G.R. No.

84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, petitioner, vs. THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY
EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents.

G.R. No. 84157 July 28, 1989

JACOB S. LIM, petitioner, vs. COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER MACHINERY and HEAVY
EQUIPMENT CO., INC,, FRANCISCO and MODESTO CERVANTES and CONSTANCIO MAGLANA, respondents.

GUTIERREZ, JR., J.:

The subject matter of these consolidated petitions is the decision of the Court of Appeals in CA-G.R. CV No. 66195 which modified the
decision of the then Court of First Instance of Manila in Civil Case No. 66135. The plaintiffs complaint (petitioner in G.R. No. 84197)
against all defendants (respondents in G.R. No. 84197) was dismissed but in all other respects the trial court's decision was affirmed.

The dispositive portion of the trial court's decision reads as follows:

WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim to pay plaintiff the amount of P311,056.02, with
interest at the rate of 12% per annum compounded monthly; plus 15% of the amount awarded to plaintiff as attorney's fees from July
2,1966, until full payment is made; plus P70,000.00 moral and exemplary damages.

It is found in the records that the cross party plaintiffs incurred additional miscellaneous expenses aside from Pl51,000.00,,making a
total of P184,878.74. Defendant Jacob S. Lim is further required to pay cross party plaintiff, Bormaheco, the Cervanteses one-half and
Maglana the other half, the amount of Pl84,878.74 with interest from the filing of the cross-complaints until the amount is fully paid;
plus moral and exemplary damages in the amount of P184,878.84 with interest from the filing of the cross-complaints until the amount
is fully paid; plus moral and exemplary damages in the amount of P50,000.00 for each of the two Cervanteses.

Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses, and another P20,000.00 to Constancio B. Maglana as
attorney's fees.

xxx xxx xxx

WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against defendants Bormaheco, the Cervanteses and Constancio B.
Maglana, is dismissed. Instead, plaintiff is required to indemnify the defendants Bormaheco and the Cervanteses the amount of
P20,000.00 as attorney's fees and the amount of P4,379.21, per year from 1966 with legal rate of interest up to the time it is paid.

Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount of P20,000.00 as attorney's fees and costs.

No moral or exemplary damages is awarded against plaintiff for this action was filed in good faith. The fact that the properties of the
Bormaheco and the Cervanteses were attached and that they were required to file a counterbond in order to dissolve the attachment, is
not an act of bad faith. When a man tries to protect his rights, he should not be saddled with moral or exemplary damages.
Furthermore, the rights exercised were provided for in the Rules of Court, and it was the court that ordered it, in the exercise of its
discretion.

No damage is decided against Malayan Insurance Company, Inc., the third-party defendant, for it only secured the attachment prayed
for by the plaintiff Pioneer. If an insurance company would be liable for damages in performing an act which is clearly within its power
and which is the reason for its being, then nobody would engage in the insurance business. No further claim or counter-claim for or
against anybody is declared by this Court. (Rollo - G.R. No. 24197, pp. 15-16)

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owner-operator of Southern Air Lines (SAL) a
single proprietorship.

On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and executed a sales contract (Exhibit A) for the
sale and purchase of two (2) DC-3A Type aircrafts and one (1) set of necessary spare parts for the total agreed price of US $109,000.00
to be paid in installments. One DC-3 Aircraft with Registry No. PIC-718, arrived in Manila on June 7,1965 while the other aircraft, arrived
in Manila on July 18,1965.

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On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197) as surety executed and issued its
Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts and spare parts.

It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and Modesto Cervantes (Cervanteses)
and Constancio Maglana (respondents in both petitions) contributed some funds used in the purchase of the above aircrafts and spare
parts. The funds were supposed to be their contributions to a new corporation proposed by Lim to expand his airline business. They
executed two (2) separate indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer, one signed by Maglana and the other jointly
signed by Lim for SAL, Bormaheco and the Cervanteses. The indemnity agreements stipulated that the indemnitors principally agree and
bind themselves jointly and severally to indemnify and hold and save harmless Pioneer from and against any/all damages, losses, costs,
damages, taxes, penalties, charges and expenses of whatever kind and nature which Pioneer may incur in consequence of having
become surety upon the bond/note and to pay, reimburse and make good to Pioneer, its successors and assigns, all sums and amounts
of money which it or its representatives should or may pay or cause to be paid or become liable to pay on them of whatever kind and
nature.

On June 10, 1965, Lim doing business under the name and style of SAL executed in favor of Pioneer as deed of chattel mortgage as
security for the latter's suretyship in favor of the former. It was stipulated therein that Lim transfer and convey to the surety the two
aircrafts. The deed (Exhibit D) was duly registered with the Office of the Register of Deeds of the City of Manila and with the Civil
Aeronautics Administration pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law (Republic Act No. 776), respectively.

Lim defaulted on his subsequent installment payments prompting JDA to request payments from the surety. Pioneer paid a total sum of
P298,626.12.

Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the Sheriff of Davao City. The
Cervanteses and Maglana, however, filed a third party claim alleging that they are co-owners of the aircrafts,

On July 19, 1966, Pioneer filed an action for judicial foreclosure with an application for a writ of preliminary attachment against Lim and
respondents, the Cervanteses, Bormaheco and Maglana.

In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-claims against Lim alleging that they were not privies to the
contracts signed by Lim and, by way of counterclaim, sought for damages for being exposed to litigation and for recovery of the sums of
money they advanced to Lim for the purchase of the aircrafts in question.

After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed Pioneer's complaint against all other
defendants.

As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs complaint against all the defendants was
dismissed. In all other respects the trial court's decision was affirmed.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED THE APPEAL OF PETITIONER ON THE SOLE GROUND THAT
PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT IT CANNOT
REPRESENT A REINSURER TO RECOVER THE AMOUNT FROM HEREIN PRIVATE RESPONDENTS AS DEFENDANTS IN THE TRIAL COURT.
(Rollo - G. R. No. 84197, p. 10)

The petitioner questions the following findings of the appellate court:

We find no merit in plaintiffs appeal. It is undisputed that plaintiff Pioneer had reinsured its risk of liability under the surety bond in
favor of JDA and subsequently collected the proceeds of such reinsurance in the sum of P295,000.00. Defendants' alleged obligation to
Pioneer amounts to P295,000.00, hence, plaintiffs instant action for the recovery of the amount of P298,666.28 from defendants will no
longer prosper. Plaintiff Pioneer is not the real party in interest to institute the instant action as it does not stand to be benefited or
injured by the judgment.

Plaintiff Pioneer's contention that it is representing the reinsurer to recover the amount from defendants, hence, it instituted the action
is utterly devoid of merit. Plaintiff did not even present any evidence that it is the attorney-in-fact of the reinsurance company,

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authorized to institute an action for and in behalf of the latter. To qualify a person to be a real party in interest in whose name an action
must be prosecuted, he must appear to be the present real owner of the right sought to be enforced (Moran, Vol. I, Comments on the
Rules of Court, 1979 ed., p. 155). It has been held that the real party in interest is the party who would be benefited or injured by the
judgment or the party entitled to the avails of the suit (Salonga v. Warner Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest
is meant a present substantial interest as distinguished from a mere expectancy or a future, contingent, subordinate or consequential
interest (Garcia v. David, 67 Phil. 27; Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v. Germans, 1 NW 2d
424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).

Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real party in interest as it has already been paid by the
reinsurer the sum of P295,000.00 — the bulk of defendants' alleged obligation to Pioneer.

In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from its reinsurer, the former was able to foreclose
extra-judicially one of the subject airplanes and its spare engine, realizing the total amount of P37,050.00 from the sale of the
mortgaged chattels. Adding the sum of P37,050.00, to the proceeds of the reinsurance amounting to P295,000.00, it is patent that
plaintiff has been overpaid in the amount of P33,383.72 considering that the total amount it had paid to JDA totals to only P298,666.28.
To allow plaintiff Pioneer to recover from defendants the amount in excess of P298,666.28 would be tantamount to unjust enrichment
as it has already been paid by the reinsurance company of the amount plaintiff has paid to JDA as surety of defendant Lim vis-a-vis
defendant Lim's liability to JDA. Well settled is the rule that no person should unjustly enrich himself at the expense of another (Article
22, New Civil Code). (Rollo-84197, pp. 24-25).

The petitioner contends that-(1) it is at a loss where respondent court based its finding that petitioner was paid by its reinsurer in the
aforesaid amount, as this matter has never been raised by any of the parties herein both in their answers in the court below and in their
respective briefs with respondent court; (Rollo, p. 11) (2) even assuming hypothetically that it was paid by its reinsurer, still none of the
respondents had any interest in the matter since the reinsurance is strictly between the petitioner and the re-insurer pursuant to
section 91 of the Insurance Code; (3) pursuant to the indemnity agreements, the petitioner is entitled to recover from respondents
Bormaheco and Maglana; and (4) the principle of unjust enrichment is not applicable considering that whatever amount he would
recover from the co-indemnitor will be paid to the reinsurer.

The records belie the petitioner's contention that the issue on the reinsurance money was never raised by the parties.

A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were:

xxx xxx xxx

1. Has Pioneer a cause of action against defendants with respect to so much of its obligations to JDA as has been paid with reinsurance
money?

2. If the answer to the preceding question is in the negative, has Pioneer still any claim against defendants, considering the amount it
has realized from the sale of the mortgaged properties? (Record on Appeal, p. 359, Annex B of G.R. No. 84157).

In resolving these issues, the trial court made the following findings:

It appearing that Pioneer reinsured its risk of liability under the surety bond it had executed in favor of JDA, collected the proceeds of
such reinsurance in the sum of P295,000, and paid with the said amount the bulk of its alleged liability to JDA under the said surety
bond, it is plain that on this score it no longer has any right to collect to the extent of the said amount.

On the question of why it is Pioneer, instead of the reinsurance (sic), that is suing defendants for the amount paid to it by the reinsurers,
notwithstanding that the cause of action pertains to the latter, Pioneer says: The reinsurers opted instead that the Pioneer Insurance &
Surety Corporation shall pursue alone the case.. . . . Pioneer Insurance & Surety Corporation is representing the reinsurers to recover the
amount.' In other words, insofar as the amount paid to it by the reinsurers Pioneer is suing defendants as their attorney-in-fact.

But in the first place, there is not the slightest indication in the complaint that Pioneer is suing as attorney-in- fact of the reinsurers for
any amount. Lastly, and most important of all, Pioneer has no right to institute and maintain in its own name an action for the benefit of
the reinsurers. It is well-settled that an action brought by an attorney-in-fact in his own name instead of that of the principal will not
prosper, and this is so even where the name of the principal is disclosed in the complaint.

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Section 2 of Rule 3 of the Old Rules of Court provides that 'Every action must be prosecuted in the name of the real party in interest.'
This provision is mandatory. The real party in interest is the party who would be benefitted or injured by the judgment or is the party
entitled to the avails of the suit.

This Court has held in various cases that an attorney-in-fact is not a real party in interest, that there is no law permitting an action to be
brought by an attorney-in-fact. Arroyo v. Granada and Gentero, 18 Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12;
Filipinos Industrial Corporation v. San Diego G.R. No. L- 22347,1968, 23 SCRA 706, 710-714.

The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected P295,000.00 from the reinsurers, the uninsured
portion of what it paid to JDA is the difference between the two amounts, or P3,666.28. This is the amount for which Pioneer may sue
defendants, assuming that the indemnity agreement is still valid and effective. But since the amount realized from the sale of the
mortgaged chattels are P35,000.00 for one of the airplanes and P2,050.00 for a spare engine, or a total of P37,050.00, Pioneer is still
overpaid by P33,383.72. Therefore, Pioneer has no more claim against defendants. (Record on Appeal, pp. 360-363).

The payment to the petitioner made by the reinsurers was not disputed in the appellate court. Considering this admitted payment, the
only issue that cropped up was the effect of payment made by the reinsurers to the petitioner. Therefore, the petitioner's argument
that the respondents had no interest in the reinsurance contract as this is strictly between the petitioner as insured and the reinsuring
company pursuant to Section 91 (should be Section 98) of the Insurance Code has no basis.

In general a reinsurer, on payment of a loss acquires the same rights by subrogation as are acquired in similar cases where the original
insurer pays a loss (Universal Ins. Co. v. Old Time Molasses Co. C.C.A. La., 46 F 2nd 925).

The rules of practice in actions on original insurance policies are in general applicable to actions or contracts of reinsurance. (Delaware,
Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con. 1134).

Hence the applicable law is Article 2207 of the new Civil Code, to wit:

Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the insurance company for the injury or loss
arising out of the wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured
against the wrongdoer or the person who has violated the contract. If the amount paid by the insurance company does not fully cover
the injury or loss, the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury.

Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co. (101 Phil. 1031 [1957]) which we
subsequently applied in Manila Mahogany Manufacturing Corporation v. Court of Appeals (154 SCRA 650 [1987]):

Note that if a property is insured and the owner receives the indemnity from the insurer, it is provided in said article that the insurer is
deemed subrogated to the rights of the insured against the wrongdoer and if the amount paid by the insurer does not fully cover the
loss, then the aggrieved party is the one entitled to recover the deficiency. Evidently, under this legal provision, the real party in interest
with regard to the portion of the indemnity paid is the insurer and not the insured. (Emphasis supplied).

It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the reinsurer.

Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's complaint as against the respondents for
the reason that the petitioner was not the real party in interest in the complaint and, therefore, has no cause of action against the
respondents.

Nevertheless, the petitioner argues that the appeal as regards the counter indemnitors should not have been dismissed on the premise
that the evidence on record shows that it is entitled to recover from the counter indemnitors. It does not, however, cite any grounds
except its allegation that respondent "Maglanas defense and evidence are certainly incredible" (p. 12, Rollo) to back up its contention.

On the other hand, we find the trial court's findings on the matter replete with evidence to substantiate its finding that the counter-
indemnitors are not liable to the petitioner. The trial court stated:

Apart from the foregoing proposition, the indemnity agreement ceased to be valid and effective after the execution of the chattel
mortgage.

Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

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Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved, agreed to issue the bond provided that the same
would be mortgaged to it, but this was not possible because the planes were still in Japan and could not be mortgaged here in the
Philippines. As soon as the aircrafts were brought to the Philippines, they would be mortgaged to Pioneer Insurance to cover the bond,
and this indemnity agreement would be cancelled.

The following is averred under oath by Pioneer in the original complaint:

The various conflicting claims over the mortgaged properties have impaired and rendered insufficient the security under the chattel
mortgage and there is thus no other sufficient security for the claim sought to be enforced by this action.

This is judicial admission and aside from the chattel mortgage there is no other security for the claim sought to be enforced by this
action, which necessarily means that the indemnity agreement had ceased to have any force and effect at the time this action was
instituted. Sec 2, Rule 129, Revised Rules of Court.

Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on the planes and spare parts, no longer has any
further action against the defendants as indemnitors to recover any unpaid balance of the price. The indemnity agreement was ipso jure
extinguished upon the foreclosure of the chattel mortgage. These defendants, as indemnitors, would be entitled to be subrogated to the
right of Pioneer should they make payments to the latter. Articles 2067 and 2080 of the New Civil Code of the Philippines.

Independently of the preceding proposition Pioneer's election of the remedy of foreclosure precludes any further action to recover any
unpaid balance of the price.

SAL or Lim, having failed to pay the second to the eight and last installments to JDA and Pioneer as surety having made of the payments
to JDA, the alternative remedies open to Pioneer were as provided in Article 1484 of the New Civil Code, known as the Recto Law.

Pioneer exercised the remedy of foreclosure of the chattel mortgage both by extrajudicial foreclosure and the instant suit. Such being
the case, as provided by the aforementioned provisions, Pioneer shall have no further action against the purchaser to recover any
unpaid balance and any agreement to the contrary is void.' Cruz, et al. v. Filipinas Investment & Finance Corp. No. L- 24772, May
27,1968, 23 SCRA 791, 795-6.

The operation of the foregoing provision cannot be escaped from through the contention that Pioneer is not the vendor but JDA. The
reason is that Pioneer is actually exercising the rights of JDA as vendor, having subrogated it in such rights. Nor may the application of
the provision be validly opposed on the ground that these defendants and defendant Maglana are not the vendee but indemnitors.
Pascual, et al. v. Universal Motors Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change of their maturity dates discharged these defendants from any liability
as alleged indemnitors. The change of the maturity dates of the obligations of Lim, or SAL extinguish the original obligations thru
novations thus discharging the indemnitors.

The principal hereof shall be paid in eight equal successive three months interval installments, the first of which shall be due and
payable 25 August 1965, the remainder of which ... shall be due and payable on the 26th day x x x of each succeeding three months and
the last of which shall be due and payable 26th May 1967.

However, at the trial of this case, Pioneer produced a memorandum executed by SAL or Lim and JDA, modifying the maturity dates of
the obligations, as follows:

The principal hereof shall be paid in eight equal successive three month interval installments the first of which shall be due and payable
4 September 1965, the remainder of which ... shall be due and payable on the 4th day ... of each succeeding months and the last of
which shall be due and payable 4th June 1967.

Not only that, Pioneer also produced eight purported promissory notes bearing maturity dates different from that fixed in the aforesaid
memorandum; the due date of the first installment appears as October 15, 1965, and those of the rest of the installments, the 15th of
each succeeding three months, that of the last installment being July 15, 1967.

These restructuring of the obligations with regard to their maturity dates, effected twice, were done without the knowledge, much less,
would have it believed that these defendants Maglana (sic). Pioneer's official Numeriano Carbonel would have it believed that these
defendants and defendant Maglana knew of and consented to the modification of the obligations. But if that were so, there would have

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been the corresponding documents in the form of a written notice to as well as written conformity of these defendants, and there are
no such document. The consequence of this was the extinguishment of the obligations and of the surety bond secured by the indemnity
agreement which was thereby also extinguished. Applicable by analogy are the rulings of the Supreme Court in the case of Kabankalan
Sugar Co. v. Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum Co. v. Hizon David, 45 Phil. 532, 538.

Art. 2079. An extension granted to the debtor by the creditor without the consent of the guarantor extinguishes the guaranty The mere
failure on the part of the creditor to demand payment after the debt has become due does not of itself constitute any extension time
referred to herein, (New Civil Code).'

Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.

Pioneer's liability as surety to JDA had already prescribed when Pioneer paid the same. Consequently, Pioneer has no more cause of
action to recover from these defendants, as supposed indemnitors, what it has paid to JDA. By virtue of an express stipulation in the
surety bond, the failure of JDA to present its claim to Pioneer within ten days from default of Lim or SAL on every installment, released
Pioneer from liability from the claim.

Therefore, Pioneer is not entitled to exact reimbursement from these defendants thru the indemnity.

Art. 1318. Payment by a solidary debtor shall not entitle him to reimbursement from his co-debtors if such payment is made after the
obligation has prescribed or became illegal.

These defendants are entitled to recover damages and attorney's fees from Pioneer and its surety by reason of the filing of the instant
case against them and the attachment and garnishment of their properties. The instant action is clearly unfounded insofar as plaintiff
drags these defendants and defendant Maglana.' (Record on Appeal, pp. 363-369, Rollo of G.R. No. 84157).

We find no cogent reason to reverse or modify these findings.

Hence, it is our conclusion that the petition in G.R. No. 84197 is not meritorious.

We now discuss the merits of G.R. No. 84157.

Petitioner Jacob S. Lim poses the following issues:

l. What legal rules govern the relationship among co-investors whose agreement was to do business through the corporate vehicle but
who failed to incorporate the entity in which they had chosen to invest? How are the losses to be treated in situations where their
contributions to the intended 'corporation' were invested not through the corporate form? This Petition presents these fundamental
questions which we believe were resolved erroneously by the Court of Appeals ('CA'). (Rollo, p. 6).

These questions are premised on the petitioner's theory that as a result of the failure of respondents Bormaheco, Spouses Cervantes,
Constancio Maglana and petitioner Lim to incorporate, a de facto partnership among them was created, and that as a consequence of
such relationship all must share in the losses and/or gains of the venture in proportion to their contribution. The petitioner, therefore,
questions the appellate court's findings ordering him to reimburse certain amounts given by the respondents to the petitioner as their
contributions to the intended corporation, to wit:

However, defendant Lim should be held liable to pay his co-defendants' cross-claims in the total amount of P184,878.74 as correctly
found by the trial court, with interest from the filing of the cross-complaints until the amount is fully paid. Defendant Lim should pay
one-half of the said amount to Bormaheco and the Cervanteses and the other one-half to defendant Maglana. It is established in the
records that defendant Lim had duly received the amount of Pl51,000.00 from defendants Bormaheco and Maglana representing the
latter's participation in the ownership of the subject airplanes and spare parts (Exhibit 58). In addition, the cross-party plaintiffs incurred
additional expenses, hence, the total sum of P 184,878.74.

We first state the principles.

While it has been held that as between themselves the rights of the stockholders in a defectively incorporated association should be
governed by the supposed charter and the laws of the state relating thereto and not by the rules governing partners (Cannon v. Brush
Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is ordinarily held that persons who attempt, but fail, to form a corporation and
who carry on business under the corporate name occupy the position of partners inter se (Lynch v. Perryman, 119 P. 229, 29 Okl. 615,
Ann. Cas. 1913A 1065). Thus, where persons associate themselves together under articles to purchase property to carry on a business,
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and their organization is so defective as to come short of creating a corporation within the statute, they become in legal effect partners
inter se, and their rights as members of the company to the property acquired by the company will be recognized (Smith v. Schoodoc
Pond Packing Co., 84 A. 268,109 Me. 555; Whipple v. Parker, 29 Mich. 369). So, where certain persons associated themselves as a
corporation for the development of land for irrigation purposes, and each conveyed land to the corporation, and two of them
contracted to pay a third the difference in the proportionate value of the land conveyed by him, and no stock was ever issued in the
corporation, it was treated as a trustee for the associates in an action between them for an accounting, and its capital stock was treated
as partnership assets, sold, and the proceeds distributed among them in proportion to the value of the property contributed by each
(Shorb v. Beaudry, 56 Cal. 446). However, such a relation does not necessarily exist, for ordinarily persons cannot be made to assume the
relation of partners, as between themselves, when their purpose is that no partnership shall exist (London Assur. Corp. v. Drennen,
Minn., 6 S.Ct. 442, 116 U.S. 461, 472, 29 L.Ed. 688), and it should be implied only when necessary to do justice between the parties; thus,
one who takes no part except to subscribe for stock in a proposed corporation which is never legally formed does not become a partner
with other subscribers who engage in business under the name of the pretended corporation, so as to be liable as such in an action for
settlement of the alleged partnership and contribution (Ward v. Brigham, 127 Mass. 24). A partnership relation between certain
stockholders and other stockholders, who were also directors, will not be implied in the absence of an agreement, so as to make the
former liable to contribute for payment of debts illegally contracted by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus
Juris Secundum, Vol. 68, p. 464). (Italics supplied).

In the instant case, it is to be noted that the petitioner was declared non-suited for his failure to appear during the pretrial despite
notification. In his answer, the petitioner denied having received any amount from respondents Bormaheco, the Cervanteses and
Maglana. The trial court and the appellate court, however, found through Exhibit 58, that the petitioner received the amount of
P151,000.00 representing the participation of Bormaheco and Atty. Constancio B. Maglana in the ownership of the subject airplanes and
spare parts. The record shows that defendant Maglana gave P75,000.00 to petitioner Jacob Lim thru the Cervanteses.

It is therefore clear that the petitioner never had the intention to form a corporation with the respondents despite his representations
to them. This gives credence to the cross-claims of the respondents to the effect that they were induced and lured by the petitioner to
make contributions to a proposed corporation which was never formed because the petitioner reneged on their agreement. Maglana
alleged in his cross-claim:

... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and Maglana to expand his airline business. Lim was to
procure two DC-3's from Japan and secure the necessary certificates of public convenience and necessity as well as the required permits
for the operation thereof. Maglana sometime in May 1965, gave Cervantes his share of P75,000.00 for delivery to Lim which Cervantes
did and Lim acknowledged receipt thereof. Cervantes, likewise, delivered his share of the undertaking. Lim in an undertaking sometime
on or about August 9,1965, promised to incorporate his airline in accordance with their agreement and proceeded to acquire the planes
on his own account. Since then up to the filing of this answer, Lim has refused, failed and still refuses to set up the corporation or return
the money of Maglana. (Record on Appeal, pp. 337-338).

while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, cross-claim and third party complaint:

Sometime in April 1965, defendant Lim lured and induced the answering defendants to purchase two airplanes and spare parts from
Japan which the latter considered as their lawful contribution and participation in the proposed corporation to be known as SAL.
Arrangements and negotiations were undertaken by defendant Lim. Down payments were advanced by defendants Bormaheco and the
Cervanteses and Constancio Maglana (Exh. E- 1). Contrary to the agreement among the defendants, defendant Lim in connivance with
the plaintiff, signed and executed the alleged chattel mortgage and surety bond agreement in his personal capacity as the alleged
proprietor of the SAL. The answering defendants learned for the first time of this trickery and misrepresentation of the other, Jacob Lim,
when the herein plaintiff chattel mortgage (sic) allegedly executed by defendant Lim, thereby forcing them to file an adverse claim in
the form of third party claim. Notwithstanding repeated oral demands made by defendants Bormaheco and Cervanteses, to defendant
Lim, to surrender the possession of the two planes and their accessories and or return the amount advanced by the former amounting
to an aggregate sum of P 178,997.14 as evidenced by a statement of accounts, the latter ignored, omitted and refused to comply with
them. (Record on Appeal, pp. 341-342).

Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto partnership was created among the
parties which would entitle the petitioner to a reimbursement of the supposed losses of the proposed corporation. The record shows
that the petitioner was acting on his own and not in behalf of his other would-be incorporators in transacting the sale of the airplanes
and spare parts.

7
WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of Appeals is AFFIRMED.

SO ORDERED.

Fernan, C.J., (Chairman), Bidin and Cortes, JJ., concur.

Feliciano, J., took no part.
G.R. No. 205925, June 20, 2018

BASES CONVERSION AND DEVELOPMENT AUTHORITY, Petitioner, v. COMMISSIONER OF INTERNAL REVENUE, Respondent.

DECISION

REYES, JR., J.:

This petition for review on certiorari1 under Rule 45 of the Rules of Court seeks to reverse and set aside the Decision 2 dated August 29,
2012 and Resolution3 dated February 12, 2013 of the Court of Tax Appeals (CTA) En Banc in CTA EB Case No. 797, which affirmed the
CTA First Division's dismissal of the case filed by herein petitioner Bases Conversion and Development Authority (BCDA) on the ground
that the latter failed to pay docket fees as required under Rule 141 of the Rules of Court.

The Facts

The facts, as summarized by the CTA En Banc, read as follows:

On October 8, 2010, BCDA filed a petition for review with the CTA in order to preserve its right to pursue its claim for refund of the
Creditable Withholding Tax (CWT) in the amount of Php122,079,442.53, which was paid under protest from March 19, 2008 to October
8, 2008. The CWT which BCDA paid under protest was in connection with its sale of the BCDA-allocated units as its share in the Serendra
Project pursuant to the Joint Development Agreement with Ayala Land, Inc.4

The petition for review was filed with a Request for Exemption from the Payment of Filing Fees in the amount of Php1,209,457.90.5

On October 20, 2010, the CTA First Division denied BCDA's Request for Exemption and ordered it to pay the filing fees within five days
from notice.6

BCDA moved for reconsideration which was denied by the CTA First Division on February 8, 2011. BCDA was once again ordered to pay
the filing fees within five days from notice, otherwise, the petition for review will be dismissed.7

BCDA filed a petition for review with the CTA En Banc on February 25, 2011, which petition was returned and not deemed filed without
the payment of the correct legal fees. BCDA once again emphasized its position that it is exempt from the payment of such fees. 8

On March 28, 2011, the petition before the CTA First Division was dismissed. BCDA attempted to tile its Motion for Reconsideration,
however, the Officer-In-Charge of the First Division refused to receive the checks for the payment of the filing fees, and the Motion for
Reconsideration. BCDA then filed its Motion for Reconsideration by registered mail. 9

Subsequently, BCDA filed a manifestation stating the incidents relating to the tiling of its Motion for Reconsideration. The CTA First
Division, on April 26, 2011, issued its Resolution,10 the dispositive portion of which states:

WHEREFORE, finding no reason to deny receipt of the supposed Motion for Reconsideration of the [BCDA] on the dismissal of its
Petition for Review, the Executive Clerk of Court III of this Division, Atty. Margarette Y. Guzman, is hereby DIRECTED to allow petitioner
BCDA to file the same, or to accept said pleading which was allegedly mailed through registered mail, upon receipt thereof, and to
commence the procedure in paying the prescribed docket fees, subject to the caveat herein stated, should petitioner BCDA decide to
pursue its case.

SO ORDERED.11

On May 17, 2011, BCDA moved for reconsideration of the Resolution dated April 26, 2011 and prayed that it be allowed to pay the
prescribed docket fees of Php1,209,457.90 without qualification. On June 9, 2011, the CTA First Division denied both motions for
reconsideration.12

On June 28, 2011, BCDA filed a petition for review with the CTA En Banc but the same was dismissed. In its assailed Decision13 dated
August 29, 2012, it adopted and affirmed the findings of the First Division, to wit:
8
BCDA fails to raise any new and substantial arguments, and no cogent reason exists to warrant a consideration of the Court's Resolution
dated March 28, 2011 dismissing its Petition for Review.

It must be emphasized that payment in full of docket fees within the prescribed period is mandatory. It is an essential requirement
without which the decision appealed from would become final and executory as if no appeal had been filed. To repeat, in both original
and appellate cases, the court acquires jurisdiction over the case only upon the payment of the prescribed docket fees.

In this case, due to BCDA's non-payment of the prescribed legal fees within the prescribed period, this Court has not acquired
jurisdiction over the case. Consequently, it is as if no appeal was ever filed with this Court. 14

Undeterred, BCDA filed a Motion15 for Reconsideration but was likewise denied by the CTA En Banc in the assailed Resolution16 dated
February 12, 2013.

Hence, this petition.

The Issues

I.

THE CTA EN BANC ERRED IN AFFIRMING THE CTA FIRST DIVISION'S RULING THAT BCDA IS NOT A GOVERNMENT INSTRUMENTALITY,
HENCE, NOT EXEMPT FROM PAYMENT OF LEGAL FEES.

II.

THE CTA EN BANC ERRED IN AFFIRMING CTA FIRST DIVISION'S RESOLUTION DISMISSING BCDA'S PETITION FOR REVIEW FOR NON-
PAYMENT OF THE PRESCRIBED LEGAL FEES WITHIN THE REGLEMENTARY PERIOD.

Ruling of the Court

The petition is impressed with merit.

BCDA is a government instrumentality vested with corporate powers. As such, it is exempt from the payment of docket fees.

At the crux of the present pet1t1on is the issue of whether or not BCDA is a government instrumentality or a government-owned and –
controlled corporation (GOCC). [fit is an instrumentality, it is exempt from the payment of docket fees. lf it is a GOCC, it is not exempt
and as such non-payment thereof would mean that the tax court did not acquire jurisdiction over the case and properly dismissed it for
BCDA's failure to settle the fees on time.

BCDA is a government instrumentality vested with corporate powers. As such, it is exempt from the payment of docket fees required
under Section 21, Rule 141 of the Rules or Court, to wit:

RULE 141
LEGAL FEES

SEC. 1. Payment of fees. – Upon the filing of the pleading or other application which initiates an action or proceeding, the fees
prescribed therefor shall be paid in full.

xxxx

SEC. 21. Government exempt. – The Republic of the Philippines, its agencies and instrumentalities, are exempt from paying the legal
fees provided in this rule. Local governments and government-owned or controlled corporations with or without independent charters
are not exempt from paying such fees. (Emphasis Ours)

Section 2(10) and (13) of the Introductory Provisions of the Administrative Code of 1987 provides for the definition of a government
"instrumentality" and a "GOCC", to wit:

SEC. 2. General Terms Defined. x x x x

9
(10) Instrumentality refers to any agency of the National Government. not integrated within the department framework, vested with
special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying
operational autonomy, usually through a charter. x x x.

xxxx

(13) Government-owned or controlled corporation refers to any agency organized as a stock or non-stock corporation, vested with
functions relating to public needs whether governmental or proprietary in nature, and owned by the Government directly or through its
instrumentalities either wholly, or, where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent
of its capital stock: x x x. (Emphasis Ours)

The grant of these corporate powers is likewise stated in Section 3 of Republic Act (R.A.) No. 7227; also known as The Bases Conversion
and Development Act of 1992 which provides for BCDA's manner of creation, to wit:

Sec. 3. Creation of the Bases Conversion and Development Authority. - There is hereby created a body corporate to be known as the
Bases Conversion and Development Authority, which shall have the attribute of perpetual succession and shall be vested with the
powers of a corporation. (Emphasis Ours)

From the foregoing, it is clear that a government instrumentality may be endowed with corporate powers and at the same time retain
its classification as a government "instrumentality" for all other purposes.

In the 2006 case of Manila International Airport Authority v. CA,17 the Court, speaking through Associate Justice Antonio T. Carpio,
explained in this wise:

Many government instrumentalities are vested with corporate powers but they do not become stock or non-stock corporations, which is
a necessary condition before an agency or instrumentality is deemed a [GOCC]. Examples are the Mactan International Airport
Authority, the Philippine Ports Authority, the University of the Philippines and Bangko Sentral ng Pilipinas. All these government
instrumentalities exercise corporate powers but they are not organized as stock or non-stock corporations as required by Section 2 (13)
of the Introductory Provisions of the Administrative Code. These government instrumentalities arc sometimes loosely called
government corporate entities. However, they are not [GOCCs] in the strict sense as understood under the Administrative Code, which
is the governing law defining the legal relationship or status of government entities. 18

Moreover, in the 2007 case of Philippine Fisheries Development Authority v. CA,19 the Court reiterated that a government
instrumentality retains its classification as such albeit having been endowed with some if not all corporate powers. The relevant portion
of said decision reads as follows:

Indeed, the Authority is not a GOCC but an instrumentality of the government. The Authority has a capital stock but it is not divided into
shares of stocks. Also, it has no stockholders or voting shares. Hence, it is not a stock corporation. Neither is it a non-stock corporation
because it has no members.

The Authority is actually a national government instrumentality which is define as an agency of the national government, not integrated
within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers,
administering special funds and enjoying operational autonomy, usually through a charter. When the law vests in a government
instrumentality corporate powers, the instrumentality does not become a corporation. Unless the government instrumentality is
organized as a stock or non-stock corporation, it remains a government instrumentality exercising not only governmental but also
corporate powers.20

As previously mentioned, in order to qualify as a GOCC, one must be organized either as a stock or non-stock corporation. Section 321 of
the Corporation Code defines a stock corporation as one whose "capital stock is divided into shares and x x x authorized to distribute to
the holders of such shares dividends x x x.''

Section 6 of R.A. No. 7227 provides for BCDA's capitalization, to wit:

Sec. 6. Capitalization. – The Conversion Authority shall have an authorized capital of One hundred billion pesos (P100,000,000,000.00)
which may be fully subscribed by the Republic of the Philippines and shall either be paid up from the proceeds of the sales of its land
assets as provided for in Section 8 of this Act or by transferring to the Conversion Authority properties valued in such amount.

10
An initial operating capital in the amount of seventy million pesos (P70,000,000.00) is hereby authorized to be appropriated out of any
funds in the National Treasury not otherwise appropriated which shall be covered by preferred shares of the Conversion Authority
retireable within two (2) years.

Based on the foregoing, it is clear that BCDA has an authorized capital of Php100 Billion, however, it is not divided into shares of stock.
BCDA has no voting shares. There is likewise no provision which authorizes the distribution of dividends and allotments of surplus and
profits to BCDA's stockholders. Hence, BCDA is not a stock corporation.

Section 8 of R.A. No. 7227 provides an enumeration of BCDA's purposes and their corresponding percentage shares in the sales
proceeds of BCDA. Section 8 likewise states that after distribution of the proceeds acquired from BCDA's activities, the balance, if any,
shall accrue and be remitted to the National Treasury, to wit:

Sec. 8. Funding Scheme.—The capital of the Conversion Authority shall come from the sales proceeds and/or transfers of certain Metro
Manila military camps, including all lands covered by Proclamation No. 423, series of 1957, commonly known as Fort Bonifacio and
Villamor (Nicholas) Air Base x x x.

xxxx

The President is hereby authorized to sell the above lands, in whole or in part, which are hereby declared alienable and disposable
pursuant to the provisions of existing laws and regulations governing sales of government properties: provided, that no sale or
disposition of such lands will be undertaken until a development plan embodying projects for conversion shall be approved by the
President in accordance with paragraph (b), Sec. 4, of this Act. However, six (6) months after approval of this Act, the President shall
authorize the Conversion Authority to dispose of certain areas in Fort Bonifacio and Villamor as the latter so determines. The Conversion
Authority shall provide the President a report on any such disposition or plan for disposition within one (1) month from such disposition
or preparation of such plan. The proceeds from any sale, after deducting all expenses related to the sale, of portions of Metro Manila
military camps as authorized under this Act, shall be used for the following purposes with their corresponding percent shares of
proceeds:

(1) Thirty-two and five-tenths percent (35.5%) — To finance the transfer of the AFP military camps and the construction of new camps,
the self-reliance and modernization program of the AFP, the concessional and long-term housing loan assistance and livelihood
assistance to AFP officers and enlisted men and their families, and the rehabilitation and expansion of the AFP's medical facilities;

(2) Fifty percent (50%) — To finance the conversion and the commercial uses of the Clark and subic military reservations and their
extentions;

(3) Five Percent (5%) — To finance the concessional and long-term housing loan assistance for the homeless of Metro Manila, Olongapo
City, Angeles City and other affected municipalities contiguous to the base areas as mandated herein: and

(4) The balance shall accrue and be remitted to the National Treasury to be appropriated thereafter by Congress for the sole purpose
of financing programs and projects vital for the economic upliftment of the Filipino people. (Emphasis Ours)

The remaining balance, if any, from the proceeds of BCDA's activities shall be remitted to the National Treasury. The National Treasury is
not a stockholder of BCDA Hence, none of the proceeds from BCDA's activities will be allotted to its stockholders.

BCDA also does not qualify as a non-stock corporation because it is not organized for any of the purposes mentioned under Section 88
of the Corporation Code, to wit:

Sec. 88. Purposes. – Non-stock corporations may be formed or organized tor charitable, religious, educational, professional, cultural,
fraternal, literary, scientific, social, civic service, or similar purposes, like trade industry, agricultural and like chambers, or any
combination thereof: subject to the special provisions of this Title governing particular classes of non-stock corporations.

A cursory reading of Section 4 of R.A. No. 7227 shows that BCDA is organized for a specific purpose - to own, hold and/or administer the
military reservations in the country and implement its conversion to other productive uses, to wit:

Sec. 4. Purposes of the Conversion Authority. — The Conversion Authority shall have the following purposes:

11
(a) To own, hold and/or administer the military reservations of John Hay Air Station, Wallace Air Station, O'Donnell Transmitter Station,
San Miguel Naval Communications Station. Mt. Sta. Rita Station (Hermosa, Bataan) and those portions of Metro Manila military camps
which may be transferred to it by the President:

(b) To adopt, prepare and implement a comprehensive and detailed development plan embodying a list of projects including but not
limited to those provided in the Legislative-Executive Bases Council (LEBC) framework plan for the sound and balanced conversion of
the Clark and Subic military reservations and their extensions consistent with ecological and environmental standards, into other
productive uses to promote the economic and social development of Central Luzon in particular and the country in general;

(c) To encourage the active participation of the private sector in transforming the Clark and Subic military reservations and their
extensions into other productive uses;

(d) To serve as the holding company of subsidiary companies created pursuant to Section 16 of this Act and to invest in Special
Economic Zones declared under Sections 12 and 15 of this Act;

(e) To manage and operate through private sector companies developmental projects outside the jurisdiction of subsidiary companies
and Special Economic Zones declared by presidential proclamations and established under this Act;

(f) To establish a mechanism in coordination with the appropriate local government units to effect meaningful consultation regarding
the plans, programs and projects within the regions where such plans, programs and/or project development are part of the
conversion of the Clark and Subic military reservations and their extensions and the surrounding communities as envisioned in this Act;
and

(g) To plan, program and undertake the readjustment, relocation, or resettlement of population within the Clark and Subic military
reservations and their extensions as may be deemed necessary and beneficial by the Conversion Authority, in coordination with the
appropriate government agencies and local government units. (Emphases Ours)

From the foregoing, it is clear that BCDA is neither a stock nor a non-stock corporation. BCDA is a government instrumentality vested
with corporate powers. Under Section 21,22 Rule 141 of the Rules of Court, agencies and instrumentalities of the Republic of the
Philippines are exempt from paying legal or docket fees. Hence, BCDA is exempt from the payment of docket fees.
WHEREFORE, premises considered, the present petition is GRANTED. The Decision dated August 29, 2012 and Resolution dated February 12, 2013 of the CTA En Banc are
hereby REVERSED and SET ASIDE.

Let this case be remanded to the Court of Tax Appeals for further proceedings regarding Bases conversion and Development Authority's claim for refund of the Creditable
Withholding Tax (CWT) in the amount of P122,079,442.53 which the latter paid under protest from March 19, 2008 to October 8, 2008.

SO ORDERED.

Carpio* (Chairperson), Peralta, Perlas-Bernabe, and Caguioa, JJ., concur.

Endnotes:
*
Senior Associate Justice (Per Section 12, R.A. No. 296 The Judiciary Act of 1948, as amended)
1Rollo, pp. 3-28.

2 Penned by Associate Justice Amelia R. Cotangco-Manalastas; id. at 33-41.

3
Id. at 43-45.
4 Id. at 34.

5
Id.
6 Id.

7 Id. at 35.

8 Id.

9 Id.

10 Id.

11 Id.

12 Id.

13 Id. at 33-41.

14 Id. at 39-40.

15 Id. at 138-162.

16 Id. at 43-45.

17 528 Phil. 181 (2006).

18 Id. at 213.

19 555 Phil 661 (2007).

12
20Id. at 669-670.
21Sec. 3. Classes of corporations. - Corporations formed or organized under this Code may be stock or non-stock corporations. Corporations which have capital stock
divided into shares and are authorized to distribute to the holders of such shares dividends or allotments of the surplus profits on the basis of the shares held are stock
corporations. All other corporations are non-stock corporations.
22SEC. 21. Government exempt. - The Republic of the Philippines, its agencies and instrumentalities, are exempt from paying legal fees provided in this rule. Local

governments and government-owned or controlled corporations with or without independent charters are not exempt from paying such fees.

13