1 BUSINESS ORGANIZATION

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CLASSES OF PARTNERSHIPS AND PARTNERS (1776TAU MU: 568

CLASSES OF PARTNERSHIPS (ARTICLES 1776 TO 1783

ORTEGA VS CA
In this petition for review under Rule 45 of the Rules of Court, petitioners confine themselves to the following issues:
1. Whether or not the Court of Appeals has erred in holding that the partnership of Bito, Misa & Lozada (now
Bito, Lozada, Ortega & Castillo) is a partnership at will;
2. Whether or not the Court of Appeals has erred in holding that the withdrawal of private respondent
dissolved the partnership regardless of his good or bad faith; and
3. Whether or not the Court of Appeals has erred in holding that private respondent's demand for the
dissolution of the partnership so that he can get a physical partition of partnership was not made in bad faith;
to which matters we shall, accordingly, likewise limit ourselves.
A partnership that does not fix its term is a partnership at will. That the law firm "Bito, Misa & Lozada," and now
"Bito, Lozada, Ortega and Castillo," is indeed such a partnership need not be unduly belabored. We quote, with
approval, like did the appellate court, the findings and disquisition of respondent SEC on this matter; viz:
The partnership agreement (amended articles of 19 August 1948) does not provide for a specified period or
undertaking. The "DURATION" clause simply states:
"5. DURATION. The partnership shall continue so long as mutually satisfactory and upon the
death or legal incapacity of one of the partners, shall be continued by the surviving partners."
The hearing officer however opined that the partnership is one for a specific undertaking and hence not a
partnership at will, citing paragraph 2 of the Amended Articles of Partnership (19 August 1948):
"2. Purpose. The purpose for which the partnership is formed, is to act as legal adviser and
representative of any individual, firm and corporation engaged in commercial, industrial or
other lawful businesses and occupations; to counsel and advise such persons and entities
with respect to their legal and other affairs; and to appear for and represent their principals
and client in all courts of justice and government departments and offices in the Philippines,
and elsewhere when legally authorized to do so."
The "purpose" of the partnership is not the specific undertaking referred to in the law. Otherwise, all
partnerships, which necessarily must have a purpose, would all be considered as partnerships for a definite
undertaking. There would therefore be no need to provide for articles on partnership at will as none would so
exist. Apparently what the law contemplates, is a specific undertaking or "project" which has a definite or
definable period of completion. 3
The birth and life of a partnership at will is predicated on the mutual desire and consent of the partners. The right to
choose with whom a person wishes to associate himself is the very foundation and essence of that partnership. Its
continued existence is, in turn, dependent on the constancy of that mutual resolve, along with each partner's
capability to give it, and the absence of a cause for dissolution provided by the law itself. Verily, any one of the
partners may, at his sole pleasure, dictate a dissolution of the partnership at will. He must, however, act in good
faith, not that the attendance of bad faith can prevent the dissolution of the partnership 4 but that it can result in a
liability for damages. 5
In passing, neither would the presence of a period for its specific duration or the statement of a particular purpose
for its creation prevent the dissolution of any partnership by an act or will of a partner. 6 Among partners, 7 mutual
agency arises and the doctrine of delectus personae allows them to have the power, although not necessarily the right, to
dissolve the partnership. An unjustified dissolution by the partner can subject him to a possible action for damages.
The dissolution of a partnership is the change in the relation of the parties caused by any partner ceasing to be
associated in the carrying on, as might be distinguished from the winding up of, the business. 8 Upon its dissolution,
the partnership continues and its legal personality is retained until the complete winding up of its business culminating in
its termination. 9
The liquidation of the assets of the partnership following its dissolution is governed by various provisions of the Civil
Code; 10 however, an agreement of the partners, like any other contract, is binding among them and normally takes
precedence to the extent applicable over the Code's general provisions. We here take note of paragraph 8 of the
"Amendment to Articles of Partnership" reading thusly:

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. . . In the event of the death or retirement of any partner, his interest in the partnership shall be liquidated
and paid in accordance with the existing agreements and his partnership participation shall revert to
the Senior Partners for allocation as the Senior Partners may determine; provided, however, that with
respect to the two (2)floors of office condominium which the partnership is now acquiring, consisting of the
5th and the 6th floors of the Alpap Building, 140 Alfaro Street, Salcedo Village, Makati, Metro Manila, their
true value at the time of such death or retirement shall be determined by two (2) independent appraisers,
one to be appointed (by the partnership and the other by the) retiring partner or the heirs of a deceased
partner, as the case may be. In the event of any disagreement between the said appraisers a third appraiser
will be appointed by them whose decision shall be final. The share of the retiring or deceased partner in the
aforementioned two (2) floor office condominium shall be determined upon the basis of the valuation above
mentioned which shall be paid monthly within the first ten (10) days of every month in installments of not
less than P20,000.00 for the Senior Partners, P10,000.00 in the case of two (2) existing Junior Partners and
P5,000.00 in the case of the new Junior Partner.11
The term "retirement" must have been used in the articles, as we so hold, in a generic sense to mean the
dissociation by a partner, inclusive of resignation or withdrawal, from the partnership that thereby dissolves it.
On the third and final issue, we accord due respect to the appellate court and respondent Commission on their
common factual finding, i.e., that Attorney Misa did not act in bad faith. Public respondents viewed his withdrawal to
have been spurred by "interpersonal conflict" among the partners. It would not be right, we agree, to let any of the
partners remain in the partnership under such an atmosphere of animosity; certainly, not against their will. 12 Indeed,
for as long as the reason for withdrawal of a partner is not contrary to the dictates of justice and fairness, nor for the
purpose of unduly visiting harm and damage upon the partnership, bad faith cannot be said to characterize the act. Bad
faith, in the context here used, is no different from its normal concept of a conscious and intentional design to do a
wrongful act for a dishonest purpose or moral obliquity.
WHEREFORE, the decision appealed from is AFFIRMED. No pronouncement on costs.

ROJAS VS MAGLANA
T his is a direct appeal to this Court from a decision ** of the then Court of First Instance of Davao,
Seventh Judicial District, Branch III, in Civil Case No. 3518, dismissing appellant's complaint.
As found by the trial court, the antecedent facts of the case are as follows:
On January 14, 1955, Maglana and Rojas executed their Articles of Co-Partnership (Exhibit "A") called
Eastcoast Development Enterprises (EDE) with only the two of them as partners. The partnership EDE with
an indefinite term of existence was duly registered on January 21, 1955 with the Securities and
Exchange Commission.
One of the purposes of the duly-registered partnership was to "apply or secure timber and/or minor
forests products licenses and concessions over public and/or private forest lands and to operate, develop
and promote such forests rights and concessions." (Rollo, p. 114).
A duly registered Articles of Co-Partnership was filed together with an application for a timber concession
covering the area located at Cateel and Baganga, Davao with the Bureau of Forestry which was approved
and Timber License No. 35-56 was duly issued and became the basis of subsequent renewals made for
and in behalf of the duly registered partnership EDE.
Under the said Articles of Co-Partnership, appellee Maglana shall manage the businessaffairs of the
partnership, including marketing and handling of cash and is authorized to sign all papers and instruments
relating to the partnership, while appellant Rojas shall be the logging superintendent and shall manage the
logging operations of the partnership. It is also provided in the said articles of co-partnership that all
profits and losses of the partnership shall be divided share and share alike between the partners.
During the period from January 14, 1955 to April 30, 1956, there was no operation of said partnership
(Record on Appeal [R.A.] p. 946).
Because of the difficulties encountered, Rojas and Maglana decided to avail of the services of Pahamotang
as industrial partner.
On March 4, 1956, Maglana, Rojas and Agustin Pahamotang executed their Articles of Co-Partnership
(Exhibit "B" and Exhibit "C") under the firm name EASTCOAST DEVELOPMENT ENTERPRISES (EDE). Aside
from the slight difference in the purpose of the second partnership which is to hold and secure renewal of
timber license instead of to secure the license as in the first partnership and the term of the second
partnership is fixed to thirty (30) years, everything else is the same.
The partnership formed by Maglana, Pahamotang and Rojas started operation on May 1, 1956, and was
able to ship logs and realize profits. An income was derived from the proceeds of the logs in the sum of
P643,633.07 (Decision, R.A. 919).

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On October 25, 1956, Pahamotang, Maglana and Rojas executed a document entitled
"CONDITIONAL SALE OF INTEREST IN THE PARTNERSHIP, EASTCOAST DEVELOPMENT ENTERPRISE"
(Exhibits "C" and "D") agreeing among themselves that Maglana and Rojas shall purchase the interest,
share and participation in the Partnership of Pahamotang assessed in the amount of P31,501.12. It was
also agreed in the said instrument that after payment of the sum of P31,501.12 to Pahamotang including
the amount of loansecured by Pahamotang in favor of the partnership, the two (Maglana and Rojas) shall
become the owners of all equipment contributed by Pahamotang and the EASTCOAST DEVELOPMENT
ENTERPRISES, the name also given to the second partnership, be dissolved. Pahamotang was paid in fun
on August 31, 1957. No other rights and obligations accrued in the name of the second partnership (R.A.
921).
After the withdrawal of Pahamotang, the partnership was continued by Maglana and Rojas without the
benefit of any written agreement or reconstitution of their written Articles of Partnership (Decision, R.A.
948).
On January 28, 1957, Rojas entered into a management contract with another logging enterprise, the CMS
Estate, Inc. He left and abandoned the partnership (Decision, R.A. 947).
On February 4, 1957, Rojas withdrew his equipment from the partnership for use in the newly acquired
area (Decision, R.A. 948).
The equipment withdrawn were his supposed contributions to the first partnership and was transferred to
CMS Estate, Inc. by way of chattel mortgage (Decision, R.A. p. 948).
On March 17, 1957, Maglana wrote Rojas reminding the latter of his obligation to contribute, either
in cash or in equipment, to the capital investments of the partnership as well as his obligation to perform
his duties as logging superintendent.
Two weeks after March 17, 1957, Rojas told Maglana that he will not be able to comply with the promised
contributions and he will not work as logging superintendent. Maglana then told Rojas that the latter's
share will just be 20% of the net profits. Such was the sharing from 1957 to 1959 without complaint or
dispute (Decision, R.A. 949).
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Meanwhile, Rojas took funds from the partnership more than his contribution. Thus, in a letter dated
February 21, 1961 (Exhibit "10") Maglana notified Rojas that he dissolved the partnership (R.A. 949).
On April 7, 1961, Rojas filed an action before the Court of First Instance of Davao against Maglana for the
recovery of properties, accounting, receivership and damages, docketed as Civil Case No. 3518 (Record on
Appeal, pp. 1-26).
Rojas' petition for appointment of a receiver was denied (R.A. 894).
Upon motion of Rojas on May 23, 1961, Judge Romero appointed commissioners to examine the long and
voluminous accounts of the Eastcoast Development Enterprises (Ibid., pp. 894-895).
The motion to dismiss the complaint filed by Maglana on June 21, 1961 (Ibid., pp. 102-114) was denied by
Judge Romero for want of merit (Ibid., p. 125). Judge Romero also required the inclusion of the
entire year 1961 in the report to be submitted by the commissioners (Ibid., pp. 138-143). Accordingly, the
commissioners started examining the records and supporting papers of the partnership as well as the
information furnished them by the parties, which were compiled in three (3) volumes.
On May 11, 1964, Maglana filed his motion for leave of court to amend his answer with counterclaim,
attaching thereto the amended answer (Ibid., pp. 26-336), which was granted on May 22, 1964 (Ibid., p.
336).
On May 27, 1964, Judge M.G. Reyes approved the submitted Commissioners' Report (Ibid., p. 337).
On June 29, 1965, Rojas filed his motion for reconsideration of the order dated May 27, 1964 approving
the report of the commissioners which was opposed by the appellee.
On September 19, 1964, appellant's motion for reconsideration was denied (Ibid., pp. 446-451).
A mandatory pre-trial was conducted on September 8 and 9, 1964 and the following issues were agreed
upon to be submitted to the trial court:
(a) The nature of partnership and the legal relations of Maglana and Rojas after the dissolution of
the second partnership;
(b) Their sharing basis: whether in proportion to their contribution or share and share alike;
(c) The ownership of properties bought by Maglana in his wife's name;
(d) The damages suffered and who should be liable for them; and
(e) The legal effect of the letter dated February 23, 1961 of Maglana dissolving the partnership
(Decision, R.A. pp. 895-896).
- nad

After trial, the lower court rendered its decision on March 11, 1968, the dispositive portion of which reads
as follows:

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"WHEREFORE, the above facts and issues duly considered, judgment is hereby rendered by the
Court declaring that:
"1. The nature of the partnership and the legal relations of Maglana and Rojas after Pahamotang
retired from the second partnership, that is, after August 31, 1957, when Pahamotang was finally
paid his share the partnership of the defendant and the plaintiff is one of a de facto and at will;
"2. Whether the sharing of partnership profits should be on the basis of computation, that is the
ratio and proportion of their respective contributions, or on the basis of share and share alike
this covered by actual contributions of the plaintiff and the defendant and by their verbal
agreement; that the sharing of profits and losses is on the basis of actual contributions; that from
1957 to 1959, the sharing is on the basis of 80% for the defendant and 20% for the plaintiff of the
profits, but from 1960 to the date of dissolution, February 23, 1961, the plaintiff's share will be on
the basis of his actual contribution and, considering his indebtedness to the partnership, the
plaintiff is not entitled to any share in the profits of the said partnership;
"3. As to whether the properties which were bought by the defendant and placed in his or in his
wife's name were acquired with partnership funds or with funds of the defendant and the Court
declares that there is no evidence that these properties were acquired by the partnership funds,
and therefore the same should not belong to the partnership;
"4. As to whether damages were suffered and, if so, how much, and who caused them and who
should be liable for them the Court declares that neither parties is entitled to damages, for as
already stated above it is not a wise policy to place a price on the right of a person to litigate
and/or to come to Court for the assertion of the rights they believe they are entitled to;
"5. As to what is the legal effect of the letter of defendant to the plaintiff dated February 23, 1961;
did it dissolve the partnership or not the Court declares that the letter of the defendant to the
plaintiff dated February 23, 1961, in effect dissolved the partnership;
"6. Further, the Court relative to the canteen, which sells foodstuffs, supplies, and other
merchandise to the laborers and employees of the Eastcoast Development Enterprises, the
COURT DECLARES THE SAME AS NOT BELONGING TO THE PARTNERSHIP;
"7. That the alleged sale of forest concession Exhibit 9-B, executed by Pablo Angeles David is
VALID AND BINDING UPON THE PARTIES AND SHOULD BE CONSIDERED AS PART OF MAGLANA'S
CONTRIBUTION TO THE PARTNERSHIP;
"8. Further, the Court orders and directs plaintiff Rojas to pay or turn over to the partnership the
amount of P69,000.00 the profits he received from the CMS Estate, Inc. operated by him;
"9. The claim that plaintiff Rojas should be ordered to pay the further sum of P85,000.00 which
according to him he is still entitled to receive from the CMS Estate, Inc. is hereby denied
considering that it has not yet been actually received, and further the receipt is merely based upon
an expectancy and/or still speculative;
"10. The Court also directs and orders plaintiff Rojas to pay the sum of P62,988.19 his personal
account to the partnership;
"11. The Court also credits the defendant the amount of P85,000.00 the amount he should have
received as logging superintendent, and which was not paid to him, and this should be considered
as part of Maglana's contribution likewise to the partnership; and
"12. The complaint is hereby dismissed with costs against the plaintiff.

: rd

"SO ORDERED." Decision, Record on Appeal, pp. 985-989).

Rojas interposed the instant appeal.
The main issue in this case is the nature of the partnership and legal relationship of the Maglana-Rojas
after Pahamotang retired from the second partnership.
The lower court is of the view that the second partnership superseded the first, so that when the second
partnership was dissolved there was no written contract of co-partnership; there was no reconstitution as
provided for in the Maglana, Rojas and Pahamotang partnership contract. Hence, the partnership which
was carried on by Rojas and Maglana after the dissolution of the second partnership was a de facto
partnership and at will. It was considered as a partnership at will because there was no term, express or
implied; no period was fixed, expressly or impliedly (Decision, R.A. pp. 962-963).
On the other hand, Rojas insists that the registered partnership under the firm name of Eastcoast
Development Enterprises (EDE) evidenced by the Articles of Co-Partnership dated January 14, 1955
(Exhibit "A") has not been novated, superseded and/or dissolved by the unregistered articles of copartnership among appellant Rojas, appellee Maglana and Agustin Pahamotang, dated March 4, 1956
(Exhibit "C") and accordingly, the terms and stipulations of said registered Articles of Co-Partnership
(Exhibit "A") should govern the relations between him and Maglana. Upon withdrawal of Agustin
Pahamotang from the unregistered partnership (Exhibit "C"), the legally constituted partnership EDE

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(Exhibit "A") continues to govern the relations between them and it was legal error to consider a de facto
partnership between said two partners or a partnership at will. Hence, the letter of appellee Maglana dated
February 23, 1961, did not legally dissolve the registered partnership between them, being in
contravention of the partnership agreement agreed upon and stipulated in their Articles of Co-Partnership
(Exhibit "A"). Rather, appellant is entitled to the rights enumerated in Article 1837 of the Civil Code and to
the sharing profits between them of "share and share alike" as stipulated in the registered Articles of CoPartnership (Exhibit "A").
After a careful study of the records as against the conflicting claims of Rojas and Maglana, it appears
evident that it was not the intention of the partners to dissolve the first partnership, upon the constitution
of the second one, which they unmistakably called an "Additional Agreement" (Exhibit "9-B") (Brief for
Defendant-Appellee, pp. 24-25). Except for the fact that they took in one industrial partner; gave him an
equal share in the profits and fixed the term of the second partnership to thirty (30) years, everything else
was the same. Thus, they adopted the same name, EASTCOAST DEVELOPMENT ENTERPRISES, they
pursued the same purposes and the capital contributions of Rojas and Maglana as stipulated in both
partnerships call for the same amounts. Just as important is the fact that all subsequent renewals of
Timber License No. 35-36 were secured in favor of the First Partnership, the original licensee. To all intents
and purposes therefore, the First Articles of Partnership were only amended, in the form of Supplementary
Articles of Co-Partnership (Exhibit "C") which was never registered (Brief for Plaintiff-Appellant, p. 5).
Otherwise stated, even during the existence of the second partnership, all business transactions were
carried out under the duly registered articles. As found by the trial court, it is an admitted fact that even
up to now, there are still subsisting obligations and contracts of the latter (Decision, R.A. pp. 950-957). No
rights and obligations accrued in the name of the second partnership except in favor of Pahamotang which
was fully paid by the duly registered partnership (Decision, R.A., pp. 919-921).
On the other hand, there is no dispute that the second partnership was dissolved by common consent.
Said dissolution did not affect the first partnership which continued to exist. Significantly, Maglana and
Rojas agreed to purchase the interest, share and participation in the second partnership of Pahamotang
and that thereafter, the two (Maglana and Rojas) became the owners of equipment contributed by
Pahamotang. Even more convincing, is the fact that Maglana on March 17, 1957, wrote Rojas, reminding
the latter of his obligation to contribute either in cash or in equipment, to the capital investment of the
partnership as well as his obligation to perform his duties as logging superintendent. This reminder cannot
refer to any other but to the provisions of the duly registered Articles of Co-Partnership. As earlier stated,
Rojas replied that he will not be able to comply with the promised contributions and he will not work as
logging superintendent. By such statements, it is obvious that Roxas understood what Maglana was
referring to and left no room for doubt that both considered themselves governed by the articles of the
duly registered partnership.
Under the circumstances, the relationship of Rojas and Maglana after the withdrawal of Pahamotang can
neither be considered as a De Facto Partnership, nor a Partnership at Will, for as stressed, there is an
existing partnership, duly registered.
As to the question of whether or not Maglana can unilaterally dissolve the partnership in the case at bar,
the answer is in the affirmative.
Hence, as there are only two parties when Maglana notified Rojas that he dissolved the partnership, it is in
effect a notice of withdrawal.
Under Article 1830, par. 2 of the Civil Code, even if there is a specified term, one partner can cause its
dissolution by expressly withdrawing even before the expiration of the period, with or without justifiable
cause. Of course, if the cause is not justified or no cause was given, the withdrawing partner is liable for
damages but in no case can he be compelled to remain in the firm. With his withdrawal, the number of
members is decreased, hence, the dissolution. And in whatever way he may view the situation, the
conclusion is inevitable that Rojas and Maglana shall be guided in the liquidation of the partnership by the
provisions of its duly registered Articles of Co-Partnership; that is, all profits and losses of the partnership
shall be divided "share and share alike" between the partners.
But an accounting must first be made and which in fact was ordered by the trial court and accomplished
by the commissioners appointed for the purpose.
On the basis of the Commissioners' Report, the corresponding contribution of the partners from 19561961 are as follows: Eufracio Rojas who should have contributed P158,158.00, contributed only
P18,750.00 while Maglana who should have contributed P160,984.00, contributed P267,541.44 (Decision,
R.A. p. 976). It is a settled rule that when a partner who has undertaken to contribute a sum of money
fails to do so, he becomes a debtor of the partnership for whatever he may have promised to contribute
(Article 1786, Civil Code) and for interests and damages from the time he should have complied with his
obligation (Article 1788, Civil Code) (Moran, Jr. v. Court of Appeals, 133 SCRA 94 [1984]). Being a
contract of partnership, each partner must share in the profits and losses of the venture. That is the
essence of a partnership (Ibid., p. 95).
Thus, as reported in the Commissioners' Report, Rojas is not entitled to any profits. In their voluminous
reports which was approved by the trial court, they showed that on 50-50% basis, Rojas will be liable in

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the amount of P131,166.00; on 80-20%, he will be liable for P40,092.96 and finally on the basis of actual
capital contribution, he will be liable for P52,040.31.
Consequently, except as to the legal relationship of the partners after the withdrawal of Pahamotang which
is unquestionably a continuation of the duly registered partnership and the sharing of profits and losses
which should be on the basis of share and share alike as provided for in the duly registered Articles of CoPartnership, no plausible reason could be found to disturb the findings and conclusions of the trial court.
: nad

As to whether Maglana is liable for damages because of such withdrawal, it will be recalled that after the
withdrawal of Pahamotang, Rojas entered into a management contract with another logging enterprise,
the CMS Estate, Inc., a company engaged in the same business as the partnership. He withdrew his
equipment, refused to contribute either in cash or in equipment to the capital investment and to perform
his duties as logging superintendent, as stipulated in their partnership agreement. The records also show
that Rojas not only abandoned the partnership but also took funds in an amount more than his
contribution (Decision, R.A., p. 949).
In the given situation Maglana cannot be said to be in bad faith nor can he be liable for damages.
PREMISES CONSIDERED, the assailed decision of the Court of First Instance of Davao, Branch III, is
hereby MODIFIED in the sense that the duly registered partnership of Eastcoast Development Enterprises
continued to exist until liquidated and that the sharing basis of the partners should be on share and share
alike as provided for in its Articles of Partnership, in accordance with the computation of the
commissioners. We also hereby AFFIRM the decision of the trial court in all other respects.
: nad

PAUL MACDONALD VS NATIONAL CITY BANK OF NEW YORK

This is an appeal by certiorari from the decision of the Court of Appeals from which we are
reproducing the following basic findings of fact:
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STASIKINOCEY is a partnership doing business at No. 58, Aurora Boulevard, San Juan, Rizal, and
formed by Alan W. Gorcey, Louis F. da Costa, Jr., William Kusik and Emma Badong Gavino. This
partnership was denied registration in the Securities and Exchange Commission, and while it is
confusing to see in this case that the CARDINAL RATTAN, sometimes called the CARDINAL
RATTAN FACTORY, is treated as a copartnership, of which Defendants Gorcey and da Costa are
considered general partners, we are satisfied that, as alleged in various instruments appearing of
record, said Cardinal Rattan is merely the business name or style used by the partnership
Stasikinocey.
Prior to June 3, 1949, Defendant Stasikinocey had an overdraft account with The National City
Bank of New York, a foreign banking association duly licensed to do business in the Philippines.
On June 3, 1949, the overdraft showed a balance of P6,134.92 against theDefendant Stasikinocey
or the Cardinal Rattan (Exhibit D), which account, due to the failure of the partnership to make
the required payment, was converted into an ordinary loan for which the corresponding
promissory joint note non-negotiable was executed on June 3, 1949, by Louis F. da Costa for and
in the name of the Cardinal Rattan, Louis F. da Costa and Alan Gorcey (Exhibit D). This
promissory note was secured on June 7, 1949, by a chattel mortgage executed by Louis F. da
Costa, Jr., General Partner for and in the name of Stasikinocey, alleged to be a duly registered
Philippine partnership, doing business under the name and style of Cardinal Rattan, with
principal office at 69 Riverside, San Juan, Rizal (Exhibit A). The chattels mortgaged were the
following motor vehicles:
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(a) Fargo truck with motor No. T-118-202839, Serial No. 81410206 and with plate No. T-7333
(1949);
(b) Plymouth Sedan automobile motor No. T-5638876, Serial No. 11872718 and with plate No.
10372;
and
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(c) Fargo Pick-Up FKI-16, with motor No. T-112800032,

Serial No. 8869225 and with plate No. T-7222 (1949).
The mortgage deed was fully registered by the mortgagee on June 11, 1949, in the Office of the
Register of Deeds for the province of Rizal, at Pasig, (Exhibit A), and among other provisions it
contained the following:
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(a) That the mortgagor shall not sell or otherwise dispose of the said chattels without the
mortgagees written consent;
and
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(b) That the mortgagee may foreclose the mortgage at any time, after breach of any condition
thereof, the mortgagor waiving the 30- day notice of foreclosure.

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On June 7, 1949, the same day of the execution of the chattel mortgage aforementioned,
Gorcey and Da Costa executed an agreement purporting to convey and transfer all their rights,
title and participation in Defendant partnership to Shaeffer, allegedly in consideration of the
cancellation of an indebtedness of P25,000 owed by them and Defendant partnership to the
latter (Exhibit J), which transaction is said to be in violation of the Bulk Sales Law (Act No. 3952 of
the Philippine Legislature).
While the said loan was still unpaid and the chattel mortgage subsisting, Defendantpartnership,
through Defendants Gorcey and Da Costa transferred to Defendant McDonald the Fargo truck
and Plymouth sedan on June 24, 1949 (Exhibit L). The Fargo pickup was also sold on June 28,
1949, by William Shaeffer to Paul McDonald.
On or about July 19, 1944, Paul Mcdonald, notwithstanding Plaintifs existing mortgage lien, in
turn transferred the Fargo truck and the Plymouth sedan to Benjamin Gonzales.
The National City Bank of New York, Respondent herein, upon learning of the transfers made by
the partnership Stasikinocey to William Shaeffer, from the latter to Paul McDonald, and from Paul
McDonald to Benjamin Gonzales, of the vehicles previously pledged by Stasikinocey to
the Respondent, filed an action against Stasikinocey and its alleged partners Gorcey and Da
Costa, as well as Paul McDonald and Benjamin Gonzales, to recover its credit and to foreclose the
corresponding chattel mortgage. McDonald and Gonzales were made Defendants because they
claimed to have a better right over the pledged vehicle.
After trial the Court of First Instance of Manila rendered judgment in favor of the Respondent,
annulling the sale of the vehicles in question to Benjamin Gonzales;
sentencing Da Costa and
Gorcey to pay to the Respondent jointly and severally the sum of P6,134.92, with
legalinterest from
the debt of
the
promissory
note
involved;
sentencing
the Petitioner Gonzales to deliver the vehicles in question to the Respondent for sale at
public auction if Da Costa and Gorcey should fail to pay the money judgment;
and sentencing
Da Costa, Gorcey and Shaeffers to pay to the Respondent jointly and severally any deficiency
that may remain unpaid should the proceeds of the sale not be sufficient;
and sentencing
Gorcey, Da Costa, McDonald and Shaeffer to pay the costs. Only Paul McDonald and Benjamin
Gonzales appealed to the Court of Appeals which rendered a decision the dispositive part of
which reads as follows:
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WHEREFORE, the decision appealed from is hereby modified, relieving Appellant William
Shaeffer of the obligation of paying, jointly and severally, together with Alan W. Gorcey and Louis
F. da Costa, Jr., any deficiency that may remain unpaid after applying the proceeds of the sale of
the said motor vehicles which shall be undertaken upon the lapse of 90 days from the date this
decision becomes final, if by then Defendants Louis F. da Costa, Jr., and Alan W. Gorcey had
not paid the amount of the judgment debt. With this modification the decision appealed from is
in all other respects affirmed, with costs against Appellants. This decision is without prejudice to
whatever action Louis F. da Costa, Jr., and Alan W. Gorcey may take against their co-partners in
the Stasikinocey unregistered partnership.
This appeal by certiorari was taken by Paul McDonald and Benjamin Gonzales, Petitionersherein,
who have assigned the following errors:
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I
IN RULING THAT AN UNREGISTERED COMMERCIAL CO-PARTNERSHIP WHICH HAS NO
INDEPENDENT JURIDICAL PERSONALITY CAN HAVE A DOMICILE SO THAT A CHATTEL MORTGAGE
REGISTERED IN THAT DOMICILE WOULD BIND THIRD PERSONS WHO ARE INNOCENT
PURCHASERS FOR VALUE.
II
IN RULING THAT WHEN A CHATTEL MORTGAGE IS EXECUTED BY ONE OF THE MEMBERS OF AN
UNREGISTERED COMMERCIAL CO-PARTNERSHIP WITHOUT JURIDICAL PERSONALITY INDEPENDENT
OF ITS MEMBERS, IT NEED NOT BE REGISTERED IN THE ACTUAL RESIDENCE OF THE MEMBERS
WHO EXECUTED SAME;
AND, AS A CONSEQUENCE THEREOF, IN NOT MAKING ANY FINDING OF
FACT AS TO THE ACTUAL RESIDENCE OF SAID CHATTEL MORTGAGOR, DESPITEAPPELLANTS
RAISING THAT QUESTION PROPERLY BEFORE IT AND REQUESTING A RULING THEREON.
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III
IN NOT RULING THAT, WHEN A CHATTEL MORTGAGOR EXECUTES AN AFFIDAVIT OF GOOD FAITH
BEFORE A NOTARY PUBLIC OUTSIDE OF THE TERRITORIAL JURISDICTION OF THE LATTER, THE
AFFIDAVIT IS VOID AND THE CHATTEL MORTGAGE IS NOT BINDING ON THIRD PERSONS WHO ARE
INNOCENT PURCHASERS FOR VALUE;
AND, AS A CONSEQUENCE THEREOF, IN NOT MAKING
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ANY FINDING OF FACT AS TO WHERE THE DEED WAS IN FACT EXECUTED, DESPITEAPPELLANTS
RAISING THAT QUESTION PROPERLY BEFORE IT AND EXPRESSLY REQUESTING A RULING
THEREON.
IV
IN RULING THAT A LETTER AUTHORIZING ONE MEMBER OF AN UNREGISTERED COMMERCIAL COPARTNERSHIP TO MAKE ALL OFFICIAL AND BUSINESS ARRANGEMENTS .. WITH THE NATIONAL
CITY BANK OF NEW YORK IN ORDER TO SIMPLIFY ALL MATTERS RELATIVE TO LCS CABLE
TRANSFERS, DRAFTS, OR OTHER BANKING MEDIUMS, WAS SUFFICIENT AUTHORITY FOR THE
SAID MEMBER TO EXECUTE A CHATTEL MORTGAGE IN ORDER TO GIVE THE BANK SECURITY FOR
A PRE-EXISTING OVERDRAFT, GRANTED WITHOUT SECURITY. WHICH THE BANK HAD CONVERTED
INTO A DEMAND LOAN UPON FAILURE TO PAY SAME AND BEFORE THE CHATTEL MORTGAGE WAS
EXECUTED.
This is the first question propounded by the Petitioners:
Since an unregistered commercial
partnership unquestionably has no juridical personality, can it have a domicile so that the
registration of a chattel mortgage therein is notice to the world?.
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While an unregistered commercial partnership has no juridical personality, nevertheless, where

two or more persons attempt to create a partnership failing to comply with all the legal
formalities, the law considers them as partners and the association is a partnership in so far as it
is a favorable to third persons, by reason of the equitable principle of estoppel. In Jo Chung
Chang vs. Pacific Commercial Co., 45 Phil., 145, it was held that although the partnership with
the firm name of Teck Seing and Co. Ltd., could not be regarded as a partnership de jure, yet
with respect to third persons it will be considered a partnership with all the consequent
obligations for the purpose of enforcing the rights of such third persons. Da Costa and Gorcey
cannot deny that they are partners of the partnership Stasikinocey, because in all their
transactions with the Respondent they represented themselves as such. Petitioner McDonald
cannot disclaim knowledge of the partnership Stasikinocey because he dealt with said entity in
purchasing two of the vehicles in question through Gorcey and Da Costa. As was held in Behn
Meyer & Co. vs. Rosatzin, 5 Phil., 660, where a partnership not duly organized has been
recognized as such in its dealings with certain persons, it shall be considered as partnership by
estoppel and the persons dealing with it are estopped from denying its partnership existence.
The sale of the vehicles in question being void as to Petitioner McDonald, the transfer from the
latter to Petitioner Benjamin Gonzales is also void, as the buyer cannot have a better right than
the seller.
It results that if the law recognizes a defectively organized partnership as de facto as far as third
persons are concerned, for purposes of its de facto existence it should have such attribute of a
partnership as domicile. In Hung-Man Yoc vs. Kieng-Chiong-Seng, 6 Phil., 498, it was held that
although it has no legal standing, it is a partnership de facto and the general provisions of the
Code applicable to all partnerships apply to it. The registration of the chattel mortgage in
question with the Office of the Register of Deeds of Rizal, the residence or place of business of
the partnership Stasikinocey being San Juan, Rizal, was therefore in accordance with section 4 of
the Chattel Mortgage Law.
The second question propounded by the Petitioners is:
If not, is a chattel mortgage executed
by only one of the partners of an unregistered commercial partnership validly registered so as
to constitute notice to the world if it is not registered at the place where the aforesaid partner
actually resides but only in the place where the deed states that he resides, which is not his real
residence? And the third question is as follows:
If the actual residence of the chattel
mortgagor not the residence stated in the deed of chattel mortgage is controlling, may the
Court of Appeals refuse to make a finding of fact as to where the mortgagor resided despite
your Petitioners having properly raised that question before it and expressly requested a ruling
thereon?
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These two questions have become academic by reason of the answer to the first question,
namely, that as a de facto partnership, Stasikinocey had its domicile in San Juan, Rizal.
The fourth question asked by the Petitioners is as follows:
Is a chattel mortgage executed by
only one of the partners of an unregistered commercial partnership valid as to third persons
when that partner executed the affidavit of good faith in Quezon City before a notary public
whose appointment is only for the City of Manila? If not, may the Court of Appeals refuse to make
a finding of fact as to where the deed was executed, despite yourPetitioners having properly
raised that issue before it and expressly requested a ruling thereon?
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It is noteworthy that the chattel mortgage in question is in the form required by law, and there is
therefore the presumption of its due execution which cannot be easily destroyed by the biased

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testimony of the one who executed it. The interested version of Da Costa that the affidavit of
good faith appearing in the chattel mortgage was executed in Quezon City before a notary public
for and in the City of Manila was correctly rejected by the trial court and the Court of Appeals.
Indeed, cumbersome legal formalities are imposed to prevent fraud. As aptly pointed out in El
Hogar Filipino vs. Olviga, 60 Phil., 17, If the biased and interested testimony of a grantor and the
vague and uncertain testimony of his son are deemed sufficient to overcome a public instrument
drawn up with all the formalities prescribed by the law then there will have been established a
very dangerous doctrine which would throw wide open the doors to fraud.
The last question raised by the Petitioners is as follows:
Does only one of several partners of
an unregistered commercial partnership have authority, by himself alone, to execute a valid
chattel mortgage over property owned by the unregistered commercial partnership in order to
guarantee a pre-existing overdraft previously granted, without guaranty, by the bank?
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In view of the conclusion that Stasikinocey is a de facto partnership, and Da Costa appears as a
co-manager in the letter of Gorcey to the Respondent and in the promissory note executed by Da
Costa, and that even the partners considered him as such, as stated in the affidavit of April 21,
1948, to the effect that That we as the majority partners hereby agree to appoint Louis da Costa
co-managing partner of Alan W. Gorcey, duly approved managing partner of the said firm, the
partner who executed the chattel mortgage in question must be deemed to be so fully
authorized. Section 6 of the Chattel Mortgage Law provides that when a partnership is a party to
the mortgage, the affidavit may be made and subscribed by one member thereof. In this case
the affidavit was executed and subscribed by Da Costa, not only as a partner but as a managing
partner.
There is no merit in Petitioners pretense that the motor vehicles in question are the common
property of Da Costa and Gorcey. Petitioners invoke article 24 of the Code of Commerce in
arguing that an unregistered commercial partnership has no juridical personality and cannot
execute any act that would adversely affect innocent third persons. Petitioners forget that
theRespondent is a third person with respect to the partnership, and the chattel mortgage
executed by Da Costa cannot therefore be impugned by Gorcey on the ground that there is no
partnership between them and that the vehicles in question belonged to them in common. As a
matter of fact, the Respondent and the Petitioners are all third persons as regards the
partnership Stasikinocey;
and even assuming that the Petitioners are purchasers in good faith
and for value, the Respondent having transacted with Stasikinocey earlier than thePetitioners, it
should enjoy and be given priority.
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Wherefore, the appealed decision of the Court of Appeals is affirmed with costs against
thePetitioners.
CIR VS WILLIAM SUTER
A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.," was formed on 30 September 1947 by herein
respondent William J. Suter as the general partner, and Julia Spirig and Gustav Carlson, as the limited partners. The
partners contributed, respectively, P20,000.00, P18,000.00 and P2,000.00 to the partnership. On 1 October 1947,
the limited partnership was registered with the Securities and Exchange Commission. The firm engaged, among
other activities, in the importation, marketing, distribution and operation of automatic phonographs, radios, television
sets and amusement machines, their parts and accessories. It had an office and held itself out as a limited
partnership, handling and carrying merchandise, using invoices, bills and letterheads bearing its trade-name,
maintaining its own books of accounts and bank accounts, and had a quota allocation with the Central Bank.
In 1948, however, general partner Suter and limited partner Spirig got married and, thereafter, on 18 December
1948, limited partner Carlson sold his share in the partnership to Suter and his wife. The sale was duly recorded
with the Securities and Exchange Commission on 20 December 1948.
The limited partnership had been filing its income tax returns as a corporation, without objection by the herein
petitioner, Commissioner of Internal Revenue, until in 1959 when the latter, in an assessment, consolidated the
income of the firm and the individual incomes of the partners-spouses Suter and Spirig resulting in a determination
of a deficiency income tax against respondent Suter in the amount of P2,678.06 for 1954 and P4,567.00 for 1955.
Respondent Suter protested the assessment, and requested its cancellation and withdrawal, as not in accordance
with law, but his request was denied. Unable to secure a reconsideration, he appealed to the Court of Tax Appeals,
which court, after trial, rendered a decision, on 11 November 1965, reversing that of the Commissioner of Internal
Revenue.
The present case is a petition for review, filed by the Commissioner of Internal Revenue, of the tax court's aforesaid
decision. It raises these issues:

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(a) Whether or not the corporate personality of the William J. Suter "Morcoin" Co., Ltd. should be disregarded for
income tax purposes, considering that respondent William J. Suter and his wife, Julia Spirig Suter actually formed a
single taxable unit; and
(b) Whether or not the partnership was dissolved after the marriage of the partners, respondent William J. Suter and
Julia Spirig Suter and the subsequent sale to them by the remaining partner, Gustav Carlson, of his participation of
P2,000.00 in the partnership for a nominal amount of P1.00.
The theory of the petitioner, Commissioner of Internal Revenue, is that the marriage of Suter and Spirig and their
subsequent acquisition of the interests of remaining partner Carlson in the partnership dissolved the limited
partnership, and if they did not, the fiction of juridical personality of the partnership should be disregarded for income
tax purposes because the spouses have exclusive ownership and control of the business; consequently the income
tax return of respondent Suter for the years in question should have included his and his wife's individual incomes
and that of the limited partnership, in accordance with Section 45 (d) of the National Internal Revenue Code, which
provides as follows:
(d) Husband and wife. In the case of married persons, whether citizens, residents or non-residents, only
one consolidated return for the taxable year shall be filed by either spouse to cover the income of both
spouses; ....
In refutation of the foregoing, respondent Suter maintains, as the Court of Tax Appeals held, that his marriage with
limited partner Spirig and their acquisition of Carlson's interests in the partnership in 1948 is not a ground for
dissolution of the partnership, either in the Code of Commerce or in the New Civil Code, and that since its juridical
personality had not been affected and since, as a limited partnership, as contra distinguished from a duly registered
general partnership, it is taxable on its income similarly with corporations, Suter was not bound to include in his
individual return the income of the limited partnership.
We find the Commissioner's appeal unmeritorious.
The thesis that the limited partnership, William J. Suter "Morcoin" Co., Ltd., has been dissolved by operation of law
because of the marriage of the only general partner, William J. Suter to the originally limited partner, Julia Spirig one
year after the partnership was organized is rested by the appellant upon the opinion of now Senator Tolentino in
Commentaries and Jurisprudence on Commercial Laws of the Philippines, Vol. 1, 4th Ed., page 58, that reads as
follows:
A husband and a wife may not enter into a contract of general copartnership, because under the Civil Code,
which applies in the absence of express provision in the Code of Commerce, persons prohibited from
making donations to each other are prohibited from entering into universal partnerships. (2 Echaverri 196) It
follows that the marriage of partners necessarily brings about the dissolution of a pre-existing partnership. (1
Guy de Montella 58)
The petitioner-appellant has evidently failed to observe the fact that William J. Suter "Morcoin" Co., Ltd. was not a
universal partnership, but a particular one. As appears from Articles 1674 and 1675 of the Spanish Civil Code, of
1889 (which was the law in force when the subject firm was organized in 1947), a universal partnership requires
either that the object of the association be all the present property of the partners, as contributed by them to the
common fund, or else "all that the partners may acquire by their industry or work during the existence of the
partnership". William J. Suter "Morcoin" Co., Ltd. was not such a universal partnership, since the contributions of the
partners were fixed sums of money, P20,000.00 by William Suter and P18,000.00 by Julia Spirig and neither one of
them was an industrial partner. It follows that William J. Suter "Morcoin" Co., Ltd. was not a partnership that spouses
were forbidden to enter by Article 1677 of the Civil Code of 1889.
The former Chief Justice of the Spanish Supreme Court, D. Jose Casan, in his Derecho Civil, 7th Edition, 1952,
Volume 4, page 546, footnote 1, says with regard to the prohibition contained in the aforesaid Article 1677:
Los conyuges, segun esto, no pueden celebrar entre si el contrato de sociedad universal, pero o podran
constituir sociedad particular? Aunque el punto ha sido muy debatido, nos inclinamos a la tesis permisiva de
los contratos de sociedad particular entre esposos, ya que ningun precepto de nuestro Codigo los prohibe, y
hay que estar a la norma general segun la que toda persona es capaz para contratar mientras no sea
declarado incapaz por la ley. La jurisprudencia de la Direccion de los Registros fue favorable a esta misma
tesis en su resolution de 3 de febrero de 1936, mas parece cambiar de rumbo en la de 9 de marzo de 1943.
Nor could the subsequent marriage of the partners operate to dissolve it, such marriage not being one of the causes
provided for that purpose either by the Spanish Civil Code or the Code of Commerce.
The appellant's view, that by the marriage of both partners the company became a single proprietorship, is equally
erroneous. The capital contributions of partners William J. Suter and Julia Spirig were separately owned and

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contributed by them before their marriage; and after they were joined in wedlock, such contributions remained their
respective separate property under the Spanish Civil Code (Article 1396):
The following shall be the exclusive property of each spouse:
(a) That which is brought to the marriage as his or her own; ....
Thus, the individual interest of each consort in William J. Suter "Morcoin" Co., Ltd. did not become common property
of both after their marriage in 1948.
It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical personality of its own,
distinct and separate from that of its partners (unlike American and English law that does not recognize such
separate juridical personality), the bypassing of the existence of the limited partnership as a taxpayer can only be
done by ignoring or disregarding clear statutory mandates and basic principles of our law. The limited partnership's
separate individuality makes it impossible to equate its income with that of the component members. True, section
24 of the Internal Revenue Code merges registered general co-partnerships (compaias colectivas) with the
personality of the individual partners for income tax purposes. But this rule is exceptional in its disregard of a
cardinal tenet of our partnership laws, and can not be extended by mere implication to limited partnerships.
The rulings cited by the petitioner (Collector of Internal Revenue vs. University of the Visayas, L-13554, Resolution
of 30 October 1964, and Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 504) as authority for disregarding the fiction of legal
personality of the corporations involved therein are not applicable to the present case. In the cited cases, the
corporations were already subject to tax when the fiction of their corporate personality was pierced; in the present
case, to do so would exempt the limited partnership from income taxation but would throw the tax burden upon the
partners-spouses in their individual capacities. The corporations, in the cases cited, merely served as business
conduits or alter egos of the stockholders, a factor that justified a disregard of their corporate personalities for tax
purposes. This is not true in the present case. Here, the limited partnership is not a mere business conduit of the
partner-spouses; it was organized for legitimate business purposes; it conducted its own dealings with its customers
prior to appellee's marriage, and had been filing its own income tax returns as such independent entity. The change
in its membership, brought about by the marriage of the partners and their subsequent acquisition of all interest
therein, is no ground for withdrawing the partnership from the coverage of Section 24 of the tax code, requiring it to
pay income tax. As far as the records show, the partners did not enter into matrimony and thereafter buy the
interests of the remaining partner with the premeditated scheme or design to use the partnership as a business
conduit to dodge the tax laws. Regularity, not otherwise, is presumed.
As the limited partnership under consideration is taxable on its income, to require that income to be included in the
individual tax return of respondent Suter is to overstretch the letter and intent of the law. In fact, it would even
conflict with what it specifically provides in its Section 24: for the appellant Commissioner's stand results in equal
treatment, tax wise, of a general copartnership (compaia colectiva) and a limited partnership, when the code
plainly differentiates the two. Thus, the code taxes the latter on its income, but not the former, because it is in the
case of compaias colectivas that the members, and not the firm, are taxable in their individual capacities for any
dividend or share of the profit derived from the duly registered general partnership (Section 26, N.I.R.C.; Araas,
Anno. & Juris. on the N.I.R.C., As Amended, Vol. 1, pp. 88-89).
lawphi1.nt

But it is argued that the income of the limited partnership is actually or constructively the income of the spouses and
forms part of the conjugal partnership of gains. This is not wholly correct. As pointed out in Agapito vs. Molo 50 Phil.
779, and People's Bank vs. Register of Deeds of Manila, 60 Phil. 167, the fruits of the wife's parapherna become
conjugal only when no longer needed to defray the expenses for the administration and preservation of the
paraphernal capital of the wife. Then again, the appellant's argument erroneously confines itself to the question of
the legal personality of the limited partnership, which is not essential to the income taxability of the partnership since
the law taxes the income of even joint accounts that have no personality of their own. 1 Appellant is, likewise,
mistaken in that it assumes that the conjugal partnership of gains is a taxable unit, which it is not. What is taxable is
the "income of both spouses" (Section 45 [d] in their individual capacities. Though the amount of income (income of
the conjugal partnership vis-a-vis the joint income of husband and wife) may be the same for a given taxable year,
their consequences would be different, as their contributions in the business partnership are not the same.
The difference in tax rates between the income of the limited partnership being consolidated with, and when split
from the income of the spouses, is not a justification for requiring consolidation; the revenue code, as it presently
stands, does not authorize it, and even bars it by requiring the limited partnership to pay tax on its own income.
FOR THE FOREGOING REASONS, the decision under review is hereby affirmed. No costs.

LYONS VS ROSENSTOCK
This action was institute in the Court of First Instance of the City of Manila, by E. S. Lyons against C. W.
Rosenstock, as executor of the estate of H. W. Elser, deceased, consequent upon the taking of an appeal by the

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executor from the allowance of the claim sued upon by the committee on claims in said estate. The purpose of the
action is to recover four hundred forty-six and two thirds shares of the stock of J. K. Pickering & Co., Ltd., together
with the sum of about P125,000, representing the dividends which accrued on said stock prior to October 21, 1926,
with lawful interest. Upon hearing the cause the trial court absolved the defendant executor from the complaint, and
the plaintiff appealed.
Prior to his death on June 18, 1923, Henry W. Elser had been a resident of the City of Manila where he was
engaged during the years with which we are here concerned in buying, selling, and administering real estate. In
several ventures which he had made in buying and selling property of this kind the plaintiff, E. S. Lyons, had joined
with him, the profits being shared by the two in equal parts. In April, 1919, Lyons, whose regular vocation was that of
a missionary, or missionary agent, of the Methodist Episcopal Church, went on leave to the United States and was
gone for nearly a year and a half, returning on September 21, 1920. On the eve of his departure Elser made a
written statements showing that Lyons was, at that time, half owner with Elser of three particular pieces of real
property. Concurrently with this act Lyons execute in favor of Elser a general power of attorney empowering him to
manage and dispose of said properties at will and to represent Lyons fully and amply, to the mutual advantage of
both. During the absence of Lyons two of the pieces of property above referred to were sold by Elser, leaving in his
hands a single piece of property located at 616-618 Carried Street, in the City of Manila, containing about 282
square meters of land, with the improvements thereon.
In the spring of 1920 the attention of Elser was drawn to a piece of land, containing about 1,500,000 square meters,
near the City of Manila, and he discerned therein a fine opportunity for the promotion and development of a
suburban improvement. This property, which will be herein referred to as the San Juan Estate, was offered by its
owners for P570,000. To afford a little time for maturing his plans, Elser purchased an option on this property for
P5,000, and when this option was about to expire without his having been able to raise the necessary funds, he paid
P15,000 more for an extension of the option, with the understanding in both cases that, in case the option should be
exercised, the amounts thus paid should be credited as part of the first payment. The amounts paid for this option
and its extension were supplied by Elser entirely from his own funds. In the end he was able from his own means,
and with the assistance which he obtained from others, to acquire said estate. The amount required for the first
payment was P150,000, and as Elser had available only about P120,000, including the P20,000 advanced upon the
option, it was necessary to raise the remainder by obtaining a loan for P50,000. This amount was finally obtained
from a Chinese merchant of the city named Uy Siuliong. This loan was secured through Uy Cho Yee, a son of the
lender; and in order to get the money it was necessary for Elser not only to give a personal note signed by himself
and his two associates in the projected enterprise, but also by the Fidelity & Surety Company. The money thus
raised was delivered to Elser by Uy Siuliong on June 24, 1920. With this money and what he already had in bank
Elser purchased the San Juan Estate on or about June 28, 1920. For the purpose of the further development of the
property a limited partnership had, about this time, been organized by Elser and three associates, under the name
of J. K. Pickering & Company; and when the transfer of the property was effected the deed was made directly to this
company. As Elser was the principal capitalist in the enterprise he received by far the greater number of the shares
issued, his portion amount in the beginning to 3,290 shares.
While these negotiations were coming to a head, Elser contemplated and hoped that Lyons might be induced to
come in with him and supply part of the means necessary to carry the enterprise through. In this connection it
appears that on May 20, 1920, Elser wrote Lyons a letter, informing him that he had made an offer for a big
subdivision and that, if it should be acquired and Lyons would come in, the two would be well fixed. (Exhibit M-5.)
On June 3, 1920, eight days before the first option expired, Elser cabled Lyons that he had bought the San Juan
Estate and thought it advisable for Lyons to resign (Exhibit M-13), meaning that he should resign his position with
the mission board in New York. On the same date he wrote Lyons a letter explaining some details of the purchase,
and added "have advised in my cable that you resign and I hope you can do so immediately and will come and join
me on the lines we have so often spoken about. . . . There is plenty of business for us all now and I believe we have
started something that will keep us going for some time." In one or more communications prior to this, Elser had
sought to impress Lyons with the idea that he should raise all the money he could for the purpose of giving the
necessary assistance in future deals in real estate.
The enthusiasm of Elser did not communicate itself in any marked degree to Lyons, and found him averse from
joining in the purchase of the San Juan Estate. In fact upon this visit of Lyons to the United States a grave doubt
had arisen as to whether he would ever return to Manila, and it was only in the summer of 1920 that the board of
missions of his church prevailed upon him to return to Manila and resume his position as managing treasurer and
one of its trustees. Accordingly, on June 21, 1920, Lyons wrote a letter from New York thanking Elser for his offer to
take Lyons into his new project and adding that from the standpoint of making money, he had passed up a good
thing.
One source of embarrassment which had operated on Lyson to bring him to the resolution to stay out of this
venture, was that the board of mission was averse to his engaging in business activities other than those in which
the church was concerned; and some of Lyons' missionary associates had apparently been criticizing his
independent commercial activities. This fact was dwelt upon in the letter above-mentioned. Upon receipt of this letter
Elser was of course informed that it would be out of the question to expect assistance from Lyons in carrying out the
San Juan project. No further efforts to this end were therefore made by Elser.

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When Elser was concluding the transaction for the purchase of the San Juan Estate, his book showed that he was
indebted to Lyons to the extent of, possibly, P11,669.72, which had accrued to Lyons from profits and earnings
derived from other properties; and when the J. K. Pickering & Company was organized and stock issued, Elser
indorsed to Lyons 200 of the shares allocated to himself, as he then believed that Lyons would be one of his
associates in the deal. It will be noted that the par value of these 200 shares was more than P8,000 in excess of the
amount which Elser in fact owed to Lyons; and when the latter returned to the Philippine Islands, he accepted these
shares and sold them for his own benefit. It seems to be supposed in the appellant's brief that the transfer of these
shares to Lyons by Elser supplies some sort of basis for the present action, or at least strengthens the
considerations involved in a feature of the case to be presently explained. This view is manifestly untenable, since
the ratification of the transaction by Lyons and the appropriation by him of the shares which were issued to him
leaves no ground whatever for treating the transaction as a source of further equitable rights in Lyons. We should
perhaps add that after Lyons' return to the Philippine Islands he acted for a time as one of the members of the board
of directors of the J. K. Pickering & Company, his qualification for this office being derived precisely from the
ownership of these shares.
We now turn to the incident which supplies the main basis of this action. It will be remembered that, when Elser
obtained the loan of P50,000 to complete the amount needed for the first payment on the San Juan Estate, the
lender, Uy Siuliong, insisted that he should procure the signature of the Fidelity & Surety Co. on the note to be given
for said loan. But before signing the note with Elser and his associates, the Fidelity & Surety Co. insisted upon
having security for the liability thus assumed by it. To meet this requirements Elser mortgaged to the Fidelity &
Surety Co. the equity of redemption in the property owned by himself and Lyons on Carriedo Street. This mortgage
was executed on June 30, 1920, at which time Elser expected that Lyons would come in on the purchase of the San
Juan Estate. But when he learned from the letter from Lyons of July 21, 1920, that the latter had determined not to
come into this deal, Elser began to cast around for means to relieve the Carriedo property of the encumbrance
which he had placed upon it. For this purpose, on September 9, 1920, he addressed a letter to the Fidelity & Surety
Co., asking it to permit him to substitute a property owned by himself at 644 M. H. del Pilar Street, Manila, and 1,000
shares of the J. K. Pickering & Company, in lieu of the Carriedo property, as security. The Fidelity & Surety Co.
agreed to the proposition; and on September 15, 1920, Elser executed in favor of the Fidelity & Surety Co. a new
mortgage on the M. H. del Pillar property and delivered the same, with 1,000 shares of J. K. Pickering & Company,
to said company. The latter thereupon in turn executed a cancellation of the mortgage on the Carriedo property and
delivered it to Elser. But notwithstanding the fact that these documents were executed and delivered, the new
mortgage and the release of the old were never registered; and on September 25, 1920, thereafter, Elser returned
the cancellation of the mortgage on the Carriedo property and took back from the Fidelity & Surety Co. the new
mortgage on the M. H. del Pilar property, together with the 1,000 shares of the J. K. Pickering & Company which he
had delivered to it.
The explanation of this change of purpose is undoubtedly to be found in the fact that Lyons had arrived in Manila on
September 21, 1920, and shortly thereafter, in the course of a conversation with Elser told him to let the Carriedo
mortgage remain on the property ("Let the Carriedo mortgage ride"). Mrs. Elser testified to the conversation in which
Lyons used the words above quoted, and as that conversation supplies the most reasonable explanation of Elser's
recession from his purpose of relieving the Carriedo property, the trial court was, in our opinion, well justified in
accepting as a proven fact the consent of Lyons for the mortgage to remain on the Carriedo property. This
concession was not only reasonable under the circumstances, in view of the abundant solvency of Elser, but in view
of the further fact that Elser had given to Lyons 200 shares of the stock of the J. K. Pickering & Co., having a value
of nearly P8,000 in excess of the indebtedness which Elser had owed to Lyons upon statement of account. The trial
court found in effect that the excess value of these shares over Elser's actual indebtedness was conceded by Elser
to Lyons in consideration of the assistance that had been derived from the mortgage placed upon Lyon's interest in
the Carriedo property. Whether the agreement was reached exactly upon this precise line of thought is of little
moment, but the relations of the parties had been such that it was to be expected that Elser would be generous; and
he could scarcely have failed to take account of the use he had made of the joint property of the two.
As the development of the San Juan Estate was a success from the start, Elser paid the note of P50,000 to Uy
Siuliong on January 18, 1921, although it was not due until more than five months later. It will thus be seen that the
mortgaging of the Carriedo property never resulted in damage to Lyons to the extent of a single cent; and although
the court refused to allow the defendant to prove the Elser was solvent at this time in an amount much greater than
the entire encumbrance placed upon the property, it is evident that the risk imposed upon Lyons was negligible. It is
also plain that no money actually deriving from this mortgage was ever applied to the purchase of the San Juan
Estate. What really happened was the Elser merely subjected the property to a contingent liability, and no actual
liability ever resulted therefrom. The financing of the purchase of the San Juan Estate, apart from the modest
financial participation of his three associates in the San Juan deal, was the work of Elser accomplished entirely
upon his own account.
The case for the plaintiff supposes that, when Elser placed a mortgage for P50,000 upon the equity of redemption in
the Carriedo property, Lyons, as half owner of said property, became, as it were, involuntarily the owner of an
undivided interest in the property acquired partly by that money; and it is insisted for him that, in consideration of this
fact, he is entitled to the four hundred forty-six and two-thirds shares of J. K. Pickering & Company, with the
earnings thereon, as claimed in his complaint.

14 BUSINESS ORGANIZATION
1783)

CLASSES OF PARTNERSHIPS AND PARTNERS (1776TAU MU: 568

Lyons tells us that he did not know until after Elser's death that the money obtained from Uy Siuliong in the manner
already explained had been used to held finance the purchase of the San Juan Estate. He seems to have supposed
that the Carried property had been mortgaged to aid in putting through another deal, namely, the purchase of a
property referred to in the correspondence as the "Ronquillo property"; and in this connection a letter of Elser of the
latter part of May, 1920, can be quoted in which he uses this language:
As stated in cablegram I have arranged for P50,000 loan on Carriedo property. Will use part of the money
for Ronquillo buy (P60,000) if the owner comes through.
Other correspondence shows that Elser had apparently been trying to buy the Ronquillo property, and Lyons leads
us to infer that he thought that the money obtained by mortgaging the Carriedo property had been used in the
purchase of this property. It doubtedless appeared so to him in the retrospect, but certain consideration show that he
was inattentive to the contents of the quotation from the letter above given. He had already been informed that,
although Elser was angling for the Ronquillo property, its price had gone up, thus introducing a doubt as to whether
he could get it; and the quotation above given shows that the intended use of the money obtained by mortgaging the
Carriedo property was that only part of the P50,000 thus obtained would be used in this way, if the deal went
through. Naturally, upon the arrival of Lyons in September, 1920, one of his first inquiries would have been, if he did
not know before, what was the status of the proposed trade for the Ronquillo property.
Elser's widow and one of his clerks testified that about June 15, 1920, Elser cabled Lyons something to this effect;:
"I have mortgaged the property on Carriedo Street, secured by my personal note. You are amply protected. I wish
you to join me in the San Juan Subdivision. Borrow all money you can." Lyons says that no such cablegram was
received by him, and we consider this point of fact of little moment, since the proof shows that Lyons knew that the
Carriedo mortgage had been executed, and after his arrival in Manila he consented for the mortgage to remain on
the property until it was paid off, as shortly occurred. It may well be that Lyons did not at first clearly understand all
the ramifications of the situation, but he knew enough, we think, to apprise him of the material factors in the
situation, and we concur in the conclusion of the trial court that Elser did not act in bad faith and was guilty of no
fraud.
In the purely legal aspect of the case, the position of the appellant is, in our opinion, untenable. If Elser had used
any money actually belonging to Lyons in this deal, he would under article 1724 of the Civil Code and article 264 of
the Code of Commerce, be obligated to pay interest upon the money so applied to his own use. Under the law
prevailing in this jurisdiction a trust does not ordinarily attach with respect to property acquired by a person who
uses money belonging to another (Martinez vs. Martinez, 1 Phil., 647; Enriquez vs. Olaguer, 25 Phil., 641.). Of
course, if an actual relation of partnership had existed in the money used, the case might be difference; and much
emphasis is laid in the appellant's brief upon the relation of partnership which, it is claimed, existed. But there was
clearly no general relation of partnership, under article 1678 of the Civil Code. It is clear that Elser, in buying the San
Juan Estate, was not acting for any partnership composed of himself and Lyons, and the law cannot be distorted
into a proposition which would make Lyons a participant in this deal contrary to his express determination.
It seems to be supposed that the doctrines of equity worked out in the jurisprudence of England and the United
States with reference to trust supply a basis for this action. The doctrines referred to operate, however, only where
money belonging to one person is used by another for the acquisition of property which should belong to both; and it
takes but little discernment to see that the situation here involved is not one for the application of that doctrine, for
no money belonging to Lyons or any partnership composed of Elser and Lyons was in fact used by Elser in the
purchase of the San Juan Estate. Of course, if any damage had been caused to Lyons by the placing of the
mortgage upon the equity of redemption in the Carriedo property, Elser's estate would be liable for such damage.
But it is evident that Lyons was not prejudice by that act.
The appellee insist that the trial court committed error in admitting the testimony of Lyons upon matters that passed
between him and Elser while the latter was still alive. While the admission of this testimony was of questionable
propriety, any error made by the trial court on this point was error without injury, and the determination of the
question is not necessary to this decision. We therefore pass the point without further discussion.
The judgment appealed from will be affirmed, and it is so ordered, with costs against the appellant.