, for the firm's outside creditors
have preference over the assets of the enterprise (Civ. Code, Art. 1839), and the firm's property can
not be diminished to their prejudice. Finally, the appellant can not be held liable in his personal
capacity for the payment of partners' shares for he does not hold them except as manager of, or
trustee for, the partnership. It is the latter that must refund their shares to the retiring partners. Since
not all the members of the partnership have been impleaded, no judgment for refund can be
rendered, and the action should have been dismissed.
IN VIEW OF THE FOREGOING, the decision of the Court of Appeals is reversed and the action
ordered dismissed, without prejudice to a proper proceeding for the dissolution and liquidation of the
common enterprise. Costs against appellees.

Bengzon, C.J., Padilla, Bautista Angelo, Labrador, Concepcion, Barrera, Paredes, Dizon, Regala
and Makalintal, JJ., concur.

G.R. No. L-5837 May 31, 1954

CRISTOBAL BONNEVIE, ET AL., plaintiffs-appellants,

JAIME HERNANDEZ, defendant-appellee.

Ojeda and Vilgera for appellants.

Cea and Zurbano for appellee.


This is an action for the recovery of the sum of P115,312.50, with interests, as plaintiffs' alleged
share in the profits of a partnership.

It appears that prior to January, 1947, plaintiffs with other associates formed a syndicate or secret
partnership for the purpose of acquiring the plants, franchises and other properties of the Manila
Electric Co. hereinafter called the Meralco in the provinces of Camarines Sur, Albay, and
Sorsogon, with the idea of continuing that company's business in that region. No formal articles were
drawn for it was the purpose of the members to incorporate once the deal had been consummated.
But in the meantime they elected Pedro Serranzana and David Serrano general manager and
secretary-treasurer, respectively, of the partnership.

Negotiation for the purchase was commenced, but as it made no headway, defendant was taken in
as a member of the partnership so that he could push the deal through, and to that end he was given
the necessary power of attorney. Using partnership funds, defendant was able to buy the Meralco
properties for P122,000, paying P40,000 upon the signing of the deed of sale and agreeing to pay
the balance in two equal installments, that is, P41,000 on or before July 31, 1947, and another
P41,000 on or before January 31, 1948, with interest at 6 per cent per annum and with a penalty
clause which reads:

(6) That in case the VENDEE fails to make the payment or payments of the balance due or
any part thereof as herein provided, this contract shall, at the option of the VENDOR, be
annuled and, in such an event, all payments made by the VENDEE to the VENDOR by virtue
of this contract shall be forfeited and retained by the VENDOR in full satisfaction as the
liquidated damages sustained by said VENDOR; and the said VENDOR shall have the right
to forthwith reenter and take possession of the premises, properties and rights which are the
subject-matter of this contract.

Although defendant was the one named vendee in the deed of sale, there is no question that the
transaction was in penalty made for the partnership so that the latter assumed control of the
business the day following the sale.
About the latter half of the following month the members of the partnership proceeded with the
formation of the proposed corporation, apportioning among themselves its shares of stock in
proportion to their respective contributions to the capital of the partnership and their individual efforts
in bringing about the acquisition of the Meralco properties. But before the incorporation papers could
be perfected, several partners, not satisfied with the way matters were being run and fearful that the
venture might prove a failure because the business was not going well and there was a possibility of
their being assessed more than their original investments when the time came to meet the two
installments of the unpaid purchase price due the Meralco, expressed their desire to withdraw from
the partnership and get back the money they had invested therein. In accordance with this wish, one
of them, Judge Jaime Reyes, in a meeting held on April 10, 1947, to consider various matters
connected with the business, presented a resolution to the effect that those partners who did not
want to remain in the association should be allowed to withdraw and get back their contributions.
The resolution was approved, with the herein plaintiffs voting affirmatively, and on that same day
plaintiffs and Judge Reyes withdrew from the partnership, and, as admitted by both parties, the
partnership was then dissolved. In accordance with the terms of the resolution, the withdrawing
partners were, on the following day, reimbursed their respective contributions to the partnership

Following the dissolution of the partnership, the members who preferred to remain in the business
went ahead with the formation of the corporation, taking in new associates as stockholders. And
defendant, on his part, in fulfillment of his trust, made a formal assignment of the Meralco properties
to the treasurer of the corporation, giving them a book value of P365,000, in return for which the
corporation issued, to the various subscribers to its capital stock, shares of stock of the total face
value of P225,000 and assumed the obligation of paying what was still due the Meralco on the
purchase price. The new corporation was named "Bicol Electric Company."

Though business was losing during the first year, that is, in 1947, the corporation, thanks to a loan
obtained from the RFC later prospered and made money. Then trouble began for one of its big
stockholders, the defendant herein.

Two years from their withdrawal from the partnership, when the corporate business was already in a
prosperous condition, plaintiffs brought the present suit against Jaime Hernandez, claiming a share
in the profit the latter is supposed to have made from the assignment of the Meralco properties to the
corporation, estimated by plaintiffs to be P225,000 and their share of it to be P115,312.50.

Defendant's answer denies that he has made any profit out of the assignment in question and
alleges that in any event plaintiffs, after their withdrawal from the partnership, ceased to have any
further interest in the subsequent transactions of the remaining members.

After trial the lower court found that the partnership had not realized any profit out of the assignment
of the Meralco properties to the corporation and that, even supposing that profit had really been
made, defendant would not be the one to answer to plaintiffs for their share thereof, because he did
not receive the consideration for the assignment, which according to the court, consisted of the
subscriptions of various persons to the capital stock of the corporation. The court therefore
dismissed the complaint with costs against the plaintiffs. From this decision plaintiffs appealed. The
case comes within our jurisdiction because of the amount involved.

We find no merit in the appeal.

In the first place, the profit alleged to have been realized from the assignment of the Meralco
properties to the new corporation, the Bicol Electric Company, is more apparent than real. It is true
that the value set for those properties in the deed of assignment was P365,000 when the acquisition
price was only P122,000. But one should not jump to the conclusion that a profit, consisting of the
difference between the two sums was really made out of the transaction, for the assignment was not
made for cash but in payment for subscriptions to shares of stock in the assignee, and while those
shares had a total face value of P225,000, this is not necessarily their real worth. Needless to say,
the real value of the shares of stock of a corporation depends upon the value of its assets over and
above its liabilities. It does not appear that the Bicol Electric Company had any assets other than
those acquired from the Meralco, and according to the evidence the company, aside from owing the
Meralco, P82,000 was, in the language of the court below, actually "in the red."

In the second place, assuming that the assignment actually brought profit to the partnership, it is
hard to see how defendant could be made to answer for plaintiffs' alleged share thereof. As stated in
the decision below, defendant did not receive the consideration for the assignment for, as already
stated, the assignment was made in payment for subscriptions of various persons to the capital
stock of the new corporation. Plaintiffs, in order to give color of legality to their claim against
defendant, maintain that the latter should be held liable for damages caused to them, consisting of
the loss of their share of the profits, due to defendant's failure properly to perform his duty as a
liquidator of the dissolved partnership, this on the theory that as managing partner of the partnership,
it was defendant's duty to liquidate its affairs upon its dissolutions. But it does not appear that
plaintiffs have ever asked for a liquidation, and as will presently be explained no liquidation was
called for because when plaintiffs withdrew from the partnership the understanding was that after
they had been reimbursed their investment, they were no longer to have any further interest in the
partnership or its assets and liabilities. Moreover, the stipulation of facts made at the hearing does
not bear out the claim that defendant was the managing partner of the partnership, for if there
appears that the partnership had its general manager in the person of Pedro Serranzana, who upon
the formation of the new corporation also became its vice-president and general manager.

As a general rule, when a partner retires from the firm, he is entitled to the payment of what may be
due him after a liquidation. But certainly no liquidation is necessary where there is already a
settlement or an agreement as to what the retiring partner shall receive. In the instant case, it
appears that a settlement was agreed upon on the very day the partnership was dissolved. For when
plaintiffs and Judge Jaime Reyes withdrew from the partnership on that day they did so as agreed to
by all the partners, subject to the only condition that they were to be repaid their contributions or
investments within three days from said date. And this condition was fulfilled when on the following
day they were reimbursed the respective amounts due them pursuant to the agreement.

There is evidence that the partnership was at that time operating its business at a loss and that the
partnership did not have necessary funds to meet its obligation to Meralco for the balance of the
purchase price. And in that connection it should be recalled that nonpayment of that obligation would
result in the partnership losing its entire investment because of the penalty clause in the deed of
sale. Because of these circumstances there is every reason to believe that plaintiffs together with
Judge Jaime Reyes, withdrew from the partnership for fear that they might lose their entire
investment should they choose to remain in the partnership which then faced the danger of losing its
entire assets. As testified to by Judge Reyes, one of the withdrawing partners, it was clearly
understood that upon their withdrawal and return to them of their investment they would have
nothing more to do with the association. It must, therefore, have been the intention or understanding
of the parties that the withdrawing partners were relinquishing all their rights and interest in the
partnership upon the return to them of their investment. That Judge Reyes did not join the plaintiffs
in this action is a clear indication that such was really the understanding. Judge Reyes has testified
that when he was invited to join in the present claim he refused because he did not want to be a "sin
verguenza." And, indeed, if the agreement was that the withdrawing partners were still to have
participation in the subsequent transactions of the partnership so that they would have a share not
only in the profits but also in the losses, it is not likely that their investment would have been returned
to them.
It is, therefore, our conclusion that the acceptance by the withdrawing partners, including the
plaintiffs, of their investment in the instant case was understood and intended by all the parties as a
final settlement of whatever rights or claim the withdrawing partners might have in the dissolved
partnership. Such being the case they are now precluded from claiming any share in the alleged
profits, should there be any, at the time of the dissolution.

In view of the foregoing, we find plaintiffs' claim against defendant to be without legal basis so that
the judgment of dismissal rendered by the court below should be, as it is hereby, affirmed, with costs
against the appellants.

Paras, C. J., Pablo, Bengzon, Montemayor, Jugo, Bautista Angelo, Labrador and Concepcion,
JJ., concur.