ART 1768: PARTNERSHIP AS JURIDICAL PERSON

THIRD DIVISION

[G.R. No. 143340. August 15, 2001]

LILIBETH SUNGA-CHAN and CECILIA SUNGA, petitioners, vs. LAMBERTO T.

CHUA, respondent.
DECISION
GONZAGA-REYES, J.:
Before us is a petition for review on certiorari under Rule 45 of the Rules of
Court of the Decision[1] of the Court of Appeals dated January 31, 2000 in the case
entitled Lamberto T. Chua vs.
Lilibeth Sunga Chan and Cecilia Sunga and of the Resolution dated May 23,
2000 denying the motion for reconsideration of herein petitioners Lilibeth Sunga
Chan and Cecilia Sunga (hereafter collectively referred to as petitioners).
The pertinent facts of this case are as follows:
On June 22, 1992, Lamberto T. Chua (hereafter respondent) filed a complaint
against Lilibeth Sunga Chan (hereafter petitioner Lilibeth) and Cecilia Sunga
(hereafter petitioner Cecilia), daughter and wife, respectively of the deceased
Jacinto L. Sunga (hereafter Jacinto), for Winding Up of Partnership Affairs,
Accounting, Appraisal and Recovery of Shares and Damages with Writ of Preliminary
Attachment with the Regional Trial Court, Branch 11, Sindangan, Zamboanga del
Norte.
Respondent alleged that in 1977, he verbally entered into a partnership with
Jacinto in the distribution of Shellane Liquefied Petroleum Gas (LPG) in Manila. For
business convenience, respondent and Jacinto allegedly agreed to register the
business name of their partnership, SHELLITE GAS APPLIANCE CENTER (hereafter
Shellite), under the name of Jacinto as a sole proprietorship. Respondent allegedly
delivered his initial capital contribution of P100,000.00 to Jacinto while the latter in
turn produced P100,000.00 as his counterpart contribution, with the intention that
the profits would be equally divided between them. The partnership allegedly had
Jacinto as manager, assisted by Josephine Sy (hereafter Josephine), a sister of the
wife of respondent, Erlinda Sy. As compensation, Jacinto would receive a managers
fee or remuneration of 10% of the gross profit and Josephine would receive 10% of
the net profits, in addition to her wages and other remuneration from the business.
Allegedly, from the time that Shellite opened for business on July 8, 1977, its
business operation went quite well and was profitable. Respondent claimed that he
could attest to the success of their business because of the volume of orders and

deliveries of filled Shellane cylinder tanks supplied by Pilipinas Shell Petroleum

Corporation. While Jacinto furnished respondent with the merchandise inventories,
balance sheets and net worth of Shellite from 1977 to 1989, respondent however
suspected that the amount indicated in these documents were understated and
undervalued by Jacinto and Josephine for their own selfish reasons and for tax
avoidance.
Upon Jacintos death in the later part of 1989, his surviving wife, petitioner
Cecilia and particularly his daughter, petitioner Lilibeth, took over the operations,
control, custody, disposition and management of Shellite without respondents
consent.
Despite respondents repeated demands upon petitioners for accounting,
inventory, appraisal, winding up and restitution of his net shares in the partnership,
petitioners failed to comply. Petitioner Lilibeth allegedly continued the operations of
Shellite, converting to her own use and advantage its properties.
On March 31, 1991, respondent claimed that after petitioner Lilibeth ran out of
alibis and reasons to evade respondents demands, she disbursed out of the
partnership funds the amount of P200,000.00 and partially paid the same to
respondent. Petitioner Lilibeth allegedly informed respondent that the P200,000.00
represented partial payment of the latters share in the partnership, with a promise
that the former would make the complete inventory and winding up of the
properties of the business establishment. Despite such commitment, petitioners
allegedly failed to comply with their duty to account, and continued to benefit from
the assets and income of Shellite to the damage and prejudice of respondent.
On December 19, 1992, petitioners filed a Motion to Dismiss on the ground that
the Securities and Exchange Commission (SEC) in Manila, not the Regional Trial
Court in Zambaonga del Norte had jurisdiction over the action. Respondent opposed
the motion to dismiss.
On January 12, 1993, the trial court finding the complaint sufficient in form and
substance denied the motion to dismiss.
On January 30, 1993, petitioners filed their Answer with Compulsory
Counterclaims, contending that they are not liable for partnership shares,
unreceived income/profits, interests, damages and attorneys fees, that respondent
does not have a cause of action against them, and that the trial court has no
jurisdiction over the nature of the action, the SEC being the agency that has original
and exclusive jurisdiction over the case. As counterclaim, petitioner sought
attorneys fees and expenses of litigation.
On August 2, 1993, petitioner filed a second Motion to Dismiss this time on the
ground that the claim for winding up of partnership affairs, accounting and recovery
of shares in partnership affairs, accounting and recovery of shares in partnership
assets /properties should be dismissed and prosecuted against the estate of
deceased Jacinto in a probate or intestate proceeding.
On August 16, 1993, the trial court denied the second motion to dismiss for lack
of merit.

On November 26, 1993, petitioners filed their Petition for Certiorari, Prohibition
and Mandamus with the Court of Appeals docketed as CA-G.R. SP No. 32499
questioning the denial of the motion to dismiss.
On November 29, 1993, petitioners filed with the trial court a Motion to Suspend
Pre-trial Conference.
On December 13, 1993, the trial court granted the motion to suspend pre-trial
conference.
On November 15, 1994, the Court of Appeals denied the petition for lack of
merit.
On January 16, 1995, this Court denied the petition for review on certiorari filed
by petitioner, as petitioners failed to show that a reversible error was committed by
the appellate court."[2]
On February 20, 1995, entry of judgment was made by the Clerk of Court and
the case was remanded to the trial court on April 26, 1995.
On September 25, 1995, the trial court terminated the pre-trial conference and
set the hearing of the case on January 17, 1996. Respondent presented his evidence
while petitioners were considered to have waived their right to present evidence for
their failure to attend the scheduled date for reception of evidence despite notice.
On October 7, 1997, the trial court rendered its Decision ruling for
respondent. The dispositive portion of the Decision reads:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendants, as follows:
(1) DIRECTING them to render an accounting in acceptable form under accounting
procedures and standards of the properties, assets, income and profits of the
Shellite Gas Appliance Center since the time of death of Jacinto L. Sunga, from
whom they continued the business operations including all businesses derived from
the Shellite Gas Appliance Center; submit an inventory, and appraisal of all these
properties, assets, income, profits, etc. to the Court and to plaintiff for approval or
disapproval;
(2) ORDERING them to return and restitute to the partnership any and all properties,
assets, income and profits they misapplied and converted to their own use and
advantage that legally pertain to the plaintiff and account for the properties
mentioned in pars. A and B on pages 4-5 of this petition as basis;
(3) DIRECTING them to restitute and pay to the plaintiff shares and interest of the
plaintiff in the partnership of the listed properties, assets and good will (sic) in
schedules A, B and C, on pages 4-5 of the petition;
(4) ORDERING them to pay the plaintiff earned but unreceived income and profits
from the partnership from 1988 to may 30, 1992, when the plaintiff learned of the
closure of the store the sum of P35,000.00 per month, with legal rate of interest
until fully paid;
(5) ORDERING them to wind up the affairs of the partnership and terminate its
business activities pursuant to law, after delivering to the plaintiff all the interest,
shares, participation and equity in the partnership, or the value thereof in money or
moneys worth, if the properties are not physically divisible;

(6) FINDING them especially Lilibeth Sunga-Chan guilty of breach of trust and in bad
faith and hold them liable to the plaintiff the sum of P50,000.00 as moral and
exemplary damages; and,
(7) DIRECTING them to reimburse and pay the sum of P25,000.00 as attorneys (sic)
and P25,00.00 as litigation expenses.
NO special pronouncements as to COSTS.
SO ORDERED.[3]
On October 28, 1997, petitioners filed a Notice of Appeal with the trial court,
appealing the case to the Court of Appeals.
On January 31, 2000, the Court of Appeals dismissed the appeal. The dispositive
portion of the Decision reads:
WHEREFORE, the instant appeal is dismissed. The appealed decision is AFFIRMED in
all respects.[4]
On May 23, 2000, the Court of Appeals denied the motion for reconsideration
filed by petitioner.
Hence, this petition wherein petitioner relies upon the following grounds:
1. The Court of Appeals erred in making a legal conclusion that there existed
a partnership between respondent Lamberto T. Chua and the late Jacinto
L. Sunga upon the latters invitation and offer and that upon his death the
partnership assets and business were taken over by petitioners.
2. The Court of Appeals erred in making the legal conclusion that laches
and/or prescription did not apply in the instant case.
3. The Court of Appeals erred in making the legal conclusion that there was
competent and credible evidence to warrant the finding of a partnership,
and assuming arguendo that indeed there was a partnership, the finding
of highly exaggerated amounts or values in the partnership assets and
profits.[5]
Petitioners question the correctness of the finding of the trial court and the
Court of Appeals that a partnership existed between respondent and Jacinto from
1977 until Jacintos death. In the absence of any written document to show such
partnership between respondent and Jacinto, petitioners argue that these courts
were proscribed from hearing the testimonies of respondent and his witness,
Josephine, to prove the alleged partnership three years after Jacintos death. To
support this argument, petitioners invoke the Dead Mans Statute or Survivorship
Rule under Section 23, Rule 130 of the Rules of Court that provides:
SEC. 23. Disqualification by reason of death or insanity of adverse party.-- Parties
or assignors of parties to a case, or persons in whose behalf a case is prosecuted,
against an executor or administrator or other representative of a deceased person,
or against a person of unsound mind, upon a claim or demand against the estate of
such deceased person, or against such person of unsound mind, cannot testify as to
any matter of fact occurring before the death of such deceased person or before
such person became of unsound mind.

Petitioners thus implore this Court to rule that the testimonies of respondent and his
alter ego, Josephine, should not have been admitted to prove certain claims against
a deceased person (Jacinto), now represented by petitioners.
We are not persuaded.
A partnership may be constituted in any form, except where immovable
property or real rights are contributed thereto, in which case a public instrument
shall be necessary.[6] Hence, based on the intention of the parties, as gathered from
the facts and ascertained from their language and conduct, a verbal contract of
partnership may arise.[7] The essential points that must be proven to show that a
partnership was agreed upon are (1) mutual contribution to a common stock, and
(2) a joint interest in the profits. [8] Understandably so, in view of the absence of a
written contract of partnership between respondent and Jacinto, respondent
resorted to the introduction of documentary and testimonial evidence to prove said
partnership. The crucial issue to settle then is whether or not the Dead Mans
Statute applies to this case so as to render inadmissible respondents testimony and
that of his witness, Josephine.
The Dead Mans Statute provides that if one party to the alleged transaction is
precluded from testifying by death, insanity, or other mental disabilities, the
surviving party is not entitled to the undue advantage of giving his own
uncontradicted and unexplained account of the transaction. [9] But before this rule
can be successfully invoked to bar the introduction of testimonial evidence, it is
necessary that:
1. The witness is a party or assignor of a party to a case or persons in whose
behalf a case is prosecuted.
2. The action is against an executor or administrator or other representative
of a deceased person or a person of unsound mind;
3. The subject-matter of the action is a claim or demand against the estate
of such deceased person or against person of unsound mind;
4. His testimony refers to any matter of fact which occurred before the
death of such deceased person or before such person became of unsound
mind.[10]
Two reasons forestall the application of the Dead Mans Statute to this case.
First, petitioners filed a compulsory counterclaim[11] against respondent in their
answer before the trial court, and with the filing of their counterclaim, petitioners
themselves effectively removed this case from the ambit of the Dead Mans Statute.
[12]
Well entrenched is the rule that when it is the executor or administrator or
representatives of the estate that sets up the counterclaim, the plaintiff, herein
respondent, may testify to occurrences before the death of the deceased to defeat
the counterclaim.[13] Moreover, as defendant in the counterclaim, respondent is not
disqualified from testifying as to matters of fact occurring before the death of the
deceased, said action not having been brought against but by the estate or
representatives of the deceased.[14]
Second, the testimony of Josephine is not covered by the Dead Mans Statute for
the simple reason that she is not a party or assignor of a party to a case or persons
in whose behalf a case is prosecuted.Records show that respondent offered the

testimony of Josephine to establish the existence of the partnership between

respondent and Jacinto. Petitioners insistence that Josephine is the alter ego of
respondent does not make her an assignor because the term assignor of a party
means assignor of a cause of action which has arisen, and not the assignor of a
right assigned before any cause of action has arisen. [15] Plainly then, Josephine is
merely a witness of respondent, the latter being the party plaintiff.
We are not convinced by petitioners allegation that Josephines testimony lacks
probative value because she was allegedly coerced by respondent, her brother-inlaw, to testify in his favor. Josephine merely declared in court that she was
requested by respondent to testify and that if she were not requested to do so she
would not have testified. We fail to see how we can conclude from this candid
admission that Josephines testimony is involuntary when she did not in any way
categorically say that she was forced to be a witness of respondent. Also, the fact
that Josephine is the sister of the wife of respondent does not diminish the value of
her testimony since relationship per se, without more, does not affect the credibility
of witnesses.[16]
Petitioners reliance alone on the Dead Mans Statute to defeat respondents claim
cannot prevail over the factual findings of the trial court and the Court of Appeals
that a partnership was established between respondent and Jacinto. Based not only
on the testimonial evidence, but the documentary evidence as well, the trial court
and the Court of Appeals considered the evidence for respondent as sufficient to
prove the formation of a partnership, albeit an informal one.
Notably, petitioners did not present any evidence in their favor during trial. By
the weight of judicial precedents, a factual matter like the finding of the existence of
a partnership between respondent and Jacinto cannot be inquired into by this Court
on review.[17] This Court can no longer be tasked to go over the proofs presented by
the parties and analyze, assess and weigh them to ascertain if the trial court and
the appellate court were correct in according superior credit to this or that piece of
evidence of one party or the other. [18] It must be also pointed out that petitioners
failed to attend the presentation of evidence of respondent. Petitioners cannot now
turn to this Court to question the admissibility and authenticity of the documentary
evidence of respondent when petitioners failed to object to the admissibility of the
evidence at the time that such evidence was offered. [19]
With regard to petitioners insistence that laches and/or prescription should have
extinguished respondents claim, we agree with the trial court and the Court of
Appeals that the action for accounting filed by respondent three (3) years after
Jacintos death was well within the prescribed period. The Civil Code provides that an
action to enforce an oral contract prescribes in six (6) years [20] while the right to
demand an accounting for a partners interest as against the person continuing the
business accrues at the date of dissolution, in the absence of any contrary
agreement.[21] Considering that the death of a partner results in the dissolution of
the partnership[22], in this case, it was after Jacintos death that respondent as the
surviving partner had the right to an account of his interest as against petitioners. It
bears stressing that while Jacintos death dissolved the partnership, the dissolution
did not immediately terminate the partnership. The Civil Code[23] expressly provides
that upon dissolution, the partnership continues and its legal personality is retained
until the complete winding up of its business, culminating in its termination. [24]

In a desperate bid to cast doubt on the validity of the oral partnership between
respondent and Jacinto, petitioners maintain that said partnership that had an initial
capital of P200,000.00 should have been registered with the Securities and
Exchange Commission (SEC) since registration is mandated by the Civil Code. True,
Article 1772 of the Civil Code requires that partnerships with a capital of P3,000.00
or more must register with the SEC, however, this registration requirement is not
mandatory. Article 1768 of the Civil Code[25] explicitly provides that the partnership
retains its juridical personality even if it fails to register. The failure to register the
contract of partnership does not invalidate the same as among the partners, so long
as the contract has the essential requisites, because the main purpose of
registration is to give notice to third parties, and it can be assumed that the
members themselves knew of the contents of their contract. [26] In the case at bar,
non-compliance with this directory provision of the law will not invalidate the
partnership considering that the totality of the evidence proves that respondent and
Jacinto indeed forged the partnership in question.
WHEREFORE, in view of the foregoing, the petition is DENIED and the appealed
decision is AFFIRMED.
SO ORDERED.
Melo, (Chairman), Vitug, Panganiban, and Sandoval-Gutierrez, JJ., concur.

[G.R. No. 144214. July 14, 2003]

LUZVIMINDA J. VILLAREAL, DIOGENES VILLAREAL and

CARMELITO JOSE, petitioners, vs. DONALDO EFREN C.
RAMIREZ and Spouses CESAR G. RAMIREZ JR. and
CARMELITA C. RAMIREZ, respondents.
DECISION
PANGANIBAN, J.:

A share in a partnership can be returned only after the

completion of the latters dissolution, liquidation and winding up of
the business.
The Case

The Petition for Review on Certiorari before us challenges the

March 23, 2000 Decision and the July 26, 2000 Resolution of the
Court of Appeals (CA) in CA-GR CV No. 41026.The assailed Decision
disposed as follows:
[1]

[2]

[3]

WHEREFORE, foregoing premises considered, the Decision dated July

21, 1992 rendered by the Regional Trial Court, Branch 148, Makati
City is hereby SET ASIDE and NULLIFIED and in lieu thereof a new
decision is rendered ordering the [petitioners] jointly and severally
to pay and reimburse to [respondents] the amount
of P253,114.00. No pronouncement as to costs.
[4]

Reconsideration was denied in the impugned Resolution.

The Facts
On July 25, 1984, Luzviminda J. Villareal, Carmelito Jose and Jesus
Jose formed a partnership with a capital of P750,000 for the
operation of a restaurant and catering business under the name
Aquarius Food House and Catering Services. Villareal was appointed
general manager and Carmelito Jose, operations manager.
[5]

Respondent Donaldo Efren C. Ramirez joined as a partner in the

business on September 5, 1984. His capital contribution of P250,000
was paid by his parents, Respondents Cesar and Carmelita Ramirez.
[6]

After Jesus Jose withdrew from the partnership in January 1987,

his capital contribution of P250,000 was refunded to him in cash by
agreement of the partners.
[7]

In the same month, without prior knowledge of respondents,

petitioners closed down the restaurant, allegedly because of
increased rental. The restaurant furniture and equipment were
deposited in the respondents house for storage.
[8]

On March 1, 1987, respondent spouses wrote petitioners, saying

that they were no longer interested in continuing their partnership

or in reopening the restaurant, and that they were accepting the

latters offer to return their capital contribution.
[9]

On October 13, 1987, Carmelita Ramirez wrote another letter

informing petitioners of the deterioration of the restaurant furniture
and equipment stored in their house. She also reiterated the request
for the return of their one-third share in the equity of the
partnership. The repeated oral and written requests were, however,
left unheeded.
[10]

Before the Regional Trial Court (RTC) of Makati, Branch 59,

respondents subsequently filed a Complaint dated November 10,
1987, for the collection of a sum of money from petitioners.
[11]

In their Answer, petitioners contended that respondents had

expressed a desire to withdraw from the partnership and had called
for its dissolution under Articles 1830 and 1831 of the Civil Code;
that respondents had been paid, upon the turnover to them of
furniture and equipment worth over P400,000; and that the latter
had no right to demand a return of their equity because their share,
together with the rest of the capital of the partnership, had been
spent as a result of irreversible business losses.
[12]

In their Reply, respondents alleged that they did not know of any
loan encumbrance on the restaurant. According to them, if such
allegation were true, then the loans incurred by petitioners should
be regarded as purely personal and, as such, not chargeable to the
partnership. The former further averred that they had not received
any regular report or accounting from the latter, who had solely
managed the business. Respondents also alleged that they expected
the equipment and the furniture stored in their house to be removed
by petitioners as soon as the latter found a better location for the
restaurant.
[13]

Respondents filed an Urgent Motion for Leave to Sell or

Otherwise Dispose of Restaurant Furniture and Equipment on July
8, 1988. The furniture and the equipment stored in their house were
[14]

inventoried and appraised at P29,000. The display freezer was sold

for P5,000 and the proceeds were paid to them.
[15]

[16]

After trial, the RTC ruled that the parties had voluntarily entered
into a partnership, which could be dissolved at any time. Petitioners
clearly intended to dissolve it when they stopped operating the
restaurant. Hence, the trial court, in its July 21, 1992 Decision, held
them liable as follows:
[17]

[18]

WHEREFORE, judgment is hereby rendered in favor of [respondents]

and against the [petitioners] ordering the [petitioners] to pay jointly
and severally the following:
(a) Actual damages in the amount of P250,000.00
(b) Attorneys fee in the amount of P30,000.00
(c) Costs of suit.
The CA Ruling
The CA held that, although respondents had no right to demand
the return of their capital contribution, the partnership was
nonetheless dissolved when petitioners lost interest in continuing
the restaurant business with them. Because petitioners never gave
a proper accounting of the partnership accounts for liquidation
purposes, and because no sufficient evidence was presented to
show financial losses, the CA computed their liability as follows:
Consequently, since what has been proven is only the outstanding
obligation of the partnership in the amount of P240,658.00, although
contracted by the partnership before [respondents] have joined the
partnership but in accordance with Article 1826 of the New Civil
Code, they are liable which must have to be deducted from the
remaining capitalization of the said partnership which is in the
amount ofP1,000,000.00 resulting in the amount of P759,342.00,
and in order to get the share of [respondents], this amount

of P759,342.00 must be divided into three (3) shares or in the

amount of P253,114.00 for each share and which is the only amount
which [petitioner] will return to [respondents] representing the
contribution to the partnership minus the outstanding debt thereof.

[19]

Hence, this Petition.

[20]

Issues
In their Memorandum,
for our consideration:

[21]

petitioners submit the following issues

9.1. Whether the Honorable Court of Appeals decision ordering the

distribution of the capital contribution, instead of the net capital
after the dissolution and liquidation of a partnership, thereby
treating the capital contribution like a loan, is in accordance with law
and jurisprudence;
9.2. Whether the Honorable Court of Appeals decision ordering the
petitioners to jointly and severally pay and reimburse the amount of
[P]253,114.00 is supported by the evidence on record; and
9.3. Whether the Honorable Court of Appeals was correct in making
[n]o pronouncement as to costs.
[22]

On closer scrutiny, the issues are as follows: (1) whether

petitioners are liable to respondents for the latters share in the
partnership; (2) whether the CAs computation of P253,114 as
respondents share is correct; and (3) whether the CA was likewise
correct in not assessing costs.
This Courts Ruling
The Petition has merit.
First Issue:
Share in Partnership

Both the trial and the appellate courts found that a partnership
had indeed existed, and that it was dissolved on March 1,
1987. They found that the dissolution took place when respondents
informed petitioners of the intention to discontinue it because of the
formers dissatisfaction with, and loss of trust in, the latters
management of the partnership affairs. These findings were amply
supported by the evidence on record. Respondents consequently
demanded from petitioners the return of their one-third equity in the
partnership.
We hold that respondents have no right to demand from
petitioners the return of their equity share. Except as managers of
the partnership, petitioners did not personally hold its equity or
assets. The partnership has a juridical personality separate and
distinct from that of each of the partners. Since the capital was
contributed to the partnership, not to petitioners, it is the
partnership that must refund the equity of the retiring partners.
[23]

[24]

Second Issue:
What Must Be Returned?
Since it is the partnership, as a separate and distinct entity, that
must refund the shares of the partners, the amount to be refunded
is necessarily limited to its total resources. In other words, it can
only pay out what it has in its coffers, which consists of all its
assets. However, before the partners can be paid their shares, the
creditors of the partnership must first be compensated. After all
the creditors have been paid, whatever is left of the partnership
assets becomes available for the payment of the partners shares.
[25]

Evidently, in the present case, the exact amount of refund

equivalent to respondents one-third share in the partnership cannot
be determined until all the partnership assets will have been
liquidated -- in other words, sold and converted to cash -- and all
partnership creditors, if any, paid. The CAs computation of the

amount to be refunded to respondents as their share was thus

erroneous.
First, it seems that the appellate court was under the
misapprehension that the total capital contribution was equivalent
to the gross assets to be distributed to the partners at the time of
the dissolution of the partnership. We cannot sustain the underlying
idea that the capital contribution at the beginning of the partnership
remains intact, unimpaired and available for distribution or return to
the partners. Such idea is speculative, conjectural and totally
without factual or legal support.
Generally, in the pursuit of a partnership business, its capital is
either increased by profits earned or decreased by losses
sustained. It does not remain static and unaffected by the changing
fortunes of the business. In the present case, the financial
statements presented before the trial court showed that the
business had made meager profits. However, notable therefrom is
the omission of any provision for the depreciation of the furniture
and the equipment. The amortization of the goodwill (initially
valued at P500,000) is not reflected either.Properly taking these
non-cash items into account will show that the partnership was
actually sustaining substantial losses, which consequently
decreased the capital of the partnership.Both the trial and the
appellate courts in fact recognized the decrease of the partnership
assets to almost nil, but the latter failed to recognize the
consequent corresponding decrease of the capital.
[26]

[27]

[28]

Second, the CAs finding that the partnership had an outstanding

obligation in the amount of P240,658 was not supported by
evidence. We sustain the contrary finding of the RTC, which had
rejected the contention that the obligation belonged to the
partnership for the following reason:
x x x [E]vidence on record failed to show the exact loan owed by the
partnership to its creditors. The balance sheet (Exh. 4) does not

reveal the total loan. The Agreement (Exh. A) par. 6 shows an

outstanding obligation of P240,055.00 which the partnership owes
to different creditors, while the Certification issued by Mercator
Finance (Exh. 8) shows that it was Sps. Diogenes P. Villareal and
Luzviminda J. Villareal, the former being the nominal party
defendant in the instant case, who obtained a loan of P355,000.00
on Oct. 1983, when the original partnership was not yet formed.
Third, the CA failed to reduce the capitalization by P250,000,
which was the amount paid by the partnership to Jesus Jose when he
withdrew from the partnership.
Because of the above-mentioned transactions, the partnership
capital was actually reduced. When petitioners and respondents
ventured into business together, they should have prepared for the
fact that their investment would either grow or shrink. In the present
case, the investment of respondents substantially dwindled. The
original amount of P250,000 which they had invested could no
longer be returned to them, because one third of the partnership
properties at the time of dissolution did not amount to that much.
It is a long established doctrine that the law does not relieve
parties from the effects of unwise, foolish or disastrous contracts
they have entered into with all the required formalities and with full
awareness of what they were doing. Courts have no power to relieve
them from obligations they have voluntarily assumed, simply
because their contracts turn out to be disastrous deals or unwise
investments.
[29]

Petitioners further argue that respondents acted negligently by

permitting the partnership assets in their custody to deteriorate to
the point of being almost worthless. Supposedly, the latter should
have liquidated these sole tangible assets of the partnership and
considered the proceeds as payment of their net capital. Hence,
petitioners argue that the turnover of the remaining partnership

assets to respondents was precisely the manner of liquidating the

partnership and fully settling the latters share in the partnership.
We disagree. The delivery of the store furniture and equipment to
private respondents was for the purpose of storage. They were
unaware that the restaurant would no longer be reopened by
petitioners. Hence, the former cannot be faulted for not disposing of
the stored items to recover their capital investment.
Third Issue:
Costs
Section 1, Rule 142, provides:
SECTION 1. Costs ordinarily follow results of suit. Unless otherwise
provided in these rules, costs shall be allowed to the prevailing party
as a matter of course, but the court shall have power, for special
reasons, to adjudge that either party shall pay the costs of an
action, or that the same be divided, as may be equitable. No costs
shall be allowed against the Republic of the Philippines unless
otherwise provided by law.
Although, as a rule, costs are adjudged against the losing party,
courts have discretion, for special reasons, to decree
otherwise. When a lower court is reversed, the higher court normally
does not award costs, because the losing party relied on the lower
courts judgment which is presumed to have been issued in good
faith, even if found later on to be erroneous.Unless shown to be
patently capricious, the award shall not be disturbed by a reviewing
tribunal.
WHEREFORE, the Petition is GRANTED, and the assailed
Decision and Resolution SET ASIDE. This disposition is without
prejudice to proper proceedings for the accounting, the liquidation
and the distribution of the remaining partnership assets, if any. No
pronouncement as to costs.

SO ORDERED.

[G.R. No. 127347. November 25, 1999]

ALFREDO N. AGUILA, JR, petitioner, vs. HONORABLE COURT OF APPEALS

and FELICIDAD S. VDA. DE ABROGAR, respondents.
DECISION
MENDOZA, J.:
This is a petition for review on certiorari of the decision[1] of the Court of
Appeals, dated November 29, 1990, which reversed the decision of the Regional
Trial Court, Branch 273, Marikina, Metro Manila, dated April 11, 1995. The trial court
dismissed the petition for declaration of nullity of a deed of sale filed by private
respondent Felicidad S. Vda. de Abrogar against petitioner Alfredo N. Aguila, Jr.
The facts are as follows:
Petitioner is the manager of A.C. Aguila & Sons, Co., a partnership engaged in
lending activities. Private respondent and her late husband, Ruben M. Abrogar, were
the registered owners of a house and lot, covered by Transfer Certificate of Title No.
195101, in Marikina, Metro Manila. On April 18, 1991, private respondent, with the
consent of her late husband, and A.C. Aguila & Sons, Co., represented by petitioner,
entered into a Memorandum of Agreement, which provided:
(1) That the SECOND PARTY [A.C. Aguila & Sons, Co.] shall buy the above-described
property from the FIRST PARTY [Felicidad S. Vda. de Abrogar], and pursuant to this
agreement, a Deed of Absolute Sale shall be executed by the FIRST PARTY
conveying the property to the SECOND PARTY for and in consideration of the sum of
Two Hundred Thousand Pesos (P200,000.00), Philippine Currency;
(2) The FIRST PARTY is hereby given by the SECOND PARTY the option to repurchase
the said property within a period of ninety (90) days from the execution of this
memorandum of agreement effective April 18, 1991, for the amount of TWO
HUNDRED THIRTY THOUSAND PESOS (P230,000.00);
(3) In the event that the FIRST PARTY fail to exercise her option to repurchase the
said property within a period of ninety (90) days, the FIRST PARTY is obliged to

deliver peacefully the possession of the property to the SECOND PARTY within
fifteen (15) days after the expiration of the said 90 day grace period;
(4) During the said grace period, the FIRST PARTY obliges herself not to file any lis
pendens or whatever claims on the property nor shall be cause the annotation of
say claim at the back of the title to the said property;
(5) With the execution of the deed of absolute sale, the FIRST PARTY warrants her
ownership of the property and shall defend the rights of the SECOND PARTY against
any party whom may have any interests over the property;
(6) All expenses for documentation and other incidental expenses shall be for the
account of the FIRST PARTY;
(7) Should the FIRST PARTY fail to deliver peaceful possession of the property to the
SECOND PARTY after the expiration of the 15-day grace period given in paragraph 3
above, the FIRST PARTY shall pay an amount equivalent to Five Percent of the
principal amount of TWO HUNDRED PESOS (P200.00) or P10,000.00 per month of
delay as and for rentals and liquidated damages;
(8) Should the FIRST PARTY fail to exercise her option to repurchase the property
within ninety (90) days period above-mentioned, this memorandum of agreement
shall be deemed cancelled and the Deed of Absolute Sale, executed by the parties
shall be the final contract considered as entered between the parties and the
SECOND PARTY shall proceed to transfer ownership of the property above described
to its name free from lines and encumbrances. [2]
On the same day, April 18, 1991, the parties likewise executed a deed of
absolute sale,[3] dated June 11, 1991, wherein private respondent, with the consent
of her late husband, sold the subject property to A.C. Aguila & Sons, Co.,
represented by petitioner, for P200,000.00. In a special power of attorney dated the
same day, April 18, 1991, private respondent authorized petitioner to cause the
cancellation of TCT No. 195101 and the issuance of a new certificate of title in the
name of A.C. Aguila and Sons, Co., in the event she failed to redeem the subject
property as provided in the Memorandum of Agreement. [4]
Private respondent failed to redeem the property within the 90-day period as
provided in the Memorandum of Agreement. Hence, pursuant to the special power
of attorney mentioned above, petitioner caused the cancellation of TCT No. 195101
and the issuance of a new certificate of title in the name of A.C. Aguila and Sons,
Co.[5]
Private respondent then received a letter dated August 10, 1991 from Atty.
Lamberto C. Nanquil, counsel for A.C. Aguila & Sons, Co., demanding that she
vacate the premises within 15 days after receipt of the letter and surrender its
possession peacefully to A.C. Aguila & Sons, Co. Otherwise, the latter would bring
the appropriate action in court.[6]
Upon the refusal of private respondent to vacate the subject premises, A.C.
Aguila & Sons, Co. filed an ejectment case against her in the Metropolitan Trial
Court, Branch 76, Marikina, Metro Manila. In a decision, dated April 3, 1992, the
Metropolitan Trial Court ruled in favor of A.C. Aguila & Sons, Co. on the ground that
private respondent did not redeem the subject property before the expiration of the
90-day period provided in the Memorandum of Agreement. Private respondent

appealed first to the Regional Trial Court, Branch 163, Pasig, Metro Manila, then to
the Court of Appeals, and later to this Court, but she lost in all the cases.
Private respondent then filed a petition for declaration of nullity of a deed of
sale with the Regional Trial Court, Branch 273, Marikina, Metro Manila on December
4, 1993. She alleged that the signature of her husband on the deed of sale was a
forgery because he was already dead when the deed was supposed to have been
executed on June 11, 1991.
It appears, however, that private respondent had filed a criminal complaint for
falsification against petitioner with the Office of the Prosecutor of Quezon City which
was dismissed in a resolution, dated February 14, 1994.
On April 11, 1995, Branch 273 of RTC-Marikina rendered its decision:
Plaintiffs claim therefore that the Deed of Absolute Sale is a forgery because they
could not personally appear before Notary Public Lamberto C. Nanquil on June 11,
1991 because her husband, Ruben Abrogar, died on May 8, 1991 or one month and
2 days before the execution of the Deed of Absolute Sale, while the plaintiff was still
in the Quezon City Medical Center recuperating from wounds which she suffered at
the same vehicular accident on May 8, 1991, cannot be sustained. The Court is
convinced that the three required documents, to wit: the Memorandum of
Agreement, the Special Power of Attorney, and the Deed of Absolute Sale were all
signed by the parties on the same date on April 18, 1991. It is a common and
accepted business practice of those engaged in money lending to prepare an
undated absolute deed of sale in loans of money secured by real estate for various
reasons, foremost of which is the evasion of taxes and surcharges. The plaintiff
never questioned receiving the sum of P200,000.00 representing her loan from the
defendant. Common sense dictates that an established lending and realty firm like
the Aguila & Sons, Co. would not part with P200,000.00 to the Abrogar spouses, who
are virtual strangers to it, without the simultaneous accomplishment and signing of
all the required documents, more particularly the Deed of Absolute Sale, to protect
its interest.
....
WHEREFORE, foregoing premises considered, the case in caption is hereby
ORDERED DISMISSED, with costs against the plaintiff.
On appeal, the Court of Appeals reversed. It held:
The facts and evidence show that the transaction between plaintiff-appellant and
defendant-appellee is indubitably an equitable mortgage. Article 1602 of the New
Civil Code finds strong application in the case at bar in the light of the following
circumstances.
First: The purchase price for the alleged sale with right to repurchase is unusually
inadequate. The property is a two hundred forty (240) sq. m. lot. On said lot, the
residential house of plaintiff-appellant stands. The property is inside a
subdivision/village. The property is situated in Marikina which is already part of
Metro Manila. The alleged sale took place in 1991 when the value of the land had
considerably increased.
For this property, defendant-appellee pays only a measly P200,000.00 or P833.33
per square meter for both the land and for the house.

Second: The disputed Memorandum of Agreement specifically provides that

plaintiff-appellant is obliged to deliver peacefully the possession of the property to
the SECOND PARTY within fifteen (15) days after the expiration of the said ninety
(90) day grace period. Otherwise stated, plaintiff-appellant is to retain physical
possession of the thing allegedly sold.
In fact, plaintiff-appellant retained possession of the property sold as if they were
still the absolute owners. There was no provision for maintenance or expenses,
much less for payment of rent.
Third: The apparent vendor, plaintiff-appellant herein, continued to pay taxes on the
property sold. It is well-known that payment of taxes accompanied by actual
possession of the land covered by the tax declaration, constitute evidence of great
weight that a person under whose name the real taxes were declared has a claim of
right over the land.
It is well-settled that the presence of even one of the circumstances in Article 1602
of the New Civil Code is sufficient to declare a contract of sale with right to
repurchase an equitable mortgage.
Considering that plaintiff-appellant, as vendor, was paid a price which is unusually
inadequate, has retained possession of the subject property and has continued
paying the realty taxes over the subject property, (circumstances mentioned in par.
(1) (2) and (5) of Article 1602 of the New Civil Code), it must be conclusively
presumed that the transaction the parties actually entered into is an equitable
mortgage, not a sale with right to repurchase. The factors cited are in support to the
finding that the Deed of Sale/Memorandum of Agreement with right to repurchase is
in actuality an equitable mortgage.
Moreover, it is undisputed that the deed of sale with right of repurchase was
executed by reason of the loan extended by defendant-appellee to plaintiffappellant. The amount of loan being the same with the amount of the purchase
price.
....
Since the real intention of the party is to secure the payment of debt, now deemed
to be repurchase price: the transaction shall then be considered to be an equitable
mortgage.
Being a mortgage, the transaction entered into by the parties is in the nature of a
pactum commissorium which is clearly prohibited by Article 2088 of the New Civil
Code. Article 2088 of the New Civil Code reads:
ART. 2088. The creditor cannot appropriate the things given by way of pledge or
mortgage, or dispose of them. Any stipulation to the contrary is null and void.
The aforequoted provision furnishes the two elements for pactum commissorium to
exist: (1) that there should be a pledge or mortgage wherein a property is pledged
or mortgaged by way of security for the payment of principal obligation; and (2)
that there should be a stipulation for an automatic appropriation by the creditor of
the thing pledged and mortgaged in the event of non-payment of the principal
obligation within the stipulated period.
In this case, defendant-appellee in reality extended a P200,000.00 loan to plaintiffappellant secured by a mortgage on the property of plaintiff-appellant. The loan was
payable within ninety (90) days, the period within which plaintiff-appellant can

repurchase the property. Plaintiff-appellant will pay P230,000.00 and not

P200,000.00, the P30,000.00 excess is the interest for the loan extended. Failure of
plaintiff-appellee to pay the P230,000,00 within the ninety (90) days period, the
property shall automatically belong to defendant-appellee by virtue of the deed of
sale executed.
Clearly, the agreement entered into by the parties is in the nature of pactum
commissorium. Therefore, the deed of sale should be declared void as we hereby so
declare to be invalid, for being violative of law.
....
WHEREFORE, foregoing considered, the appealed decision is hereby REVERSED and
SET ASIDE. The questioned Deed of Sale and the cancellation of the TCT No. 195101
issued in favor of plaintiff-appellant and the issuance of TCT No. 267073 issued in
favor of defendant-appellee pursuant to the questioned Deed of Sale is hereby
declared VOID and is hereby ANNULLED. Transfer Certificate of Title No. 195101 of
the Registry of Marikina is hereby ordered REINSTATED. The loan in the amount of
P230,000.00 shall be paid within ninety (90) days from the finality of this
decision. In case of failure to pay the amount of P230,000.00 from the period
therein stated, the property shall be sold at public auction to satisfy the mortgage
debt and costs and if there is an excess, the same is to be given to the owner.
Petitioner now contends that: (1) he is not the real party in interest but A.C.
Aguila & Co., against which this case should have been brought; (2) the judgment in
the ejectment case is a bar to the filing of the complaint for declaration of nullity of
a deed of sale in this case; and (3) the contract between A.C. Aguila & Sons, Co. and
private respondent is a pacto de retro sale and not an equitable mortgage as held
by the appellate court.
The petition is meritorious.
Rule 3, 2 of the Rules of Court of 1964, under which the complaint in this case
was filed, provided that every action must be prosecuted and defended in the name
of the real party in interest. A real party in interest is one who would be benefited or
injured by the judgment, or who is entitled to the avails of the suit. [7] This ruling is
now embodied in Rule 3, 2 of the 1997 Revised Rules of Civil Procedure. Any
decision rendered against a person who is not a real party in interest in the case
cannot be executed.[8] Hence, a complaint filed against such a person should be
dismissed for failure to state a cause of action. [9]
Under Art. 1768 of the Civil Code, a partnership has a juridical personality
separate and distinct from that of each of the partners. The partners cannot be held
liable for the obligations of the partnership unless it is shown that the legal fiction of
a different juridical personality is being used for fraudulent, unfair, or illegal
purposes.[10] In this case, private respondent has not shown that A.C. Aguila & Sons,
Co., as a separate juridical entity, is being used for fraudulent, unfair, or illegal
purposes. Moreover, the title to the subject property is in the name of A.C. Aguila &
Sons, Co. and the Memorandum of Agreement was executed between private
respondent, with the consent of her late husband, and A. C. Aguila & Sons, Co.,
represented by petitioner. Hence, it is the partnership, not its officers or agents,
which should be impleaded in any litigation involving property registered in its
name. A violation of this rule will result in the dismissal of the complaint. [11] We

cannot understand why both the Regional Trial Court and the Court of Appeals
sidestepped this issue when it was squarely raised before them by petitioner.
Our conclusion that petitioner is not the real party in interest against whom this
action should be prosecuted makes it unnecessary to discuss the other issues raised
by him in this appeal.
WHEREFORE, the decision of the Court of Appeals is hereby REVERSED and the
complaint against petitioner is DISMISSED.
SO ORDERED.
Bellosillo, (Chairman), Quisumbing, Buena, and De Leon, Jr., JJ., concur.