Legal Provision from Villareal v.

Ramirez:

Provision:
The Court held that since a partnership is a separate juridical entity, the shares to be paid out to the partners
are necessarily limited only to its total resources. This means that the partnership itself, as a separate and
distinct entity, is responsible for refunding the shares of the partners. However, the partnership can only pay
the partners after it has paid all its creditors. The remaining assets, after settling debts, will be available to
refund the partners' shares.

Simplified Explanation:

1. Separate Juridical Entity:

A partnership is treated as its own separate "person" in the eyes of the law. It means that the
partnership itself owns assets and can owe debts, separate from the personal assets and debts of the
individual partners.
2. Limited Resources for Payouts:
The money or assets the partnership has are the only things that can be used to pay back the partners.
If the partnership has $100,000 in assets, that’s the maximum amount available to be shared among
the partners.
3. Priority of Creditors:
Before partners get any money, the partnership must first pay off all its debts. For example, if the
partnership owes $60,000 to creditors, that amount must be paid first. Only the remaining $40,000
(from the initial $100,000) can be shared among the partners.
4. Final Distribution to Partners:
After all debts are paid, whatever is left can be divided among the partners based on their agreed share
in the partnership. If there's money left after paying off all debts, then it can be given to the partners.
However, if the partnership’s debts are larger than its assets, there might be nothing left for the
partners.

Art. 1828. Understanding the Concepts of Partnership Dissolution, Winding Up, and Termination:

1. Dissolution of a Partnership:

● Definition: Dissolution happens when there is a change in the relationship between the partners,
caused by one partner leaving or ceasing to be involved in the business.
● Key Point: Even though the partnership is "dissolved," this doesn’t mean the partnership is
immediately ended. Instead, it simply means that the partners stop running the business together. The
partnership continues to exist legally until the winding up of its affairs is completed.

2. Winding Up:

● Definition: Winding up is the process that happens after dissolution, where the partnership settles its
business, pays off debts, collects what’s owed, and prepares to distribute the remaining assets to the
partners.
● Examples of Winding Up:
○ Paying off previous debts.
○ Collecting money owed to the partnership.
○ Selling remaining goods or assets.
● Key Point: The winding-up process is crucial because it ensures that all financial matters are settled
before the partnership is officially ended.

3. Termination:

● Definition: Termination occurs after the winding-up process is complete. This is the point when the
partnership no longer exists in any form.
● Key Point: Termination is the final step after dissolution and winding up. It’s the end of the partnership’s
life cycle.
Distinction Between Dissolution, Winding Up, and Partition or Distribution:

● Dissolution is simply the start of the process where the partners decide not to carry on the business
together anymore.
● Winding Up is the intermediate step where all remaining business affairs are settled.
● Termination is the conclusion of the partnership after all business has been settled, and any remaining
assets are distributed.

Example Problem Analysis:

Scenario:

● A marble quarrying and export business partnership originally consisted of general and limited partners.
● The original partners (L, R, and C) sold their interests to new partners (W and Z).
● X, an employee of the old partnership, is not paid his full salary and later finds out the business is now
owned by W and Z, who deny responsibility for his unpaid wages.

Legal Questions:

1. Was the old partnership extinguished and replaced by a new one?

○ Answer: Yes. The old partnership was dissolved when L, R, and C sold their interests, and a
new partnership was formed by W and Z. This dissolution, however, does not mean the
immediate end of the partnership's legal obligations.
2. Can X claim his rights under his old employment contract against the new partnership?
○ Answer: Yes. The new partnership that continues the business without properly winding up the
old partnership's affairs inherits the old partnership's obligations, including unpaid wages owed
to X. X can enforce his claims against the new partnership.

Legal Basis:

● Article 1840 of the Civil Code: It establishes that when a new partnership continues the business of a
dissolved one without proper winding up, the creditors (like X) of the old partnership can hold the new
partnership accountable for the old partnership's debts.

Summary:

● Dissolution is the start of ending a partnership, where partners stop doing business together.
● Winding Up is the process of settling all business matters before the partnership officially ends.
● Termination is the final closure of the partnership after all debts are paid, and assets are distributed.
● In the provided scenario, even though the old partnership dissolved, the new partnership continues its
obligations, and X can claim his unpaid salary from the new partnership.

Understanding Article 1829 and Its Application in the Problem:

Article 1829 Explanation:

● Provision: Article 1829 states that when a partnership is dissolved, it doesn’t immediately cease to
exist. The partnership continues to exist for the purpose of winding up its affairs, which means settling
debts, liquidating assets, and distributing any remaining assets to the partners. Only after all these
tasks are completed is the partnership finally terminated.

Key Concept:

● Dissolution vs. Termination: Dissolution refers to the point when the partners decide to stop running
the business together. However, the partnership's legal existence continues until the winding-up
process is complete. Termination is the final step when all business is settled, and the partnership no
longer exists.

Problem Analysis:
Scenario Summary:

● In March 1946, V, T, and P formed a partnership to engage in the printing business. V was supposed to
receive salaries as the President and Editor of the partnership, but T, who managed the finances, never
paid him.
● V also took a personal loan and pledged his share in the partnership equipment as collateral. T later
paid this loan and took ownership of V’s share, eventually becoming the majority owner.
● T changed the business name and continued running it without paying V or providing an accounting.
● V filed a lawsuit against T nearly 10 years after the partnership contract expired.

Issues Addressed:

1. Does the Partnership Continue Beyond Its Term?

○ General Rule (Article 1785): When a partnership for a fixed term continues beyond its term
without any express agreement, the rights and duties of the partners remain as they were
before, indicating that the partnership continues as a "partnership at will."
○ Application: However, this general rule doesn’t apply here because T repudiated the
partnership by changing the business name, taking full control of the business, and not paying V
any agreed-upon amounts. By these actions, T effectively ended the partnership, and thus, the
partnership didn’t continue in the usual sense after its original term expired.
2. V’s Claim for Unpaid Salaries and Accounting:
○ T’s Repudiation: T's actions, such as taking over the business, changing the name, and not
acknowledging V's role, indicate a repudiation of the partnership. This means T acted as if the
partnership no longer existed, which V likely knew or should have known.
○ Effect of Repudiation: When T repudiated the partnership in 1947, it was a clear signal that the
partnership was effectively over. The fact that V didn’t pursue his claims until 1961 (almost 10
years after the partnership’s term ended) weakens his case, as it suggests he accepted T’s
actions or at least didn’t timely challenge them.
3. Prescription (Time Limit to File Claims):
○ Running of Prescription: In cases where one partner repudiates the partnership and the other
partner does not challenge it within a reasonable time, the right to bring a claim can be lost due
to prescription. Here, V waited nearly 10 years after the partnership expired to file his claim,
which is far too long.

Conclusion:

● V’s Claim is Untenable: The reliance on Articles 1785 and 1829 by V is misplaced because these
articles assume the partnership continues normally until the winding-up process is complete. In this
case, T’s actions in repudiating the partnership and V’s long delay in asserting his rights make V’s claim
invalid. T's conduct of changing the business name, transferring the place of business, and not paying
V any salaries shows that the partnership effectively ended long before V’s lawsuit was filed.

Summary of Key Points:

● Dissolution doesn’t end a partnership immediately; it continues for the purpose of winding up.
● Repudiation by one partner (like T’s actions) can effectively end a partnership, especially if the other
partner (V) doesn’t timely challenge it.
● V’s delay in filing a lawsuit after the partnership's expiration significantly weakens his case due to the
principle of prescription (time limits for filing claims).

Article 1830 of the Civil Code outlines the causes for the dissolution of a partnership, which can occur both
without and in contravention of the partnership agreement. The dissolution can result from various events,
including the natural termination of the partnership's term, the express will of any partner, or other specific
circumstances. Here’s a breakdown:

1. Without violation of the agreement between the partners:

○ Definite Term or Particular Undertaking: The partnership dissolves when the specified term
ends or the agreed-upon objective is accomplished. For example, a partnership formed to build
a building would dissolve after the construction is completed.
 ○ Express Will of Any Partner (Good Faith): If the partnership does not have a fixed term, any
partner can dissolve it at will, provided they act in good faith.
○ Express Will of All Partners: If all partners agree, they can dissolve the partnership, whether
or not the partnership term has ended.
○ Expulsion of a Partner: A partner may be expelled in good faith if the partnership agreement
allows for it, leading to the partnership's dissolution.
2. In contravention of the agreement:
○ Any partner can dissolve the partnership at any time, even if it breaches the agreement, though
they may be liable for damages.
3. Illegality: If continuing the business becomes illegal, the partnership must dissolve. For example, if a
law is passed prohibiting the partnership's business activities, the partnership dissolves.
4. Loss of Specific Contribution: If a partner's promised contribution is lost before being delivered, and
the partner cannot provide something else, the partnership may dissolve.
5. Death of a Partner: The partnership dissolves upon the death of any partner unless otherwise agreed.
6. Insolvency: If a partner or the partnership becomes insolvent, it results in dissolution.
7. Civil Interdiction: A partner being placed under civil interdiction, which restricts their legal rights to
manage and dispose of their property, also causes dissolution.
8. Judicial Dissolution: A court decree under certain circumstances can dissolve the partnership.

Extrajudicial Dissolution refers to dissolutions under points 1 to 7, which occur without court intervention,
while Judicial Dissolution is specifically covered by point 8, requiring a court's involvement.

Case Examples:

● In a scenario where most partners sell their interests to new partners, resulting in a new partnership,
the original partnership dissolves. The new partnership, however, may continue the business and be
liable for the old partnership's debts.
● When a partner wants to withdraw from a partnership with a fixed term before it ends, they can do so,
causing dissolution, but may be liable for damages due to breach of contract.

Understanding these provisions helps clarify the legal framework governing partnership dissolution and the
potential consequences for the partners involved.

Article 1831 of the Civil Code provides that a court can dissolve a partnership based on certain conditions.
The provision outlines who can seek judicial dissolution and under what circumstances:

Who Can Sue for Judicial Dissolution?

1. A Partner: Any partner can apply for dissolution if any of the following grounds are present:
○ Insanity or Unsound Mind: If a partner has been declared insane or is shown to be of unsound
mind, dissolution can be sought. Insanity must be legally proven, as the law presumes sanity.
○ Incapacity: If a partner becomes incapable of fulfilling their role in the partnership, the court
may dissolve the partnership. For example, if a partner is legally prevented from participating in
the partnership's activities.
○ Prejudicial Conduct: If a partner's behavior negatively affects the business, dissolution can be
decreed. This could include unethical actions, criminal behavior, or anything that harms the
partnership's operations.
○ Persistent Breach of Agreement: If a partner repeatedly breaches the partnership agreement
or conducts themselves in a way that makes it impractical to continue the partnership,
dissolution is justified. An example would be a partner who consistently neglects their duties due
to substance abuse.
○ Unprofitable Business: If the partnership can only continue by incurring losses, dissolution is
an option. Partnerships are meant to be profitable, and if that is no longer feasible, continuing
the business may not be reasonable.
○ Equitable Grounds: The court can also dissolve a partnership if other circumstances make it
fair to do so. This is a catch-all provision for situations not explicitly covered by the other
grounds.
 2. Purchaser of a Partner’s Interest: A person who buys a partner’s interest in the partnership can also
apply for dissolution under certain conditions:
○ After Termination: If the partnership was for a specific term or undertaking, the purchaser can
seek dissolution once that term or undertaking ends.
○ At Will Partnerships: If the partnership is at will (meaning it can be dissolved by any partner at
any time), the purchaser can apply for dissolution at any time after acquiring the interest.

Case Illustrations:

1. Partnership Disputes: In the example of Y and X in W Panciteria, Y contributed money to the

partnership and later sought dissolution due to X’s failure to share profits. The court could dissolve the
partnership under Article 1831 because X’s conduct (withholding profits) prejudicially affected the
partnership.
2. Assignment of Partnership Interest: In the joint venture case, X assigned his interest to W. Even
though W did not become a partner, she could seek dissolution of the joint venture because she
acquired X’s interest. The court would allow this under the same Article, recognizing her right as the
assignee of a partner’s interest.

Key Takeaways:

● Judicial Dissolution: This is a legal remedy available when a partnership can no longer function as
intended, either due to a partner’s conduct, incapacity, or external circumstances.
● Partnership Dynamics: The relationship between partners is crucial. Issues like misconduct or
incapacity can disrupt the partnership to the point where court intervention is necessary.
● Rights of Assignees: Even if someone is not a partner, they may have the right to dissolve the
partnership if they hold a partner’s interest, particularly when the partnership is at will or the specified
term has ended.

Article 1832 of the Civil Code explains the general rule that once a partnership is dissolved, the authority of
any partner to act on behalf of the partnership generally ends. However, there are specific exceptions where a
partner may still have authority to act, particularly in winding up the partnership's affairs or completing
unfinished transactions.

Key Points of Article 1832:

1. Termination of Authority:
○ General Rule: After dissolution, a partner cannot bind the partnership in new transactions. This
means that they no longer have the legal power to enter into contracts or agreements on behalf
of the partnership.
○ Exception to the Rule: The authority to act continues only as necessary to:
■ Wind Up Partnership Affairs: This includes actions required to settle the partnership's
obligations, sell its assets, pay debts, and distribute any remaining assets to the
partners.
■ Complete Unfinished Transactions: If a transaction was started before the dissolution,
the partner may continue to act to complete that specific transaction.
2. Different Situations Based on the Cause of Dissolution:
○ With Respect to the Partners:
■ When the Dissolution is Not by Act, Insolvency, or Death of a Partner (Article
1832(1)(a)): If the dissolution is due to reasons other than a partner's act, insolvency, or
death, the general rule applies, and the authority to act for the partnership ends, except
for winding up or completing unfinished transactions.
■ When the Dissolution is by Act, Insolvency, or Death of a Partner (Article
1832(1)(b)): If the dissolution is caused by one of these reasons, Article 1833 provides
specific guidelines on when and how a partner may still have authority, primarily for
winding up purposes.
○ With Respect to Third Parties (Persons Not Partners):
 ■ Article 1834 outlines how a partner's authority to act for the partnership affects third
parties after dissolution. Generally, third parties are bound by the same limitations, but
there may be exceptions if they are unaware of the dissolution and act in good faith.

Example Scenario:

Consider a partnership between A, B, and C. If the partnership is dissolved today, none of the partners can
bind the partnership in new contracts or agreements. However, if there are pending transactions that were
initiated before the dissolution or if they need to liquidate the partnership's assets, they still have the authority
to act solely for those purposes. For instance, if A had started negotiating a contract for the sale of partnership
assets before dissolution, A could finalize that contract to complete the sale as part of the winding-up process.

Conclusion:

The dissolution of a partnership generally ends the partners' authority to bind the partnership in new business
matters. However, to ensure the orderly closure of the partnership's affairs, the law allows partners to act as
necessary to finalize existing obligations and transactions. Articles 1833 and 1834 further clarify these
exceptions, particularly in cases involving the death, insolvency, or specific acts of a partner.

Article 1833 of the Civil Code addresses the liability and authority of partners in cases where the partnership is
dissolved due to the act, death, or insolvency of a partner. Here's a breakdown of the provisions:

Key Provisions of Article 1833:

1. Authority to Bind the Partnership Post-Dissolution:

○ When a partnership is dissolved due to the act of a partner, death, or insolvency of a partner,
transactions entered into by a partner after dissolution may still be binding on the partnership,
but this depends on certain conditions.
2. Conditions for Binding Transactions:
○ Act of a Partner:
■ If the dissolution is caused by the act of a partner, the transactions entered into by other
partners after the dissolution will still be binding if the partner acting for the partnership
did not have knowledge of the dissolution.
■ If the partner had knowledge of the dissolution, then the transactions made by that
partner may not bind the partnership.
○ Death or Insolvency:
■ If the dissolution is due to the death or insolvency of a partner, the partnership is bound
by transactions made by other partners with third parties who were unaware of the death
or insolvency, provided the third party is acting in good faith.
■ If the other partners knew about the death or insolvency, the transactions may not be
binding.

Examples to Illustrate:

1. Dissolution Due to Withdrawal of a Partner:

○ Scenario: Partners A, B, and C. Partner A withdraws, causing dissolution.
■ If B and C transact with X without X knowing about A’s withdrawal: The transaction
with X is valid and binding on the partnership. Since X is in good faith, the partnership is
liable for the transaction. After C pays his share of the liability to X, C can seek
reimbursement from B.
■ If B knew about A’s withdrawal and transacts with X who is unaware: The
transaction with X is still valid and binding on the partnership, and C can seek
reimbursement from B after paying his share.
2. Dissolution Due to Death of a Partner:
○ Scenario: Partners B and C, where A has died.
■ If B, who knows about A’s death, transacts with Y who is unaware of the death:
The transaction with Y is binding on the partnership. Both B and C are liable to Y. After C
pays his share, he can seek reimbursement from B.
Summary:

● For Third Parties Not Aware of Dissolution: Transactions with third parties who are unaware of the
dissolution, death, or insolvency of a partner are generally binding on the partnership.
● For Partners Knowing About the Dissolution: Transactions entered into by partners who are aware
of the dissolution, death, or insolvency of a partner may not bind the partnership, especially if the third
party is unaware and acts in good faith.
● Reimbursement: Partners who pay more than their share of liability due to these transactions can
seek reimbursement from the other partners.

These provisions ensure that third parties acting in good faith are protected, while also providing a mechanism
for partners to settle liabilities and seek reimbursement as needed.

Article 1834 of the Civil Code addresses the authority and liability of partners after the dissolution of a
partnership. Here’s a detailed breakdown:

I. Authority and Liability After Dissolution

1. Binding Transactions:
○ Acts for Winding Up:
■ Example: After dissolution, B sells the partnership’s remaining goods and equipment to
complete the winding-up process. This transaction is binding on the partnership.
○ Unfinished Transactions:
■ Example: B delivers undelivered goods to a client, X, based on a contract made before
dissolution. This act is binding as it completes an unfinished transaction.
○ Transactions Binding if Dissolution Had Not Occurred:
■ a. Credit Extended Before Dissolution:
■ Example: X extended credit to the partnership before dissolution. If X enters into
a new contract with B (or any other partner) post-dissolution, the partnership is
still liable if X was unaware of the dissolution.
■ b. Knowledge of Partnership Before Dissolution:
■ Example: X was a supplier known to the partnership before its dissolution. If X
transacts with C (post-dissolution) and has no notice of the dissolution, the
partnership is liable if the dissolution wasn't advertised in a newspaper.
2. Conditions Where the Partnership is Not Liable:
○ Unlawful Business:
■ Example: The partnership was dissolved because their product was declared unlawful.
B sells the product to X. The partnership is not liable for this transaction.
○ Insolvent Partner:
■ Example: C, an insolvent partner, enters into a contract with X after dissolution. The
partnership is not liable for this contract.
○ No Authority to Wind Up:
■ Example: B is the designated liquidating partner. If A, who has no authority to wind up,
enters into a contract with X, the partnership is generally not liable. However, if X was
unaware of the dissolution and did not know A lacked authority, and if the dissolution
was not advertised, the partnership may still be liable.

Application of the Article:

● Winding Up and Completing Transactions: Partners may act to finalize partnership affairs and
complete pending transactions even after dissolution. These acts are binding on the partnership.
● Transactions Post-Dissolution:
○ If a transaction is made with a party who had prior credit or knowledge of the partnership and
the dissolution wasn’t properly advertised, the partnership may be liable.
○ If the partnership’s business has become unlawful, or if a partner who was not authorized to
wind up acts beyond their authority, the partnership typically isn’t liable for those transactions.

Summary:
 ● Binding Transactions: Partners can bind the partnership for transactions necessary to wind up affairs
or complete transactions that were underway before dissolution. Transactions with third parties who
were unaware of the dissolution (and where proper notice wasn’t given) are generally binding.
● Exceptions: The partnership won’t be liable for transactions made by partners if the business was
unlawful, if a partner is insolvent, or if the partner lacked authority to wind up the partnership affairs
unless the third party was unaware of these conditions and proper notice wasn’t given.

This article ensures that third parties are protected in transactions made in good faith and provides a
framework for handling partnership liabilities and authority post-dissolution.

Article 1835 of the Civil Code addresses the liability of partners and the impact of dissolution on those
liabilities. Here’s a detailed breakdown:

General Rule

● Existing Liability:
○ Dissolution of a partnership alone does not discharge any partner from existing liabilities. The
partnership remains liable for debts incurred before dissolution, and the partners remain liable
until those debts are settled.

Discharge of Liability

● Agreement Required:
○ A partner can be discharged from liability upon dissolution if:
1. Agreement Among Parties: There is an agreement between the partner, the
partnership creditors, and the person or partnership continuing the business.
2. Inferred Agreement: An agreement can be inferred from the course of dealing between
the creditor (who has knowledge of the dissolution) and the person or partnership
continuing the business.

Property of a Deceased Partner

● Liability of Individual Property:

○ The individual property of a deceased partner remains liable for the partnership’s obligations
incurred while the deceased was a partner.
○ Priority of Claims: The deceased partner’s separate debts must be paid first from their
individual property. Any remaining property can then be used to satisfy the deceased partner's
share of the partnership liabilities.

Example for Clarification

● Scenario:
○ The partnership of A, B, and C is dissolved due to the death of C.
○ X is a creditor of the partnership, and Y is a private creditor of C.
● Liability of C’s Separate Property:
○ To X (Partnership Creditor): The separate property of C can be used to satisfy C’s share of the
partnership liability to X, but only after paying C’s separate debts to Y.
○ To Y (Private Creditor): The separate property of C must first be used to pay C’s individual
debts before addressing any partnership liabilities.

Summary

● Dissolution Alone: Does not discharge a partner from existing liabilities.

● Discharge: Requires a specific agreement between the partner, creditors, and continuing partners, or
may be inferred from dealings.
● Deceased Partner’s Property: Is liable for partnership debts but must first cover the deceased
partner’s separate debts before addressing partnership liabilities.
This ensures that all obligations are properly settled before a partner can be completely discharged from
liability following the dissolution of a partnership.

Article 1836 outlines the procedures for winding up or liquidating a partnership following dissolution,
distinguishing between extrajudicial and judicial methods.

I. Extrajudicial Liquidation

● Definition:
1. Winding up is done without court intervention.
● Who May Wind Up:
1. Agreed Liquidators: Partners who have been designated to wind up the partnership as agreed
upon by all partners.
2. Non-Wrongfully Dissolving Partners: Partners who did not wrongfully dissolve the partnership
have the right to wind up the affairs.
3. Legal Representative: The legal representative of the last surviving partner who is not
insolvent can also perform the winding-up.

II. Judicial Liquidation

● Definition:
○ Winding up is conducted under the control and direction of the court.
● Who May Wind Up:
○ The person appointed by the court will manage the liquidation process.
● Conditions for Judicial Liquidation:
○ It occurs when there is a proper cause shown to the court that necessitates judicial intervention.

Key Points:

1. Extrajudicial Winding Up:

○ Preferred when partners can amicably agree on who will handle the winding-up process.
○ Avoids the need for court involvement unless a dispute arises.
2. Judicial Winding Up:
○ Used when disputes or complications require court oversight.
○ Ensures that liquidation is conducted fairly and according to legal standards.

In essence, Article 1836 provides flexibility in the liquidation process, allowing for both partner-led and
court-directed solutions depending on the circumstances and any existing agreements among the partners.

Article 1837 deals with the distribution of assets and handling of liabilities in the event of partnership
dissolution, particularly addressing situations where dissolution occurs in accordance with or in violation of the
partnership agreement.

I. Dissolution Without Contravention of the Partnership Agreement

1. Application of Partnership Property:

○ The partnership property should first be used to discharge the partnership’s liabilities.
○ Any remaining assets (surplus) are then distributed in cash to the partners based on their net
amounts owed.
2. Expulsion of a Partner:
○ If a partner is expelled in good faith according to the partnership agreement, and is discharged
from all partnership liabilities, they are entitled only to the net amount due to them in cash.

II. Dissolution in Contravention of the Partnership Agreement

1. Rights of Non-Wrongfully Dissolving Partners:

○ Discharge Liabilities: They can apply the partnership property to discharge its liabilities.
 ○Distribution of Surplus: Any remaining assets should be distributed to the partners in cash
based on net amounts owed.
○ Damages: They can claim damages from the partner who wrongfully caused the dissolution.
○ Continuation of Business: They may continue the business under the same name and
possess the partnership property, provided they secure payment to the wrongfully dissolving
partner and indemnify them against all partnership liabilities.
2. Rights of the Partner Who Wrongfully Caused Dissolution:
○ If Business Is Not Continued: They receive their share of the surplus, minus damages caused
by the wrongful dissolution.
○ If Business Is Continued: They receive the value of their interest in cash, less damages, and
are released from all existing liabilities. The value of the business goodwill is not considered in
this valuation.

Example Analysis

Scenario:

● Joint Venture Agreement (JVA) Case: V, X, Y, and Z, along with P Corp., entered into a joint venture.
Dissolution occurred due to P Corp.'s breach of the agreement.

Application:

● Extrajudicial Liquidation: The partners V, X, Y, and Z, having not breached the agreement, have the
right to apply partnership property to settle liabilities and distribute any remaining assets.
● Judicial Liquidation: If a court oversees the winding up, the transfer of land and improvements to V, X,
Y, and Z is only for the purpose of winding up, not as a final settlement of accounts.

Key Points:

1. Partnership Property Handling: Even though V, X, Y, and Z took possession of the property, it
remains partnership property until the winding up process is complete and accounts are settled.
2. Indemnification: P Corp.'s demand for indemnification for improvements was premature as the final
settlement of accounts had not yet been determined.

This ensures that the rights and obligations of the partners are handled according to the terms of the
partnership agreement and the legal framework provided by the Civil Code.

Article 1838 outlines the rights of a partner who rescinds a partnership contract due to fraud or
misrepresentation by another party. Here’s a breakdown of the three rights:

1. Right of Lien or Retention

● What It Means: The rescinding partner can retain or place a lien on the remaining partnership property
after all liabilities to third parties are settled.
● Purpose: This right ensures the rescinding partner can recover any amounts they paid to acquire their
interest in the partnership or any capital or advances they contributed.

2. Right of Subrogation

● What It Means: After satisfying all the partnership’s liabilities to third parties, the rescinding partner can
step into the position of the partnership’s creditors.
● Purpose: This allows the rescinding partner to recover any payments they made on behalf of the
partnership’s debts, essentially replacing the partnership’s creditors in terms of claims against the
partnership.

3. Right of Indemnification

● What It Means: The partner who rescinds is entitled to be indemnified by the party responsible for the
fraud or misrepresentation for all debts and liabilities of the partnership.
 ● Purpose: This provides financial protection to the rescinding partner by holding the fraudulent party
responsible for any outstanding liabilities of the partnership.

Example Application:

Suppose V, X, Y, and Z entered into a joint venture agreement with P Corp., but P Corp. committed fraud. V, X,
Y, and Z decide to rescind the agreement.

1. Right of Lien or Retention: V, X, Y, and Z can retain the partnership’s assets to cover any amounts
they invested or contributed, ensuring they recover their financial input.
2. Right of Subrogation: After paying off any partnership debts, V, X, Y, and Z can claim any remaining
rights the partnership’s creditors had, allowing them to recoup what they paid towards those debts.
3. Right of Indemnification: They can seek reimbursement from P Corp. for all partnership liabilities,
protecting them from the financial fallout caused by P Corp.’s fraudulent actions.

This framework ensures that partners who rescind due to fraud or misrepresentation are protected and
compensated for their losses and contributions.

Article 1839 details how to settle accounts among partners after the dissolution of a partnership. Here’s a
summary of the rules and procedures:

1. Assets of the Partnership

● Partnership Property: All assets owned by the partnership.

● Contributions of Partners: Any additional amounts contributed by partners needed to cover all
liabilities.

2. Order of Payment for Liabilities

● First: Creditors other than partners (external creditors).

● Second: Partners for loans or advances that are not related to their capital or profits.
● Third: Partners with respect to their capital contributions.
● Fourth: Partners in respect of profits.

3. Application of Assets

● Assets should be used to pay liabilities in the order stated above.

4. Contribution to Satisfy Liabilities

● Partners must contribute any necessary amount to cover partnership liabilities, as per Article 1797.

5. Enforcement of Contributions

● Assignee or Court-Appointed Person: Can enforce the contributions from partners.

● Partners or Legal Representatives: Can enforce contributions to the extent of what they have paid
over their share.

6. Individual Property of a Deceased Partner

● A deceased partner’s individual property can be used to cover their share of partnership liabilities,
subject to separate debts being settled first.

7. Priority in Court Possession

● Partnership Property: Priority to partnership creditors.

● Individual Property: Priority to separate creditors, with rights of lien or secured creditors preserved.

8. Insolvent Partner’s Estate

 ● First: Separate creditors.
● Second: Partnership creditors.
● Third: Partners for contributions.

Example Application:

Scenario:

A, B, and C form a partnership with equal shares and a total capital of P600,000. Upon dissolution, the
partnership has the following assets and liabilities:

● Assets: P1,000,000
● Liabilities:
○ X (creditor): P50,000
○ Y (creditor): P100,000
○ C (inside creditor): P100,000

Order of Payment:

1. External Creditors:
○ Pay X (P50,000)
○ Pay Y (P100,000)
○ Remaining assets: P850,000 (P1,000,000 - P150,000)
2. Inside Creditors:
○ Pay C (P100,000)
○ Remaining assets: P750,000 (P850,000 - P100,000)
3. Capital Contributions:
○ Pay A: P100,000
○ Pay B: P200,000
○ Pay C: P300,000
○ Remaining assets: P150,000 (P750,000 - P600,000)
4. Profit Sharing (Equal):
○ Distribute remaining P150,000 equally among A, B, and C: P50,000 each.

Scenario:

If a partner, X, becomes insolvent, their estate will pay:

1. Separate creditors.
2. Partnership creditors.
3. Partners for contributions.

Important Note:

When a partnership dissolves, the capital and assets are first used to pay off external creditors. Partners are
only paid after all external and internal liabilities are settled. If the partnership is unable to meet its obligations,
the partners must contribute additional funds as required.

Article 1840 addresses the continuation of a partnership's business after dissolution and the responsibilities of
the new or continuing partnership toward creditors of the dissolved partnership. Here’s a breakdown:

Situations Where Creditors of the Dissolved Partnership Are Also Creditors of the Continuing
Partnership:

1. New Partner or Assignments:

○ When a new partner is admitted, or when a retiring partner’s rights are assigned to remaining or
new partners, and the business continues without liquidation.
2. Single Remaining Partner:
 ○ When all but one partner retire and assign their rights to the remaining partner, who continues
the business without liquidation.
3. Consent Without Assignment:
○ When a partner retires or dies and the business continues with the consent of the
retired/deceased partner or their representative, but without assigning their rights.
4. Assignment to Third Parties:
○ When all partners or their representatives assign their rights to third persons who agree to pay
the debts and continue the business.
5. Wrongful Dissolution:
○ When a partner wrongfully causes dissolution, and the remaining partners continue the
business without liquidation.
6. Expulsion of Partner:
○ When a partner is expelled and the remaining partners continue the business without
liquidation.

Liability and Rights:

● Liability for Debts:

○ The new partnership or the continuing partners are liable to the creditors of the dissolved
partnership, but the liability of third persons joining the partnership is limited to the partnership
property unless otherwise agreed.
● Creditor Priority:
○ Creditors of the dissolved partnership have priority over any claims by the retired or deceased
partners against the continuing partnership.
● Assignment and Fraud:
○ Nothing in the article alters the rights of creditors to challenge any assignment based on fraud.
● Use of Partnership Name:
○ Continuing to use the old partnership name or the name of a deceased partner does not make
the deceased partner’s individual property liable for debts of the new or continuing partnership.

Example Scenario Analysis:

Scenario: X, an Assistant General Manager for "Mountain," had only received part of his salary due to
promises from the partners. The partnership’s partners L and R sold their interests to W and Z, with C also
selling his interest to W. The new partnership, now consisting of W and Z, continued using the old name and
operated the business without liquidating the old partnership.

Questions and Answers:

1. Is the old partnership replaced by a new one?

○ Yes, the old partnership is effectively dissolved and replaced by a new partnership composed of
W and Z. The business was continued under the same name without formally liquidating the old
partnership's affairs.
2. Can X claim unpaid salaries from the new partnership?
○ Yes, X can assert his rights under his employment contract against the new partnership.
According to Article 1840, the new partnership is liable to the creditors of the dissolved
partnership, including claims like X's unpaid salaries. The new partnership inherits the liabilities
of the old one.

In summary, Article 1840 ensures that creditors of a dissolved partnership have recourse against the new
partnership if it continues the business without proper liquidation. The new partnership assumes responsibility
for the old partnership’s debts, protecting the interests of creditors like X.

Article 1841 outlines the rights of a partner who retires or dies when the business continues without settling
accounts. Here's a summary:

Rights of a Retiring or Deceased Partner:

1. Ascertain Value:
 ○The partner or their legal representative has the right to have the value of the partner's interest
in the dissolved partnership determined as of the date of dissolution.
2. Receive Payment:
○ They can receive, as an ordinary creditor, an amount equal to the value of their interest in the
dissolved partnership, with interest. Alternatively, they may choose to receive profits attributable
to the use of their interest in the partnership’s property, instead of interest.

Priority of Claims:

● Creditor Priority:
○ Creditors of the dissolved partnership have priority over claims of the retired or deceased
partner’s separate creditors or their representative, as outlined in Article 1840.

In essence, when a partner retires or dies and the business continues without settling accounts, their legal
representative can determine the value of their partnership interest and claim payment as a creditor. They have
the option of receiving interest or the profits generated by their share of the partnership’s assets. However,
claims from dissolved partnership creditors take precedence over these claims.

Article 1842 establishes the right to an account of a partner's interest in the context of a dissolved partnership.
Here’s a summary:

Right to an Account:

1. Who Has the Right:

○ Any partner or their legal representative.
2. Who Has the Obligation:
○ The winding-up partners.
○ Surviving partners.
○ The person or partnership continuing the business.
3. When to Render an Account:
○ At the date of dissolution, unless there is a different agreement.

Problem Analysis:

1. Y’s Heirs and the Cause of Action:

○ Dissolution and Winding Up:
■ The partnership’s legal personality persists through dissolution and winding up. X’s
obligation to render an accounting to Y’s heirs started from the date of dissolution.
○ Prescription:
■ Prescription for claiming the right to an accounting starts only after the dissolution when
the final accounting should be completed. Since X did not provide an accounting, the
heirs’ right to claim and demand an accounting did not yet prescribe.
2. Y’s Claim in W Panciteria:
○ Partnership Status:
■ Y provided evidence of a partnership (e.g., a receipt signed by X) and received profits
from the partnership, which indicates he was a partner.
○ Right to Account:
■ As a partner, Y’s right to an account of his interest accrues at the date of dissolution of
the partnership, as per Article 1842. The prescription for such a claim only starts running
after the partnership is dissolved and an accounting is required.
○ Action to Take:
■ If Y is indeed a partner, he can demand an accounting of his interest and profits once the
partnership is dissolved. If the partnership continues without a formal dissolution, he can
still assert his rights as long as the partnership remains operational.

In both scenarios, the right to an accounting accrues at the dissolution of the partnership, and claims for such
an accounting cannot be prescribed until dissolution and final accounting are complete.