G.R. No. 413            February 2, 1903

JOSE FERNANDEZ, plaintiff-appellant, vs.FRANCISCO DE LA ROSA, defendant-appellee.

Vicente Miranda, for appellant.Simplicio del Rosario, for appellee.

LADD, J.:

The object of this action is to obtain from the court a declaration that a partnership exists between the parties, that the plaintiff has a consequent interested in certain cascoes which are alleged to be partnership property, and that the defendant is bound to render an account of his administration of the cascoes and the business carried on with them.

Judgment was rendered for the defendant in the court below and the plaintiff appealed.

The respective claims of the parties as to the facts, so far as it is necessary to state them in order to indicate the point in dispute, may be briefly summarized. The plaintiff alleges that in January, 1900, he entered into a verbal agreement with the defendant to form a partnership for the purchase of cascoes and the carrying on of the business of letting the same for hire in Manila, the defendant to buy the cascoes and each partner to furnish for that purpose such amount of money as he could, the profits to be divided proportionately; that in the same January the plaintiff furnished the defendant 300 pesos to purchase a casco designated as No. 1515, which the defendant did purchase for 500 pesos of Doña Isabel Vales, taking the title in his own name; that the plaintiff furnished further sums aggregating about 300 pesos for repairs on this casco; that on the fifth of the following March he furnished the defendant 825 pesos to purchase another casco designated as No. 2089, which the defendant did purchase for 1,000 pesos of Luis R. Yangco, taking the title to this casco also in his own name; that in April the parties undertook to draw up articles of partnership for the purpose of embodying the same in an authentic document, but that the defendant having proposed a draft of such articles which differed materially from the terms of the earlier verbal agreement, and being unwillingly to include casco No. 2089 in the partnership, they were unable to come to any understanding and no written agreement was executed; that the defendant having in the meantime had the control and management of the two cascoes, the plaintiff made a demand for an accounting upon him, which the defendant refused to render, denying the existence of the partnership altogether.

The defendant admits that the project of forming a partnership in the casco business in which he was already engaged to some extent individually was discussed between himself and the plaintiff in January, 1900, and earlier, one Marcos Angulo, who was a partner of the plaintiff in a bakery business, being also a party to the negotiations, but he denies that any agreement was ever consummated. He denies that the plaintiff furnished any money in January, 1900, for the purchase of casco No. 1515, or for repairs on the same, but claims that he borrowed 300 pesos on his individual account in January from the bakery firm, consisting of the plaintiff, Marcos Angulo, and Antonio Angulo. The 825 pesos, which he admits he received from the plaintiff March 5, he claims was for the purchase of casco No. 1515, which he alleged was bought March 12, and he alleges that he never received anything from the defendant toward the purchase of casco No. 2089. He claims to have paid, exclusive of repairs, 1,200 pesos for the first casco and 2,000 pesos for the second one.

The case comes to this court under the old procedure, and it is therefore necessary for us the review the evidence and pass upon the facts. Our general conclusions may be stated as follows:

(1) Doña Isabel Vales, from whom the defendant bought casco No. 1515, testifies that the sale was made and the casco delivered in January, although the public document of sale was not executed till some time afterwards. This witness is apparently disinterested, and we think it is safe to rely upon the truth of her testimony, especially as the defendant, while asserting that the sale was in March, admits that he had the casco taken to the ways for repairs in January.

It is true that the public document of sale was executed March 10, and that the vendor declares therein that she is the owner of the casco, but such declaration does not exclude proof as to the actual date of the sale, at least as against the plaintiff, who was not a party to the instrument. (Civil Code, sec. 1218.) It often happens, of course, in such cases, that the actual sale precedes by a considerable time the execution of the formal instrument of transfer, and this is what we think occurred here.

(2) The plaintiff presented in evidence the following receipt: "I have this day received from D. Jose Fernandez eight hundred and twenty-five pesos for the cost of a casco which we are to purchase in company. Manila, March 5, 1900. Francisco de la Rosa." The authenticity of this receipt is admitted by the defendant. If casco No. 1515 was bought, as we think it was, in January, the casco referred to in the receipt which the parties "are to purchase in company" must be casco No. 2089, which was bought March 22. We find this to be the fact, and that the plaintiff furnished and the defendant received 825 pesos toward the purchase of this casco, with the understanding that it was to be purchased on joint account.

(3) Antonio Fernandez testifies that in the early part of January, 1900, he saw Antonio Angulo give the defendant, in the name of the plaintiff, a sum of money, the amount of which he is unable to state, for the purchase of a casco to be used in the plaintiff's and defendant's business. Antonio Angulo also testifies, but the defendant claims that the fact that Angulo was a partner of the plaintiff rendered him incompetent as a witness under the provisions of article 643 of the then Code of Civil Procedure, and without deciding whether this point is well taken, we have discarded his testimony altogether in considering the case. The defendant admits the receipt of 300 pesos from Antonio Angulo in January, claiming, as has been stated, that it was a loan from the firm. Yet he sets up the claim that the 825 pesos which he received from the plaintiff in March were furnished toward the purchase of casco No. 1515, thereby virtually admitting that casco was purchased in company with the plaintiff. We discover nothing in the evidence to support the claim that the 300 pesos received in January was a loan, unless it may be the fact that the defendant had on previous occasions borrowed money from the bakery firm. We think all the probabilities of the case point to the truth of the evidence of Antonio Fernandez as to this transaction, and we find the fact to be that the sum in question was furnished by the plaintiff toward the purchase for joint ownership of casco No. 1515, and that the defendant received it with the understanding that it was to be used for this purposed. We also find that the plaintiff furnished some further sums of money for the repair of casco.

(4) The balance of the purchase price of each of the two cascoes over and above the amount contributed by the plaintiff was furnished by the defendant.

(5) We are unable to find upon the evidence before us that there was any specific verbal agreement of partnership, except such as may be implied from the fact as to the purchase of the casco.

(6) Although the evidence is somewhat unsatisfactory upon this point, we think it more probable than otherwise that no attempt was made to agree upon articles of partnership till about the middle of the April following the purchase of the cascoes.

(7) At some time subsequently to the failure of the attempt to agree upon partnership articles and after the defendant had been operating the cascoes for some time, the defendant returned to the

plaintiff 1,125 pesos, in two different sums, one of 300 and one of 825 pesos. The only evidence in the record as to the circumstances under which the plaintiff received these sums is contained in his answer to the interrogatories proposed to him by the defendant, and the whole of his statement on this point may properly be considered in determining the fact as being in the nature of an indivisible admission. He states that both sums were received with an express reservation on his part of all his rights as a partner. We find this to be the fact.

Two questions of law are raised by the foregoing facts: (1) Did a partnership exist between the parties? (2) If such partnership existed, was it terminated as a result of the act of the defendant in receiving back the 1,125 pesos?

(1) "Partnership is a contract by which two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves." (Civil Code, art. 1665.)

The essential points upon which the minds of the parties must meet in a contract of partnership are, therefore, (1) mutual contribution to a common stock, and (2) a joint interest in the profits. If the contract contains these two elements the partnership relation results, and the law itself fixes the incidents of this relation if the parties fail to do so. (Civil Code, secs. 1689, 1695.)

We have found as a fact that money was furnished by the plaintiff and received by the defendant with the understanding that it was to be used for the purchase of the cascoes in question. This establishes the first element of the contract, namely, mutual contribution to a common stock. The second element, namely, the intention to share profits, appears to be an unavoidable deduction from the fact of the purchase of the cascoes in common, in the absence of any other explanation of the object of the parties in making the purchase in that form, and, it may be added, in view of the admitted fact that prior to the purchase of the first casco the formation of a partnership had been a subject of negotiation between them.

Under other circumstances the relation of joint ownership, a relation distinct though perhaps not essentially different in its practical consequence from that of partnership, might have been the result of the joint purchase. If, for instance, it were shown that the object of the parties in purchasing in company had been to make a more favorable bargain for the two cascoes that they could have done by purchasing them separately, and that they had no ulterior object except to effect a division of the common property when once they had acquired it, theaffectio societatis would be lacking and the parties would have become joint tenants only; but, as nothing of this sort appears in the case, we must assume that the object of the purchase was active use and profit and not mere passive ownership in common.

It is thus apparent that a complete and perfect contract of partnership was entered into by the parties. This contract, it is true, might have been subject to a suspensive condition, postponing its operation until an agreement was reached as to the respective participation of the partners in the profits, the character of the partnership as collective or en comandita, and other details, but although it is asserted by counsel for the defendant that such was the case, there is little or nothing in the record to support this claim, and that fact that the defendant did actually go on and purchase the boat, as it would seem, before any attempt had been made to formulate partnership articles, strongly discountenances the theory.

The execution of a written agreement was not necessary in order to give efficacy to the verbal contract of partnership as a civil contract, the contributions of the partners not having been in the form of immovables or rights in immovables. (Civil Code, art. 1667.) The special provision cited, requiring the execution of a public writing in the single case mentioned and dispensing with all formal

requirements in other cases, renders inapplicable to this species of contract the general provisions of article 1280 of the Civil Code.

(2) The remaining question is as to the legal effect of the acceptance by the plaintiff of the money returned to him by the defendant after the definitive failure of the attempt to agree upon partnership articles. The amount returned fell short, in our view of the facts, of that which the plaintiff had contributed to the capital of the partnership, since it did not include the sum which he had furnished for the repairs of casco No. 1515. Moreover, it is quite possible, as claimed by the plaintiff, that a profit may have been realized from the business during the period in which the defendant have been administering it prior to the return of the money, and if so he still retained that sum in his hands. For these reasons the acceptance of the money by the plaintiff did not have the effect of terminating the legal existence of the partnership by converting it into a societas leonina, as claimed by counsel for the defendant.

Did the defendant waive his right to such interest as remained to him in the partnership property by receiving the money? Did he by so doing waive his right to an accounting of the profits already realized, if any, and a participation in them in proportion to the amount he had originally contributed to the common fund? Was the partnership dissolved by the "will or withdrawal of one of the partners" under article 1705 of the Civil Code? We think these questions must be answered in the negative.

There was no intention on the part of the plaintiff in accepting the money to relinquish his rights as a partner, nor is there any evidence that by anything that he said or by anything that he omitted to say he gave the defendant any ground whatever to believe that he intended to relinquish them. On the contrary he notified the defendant that he waived none of his rights in the partnership. Nor was the acceptance of the money an act which was in itself inconsistent with the continuance of the partnership relation, as would have been the case had the plaintiff withdrawn his entire interest in the partnership. There is, therefore, nothing upon which a waiver, either express or implied, can be predicated. The defendant might have himself terminated the partnership relation at any time, if he had chosen to do so, by recognizing the plaintiff's right in the partnership property and in the profits. Having failed to do this he can not be permitted to force a dissolution upon his co-partner upon terms which the latter is unwilling to accept. We see nothing in the case which can give the transaction in question any other aspect than that of the withdrawal by one partner with the consent of the other of a portion of the common capital.

The result is that we hold and declare that a partnership was formed between the parties in January, 1900, the existence of which the defendant is bound to recognize; that cascoes No. 1515 and 2089 constitute partnership property, and that the plaintiff is entitled to an accounting of the defendant's administration of such property, and of the profits derived therefrom. This declaration does not involve an adjudication as to any disputed items of the partnership account.

The judgment of the court below will be reversed without costs, and the record returned for the execution of the judgment now rendered. So ordered.

Arellano, C.J., Torres, Cooper, and Mapa, JJ., concur.Willard, J., dissenting.

July 30, 1979

PETITION FOR AUTHORITY TO CONTINUE USE OF THE FIRM NAME "SYCIP, SALAZAR, FELICIANO, HERNANDEZ & CASTILLO." LUCIANO E. SALAZAR, FLORENTINO P. FELICIANO, BENILDO G. HERNANDEZ. GREGORIO R. CASTILLO. ALBERTO P. SAN JUAN, JUAN C. REYES. JR., ANDRES G. GATMAITAN, JUSTINO H. CACANINDIN, NOEL A. LAMAN, ETHELWOLDO E. FERNANDEZ, ANGELITO C. IMPERIO, EDUARDO R. CENIZA, TRISTAN A. CATINDIG, ANCHETA K. TAN, and ALICE V. PESIGAN, petitioners.

IN THE MATTER OF THE PETITION FOR AUTHORITY TO CONTINUE USE OF THE FIRM NAME "OZAETA, ROMULO, DE LEON, MABANTA & REYES." RICARDO J. ROMULO, BENJAMIN M. DE LEON, ROMAN MABANTA, JR., JOSE MA, REYES, JESUS S. J. SAYOC, EDUARDO DE LOS ANGELES, and JOSE F. BUENAVENTURA, petitioners.

R E S O L U T I O N

MELENCIO-HERRERA, J.:ñé+.£ªwph!1

Two separate Petitions were filed before this Court 1) by the surviving partners of Atty. Alexander Sycip, who died on May 5, 1975, and 2) by the surviving partners of Atty. Herminio Ozaeta, who died on February 14, 1976, praying that they be allowed to continue using, in the names of their firms, the names of partners who had passed away. In the Court's Resolution of September 2, 1976, both Petitions were ordered consolidated.

Petitioners base their petitions on the following arguments:

1. Under the law, a partnership is not prohibited from continuing its business under a firm name which includes the name of a deceased partner; in fact, Article 1840 of the Civil Code explicitly sanctions the practice when it provides in the last paragraph that: têñ.£îhqwâ£

The use by the person or partnership continuing the business of the partnership name, or the name of a deceased partner as part thereof, shall not of itself make the individual property of the deceased partner liable for any debts contracted by such person or partnership. 1

2. In regulating other professions, such as accountancy and engineering, the legislature has authorized the adoption of firm names without any restriction as to the use, in such firm name, of the name of a deceased partner; 2 the legislative authorization given to those engaged in the practice of accountancy — a profession requiring the same degree of trust and confidence in respect of clients as that implicit in the relationship of attorney and client — to acquire and use a trade name, strongly indicates that there is no fundamental policy that is offended by the continued use by a firm of professionals of a firm name which includes the name of a deceased partner, at least where such firm name has acquired the characteristics of a "trade name." 3

3. The Canons of Professional Ethics are not transgressed by the continued use of the name of a deceased partner in the firm name of a law partnership because Canon 33 of the Canons of Professional Ethics adopted by the American Bar Association declares that: têñ.£îhqwâ£

... The continued use of the name of a deceased or former partner when permissible by local custom, is not unethical but care should be taken that no imposition or deception is practiced through this use. ... 4

4. There is no possibility of imposition or deception because the deaths of their respective deceased partners were well-publicized in all newspapers of general circulation for several days; the stationeries now being used by them carry new letterheads indicating the years when their respective deceased partners were connected with the firm; petitioners will notify all leading national and international law directories of the fact of their respective deceased partners' deaths. 5

5. No local custom prohibits the continued use of a deceased partner's name in a professional firm's name; 6 there is no custom or usage in the Philippines, or at least in the Greater Manila Area, which recognizes that the name of a law firm necessarily Identifies the individual members of the firm. 7

6. The continued use of a deceased partner's name in the firm name of law partnerships has been consistently allowed by U.S. Courts and is an accepted practice in the legal profession of most countries in the world. 8

The question involved in these Petitions first came under consideration by this Court in 1953 when a law firm in Cebu (the Deen case) continued its practice of including in its firm name that of a deceased partner, C.D. Johnston. The matter was resolved with this Court advising the firm to desist from including in their firm designation the name of C. D. Johnston, who has long been dead."

The same issue was raised before this Court in 1958 as an incident in G. R. No. L-11964, entitled Register of Deeds of Manila vs. China Banking Corporation. The law firm of Perkins & Ponce Enrile moved to intervene asamicus curiae. Before acting thereon, the Court, in a Resolution of April 15, 1957, stated that it "would like to be informed why the name of Perkins is still being used although Atty. E. A. Perkins is already dead." In a Manifestation dated May 21, 1957, the law firm of Perkins and Ponce Enrile, raising substantially the same arguments as those now being raised by petitioners, prayed that the continued use of the firm name "Perkins & Ponce Enrile" be held proper.

On June 16, 1958, this Court resolved: têñ.£îhqwâ£

After carefully considering the reasons given by Attorneys Alfonso Ponce Enrile and Associates for their continued use of the name of the deceased E. G. Perkins, the Court found no reason to depart from the policy it adopted in June 1953 when it required Attorneys Alfred P. Deen and Eddy A. Deen of Cebu City to desist from including in their firm designation, the name of C. D. Johnston, deceased. The Court believes that, in view of the personal and confidential nature of the relations between attorney and client, and the high standards demanded in the canons of professional ethics, no practice should be allowed which even in a remote degree could give rise to the possibility of deception. Said attorneys are accordingly advised to drop the name "PERKINS" from their firm name.

Petitioners herein now seek a re-examination of the policy thus far enunciated by the Court.

The Court finds no sufficient reason to depart from the rulings thus laid down.

A. Inasmuch as "Sycip, Salazar, Feliciano, Hernandez and Castillo" and "Ozaeta, Romulo, De Leon, Mabanta and Reyes" are partnerships, the use in their partnership names of the names of deceased partners will run counter to Article 1815 of the Civil Code which provides: têñ.£îhqwâ£

Art. 1815. Every partnership shall operate under a firm name, which may or may not include the name of one or more of the partners.

Those who, not being members of the partnership, include their names in the firm name, shall be subject to the liability, of a partner.

It is clearly tacit in the above provision that names in a firm name of a partnership must either be those of living partners and. in the case of non-partners, should be living persons who can be subjected to liability. In fact, Article 1825 of the Civil Code prohibits a third person from including his name in the firm name under pain of assuming the liability of a partner. The heirs of a deceased partner in a law firm cannot be held liable as the old members to the creditors of a firm particularly where they are non-lawyers. Thus, Canon 34 of the Canons of Professional Ethics "prohibits an agreement for the payment to the widow and heirs of a deceased lawyer of a percentage, either gross or net, of the fees received from the future business of the deceased lawyer's clients, both because the recipients of such division are not lawyers and because such payments will not represent service or responsibility on the part of the recipient. " Accordingly, neither the widow nor the heirs can be held liable for transactions entered into after the death of their lawyer-predecessor. There being no benefits accruing, there ran be no corresponding liability.

Prescinding the law, there could be practical objections to allowing the use by law firms of the names of deceased partners. The public relations value of the use of an old firm name can tend to create undue advantages and disadvantages in the practice of the profession. An able lawyer without connections will have to make a name for himself starting from scratch. Another able lawyer, who can join an old firm, can initially ride on that old firm's reputation established by deceased partners.

B. In regards to the last paragraph of Article 1840 of the Civil Code cited by petitioners, supra, the first factor to consider is that it is within Chapter 3 of Title IX of the Code entitled "Dissolution and Winding Up." The Article primarily deals with the exemption from liability in cases of a dissolved partnership, of the individual property of the deceased partner for debts contracted by the person or partnership which continues the business using the partnership name or the name of the deceased partner as part thereof. What the law contemplates therein is a hold-over situation preparatory to formal reorganization.

Secondly, Article 1840 treats more of a commercial partnership with a good will to protect rather than of aprofessional partnership, with no saleable good will but whose reputation depends on the personal qualifications of its individual members. Thus, it has been held that a saleable goodwill can exist only in a commercial partnership and cannot arise in a professional partnership consisting of lawyers. 9

têñ.£îhqwâ£

As a general rule, upon the dissolution of a commercial partnership the succeeding partners or parties have the right to carry on the business under the old name, in the absence of a stipulation forbidding it, (s)ince the name of a commercial partnership is a partnership asset inseparable from the good will of the firm. ... (60 Am Jur 2d, s 204, p. 115) (Emphasis supplied)

On the other hand, têñ.£îhqwâ£

... a professional partnership the reputation of which depends or; the individual skill of the members, such as partnerships of attorneys or physicians, has no good win to be distributed as a firm asset on its dissolution, however intrinsically valuable such skill and reputation may be, especially where there is no provision in the partnership agreement relating to good will as an asset. ... (ibid, s 203, p. 115) (Emphasis supplied)

C. A partnership for the practice of law cannot be likened to partnerships formed by other professionals or for business. For one thing, the law on accountancy specifically allows the use of a trade name in connection with the practice of accountancy. 10 têñ.£îhqwâ£

A partnership for the practice of law is not a legal entity. It is a mere relationship or association for a particular purpose. ... It is not a partnership formed for the purpose of carrying on trade or business or of holding property." 11 Thus, it has been stated that "the use of a nom de plume, assumed or trade name in law practice is improper. 12

The usual reason given for different standards of conduct being applicable to the practice of law from those pertaining to business is that the law is a profession.

Dean Pound, in his recently published contribution to the Survey of the Legal Profession, (The Lawyer from Antiquity to Modern Times, p. 5) defines a profession as "a group of men pursuing a learned art as a common calling in the spirit of public service, — no less a public service because it may incidentally be a means of livelihood."

xxx xxx xxx

Primary characteristics which distinguish the legal profession from business are:

1. A duty of public service, of which the emolument is a byproduct, and in which one may attain the highest eminence without making much money.

2. A relation as an "officer of court" to the administration of justice involving thorough sincerity, integrity, and reliability.

3. A relation to clients in the highest degree fiduciary.

4. A relation to colleagues at the bar characterized by candor, fairness, and unwillingness to resort to current business methods of advertising and encroachment on their practice, or dealing directly with their clients. 13

"The right to practice law is not a natural or constitutional right but is in the nature of a privilege or franchise. 14 It is limited to persons of good moral character with special qualifications duly ascertained and certified. 15 The right does not only presuppose in its possessor integrity, legal standing and attainment, but also the exercise of a special privilege, highly personal and partaking of the nature of a public trust." 16

D. Petitioners cited Canon 33 of the Canons of Professional Ethics of the American Bar Association" in support of their petitions.

It is true that Canon 33 does not consider as unethical the continued use of the name of a deceased or former partner in the firm name of a law partnership when such a practice is permissible by local custom but the Canon warns that care should be taken that no imposition or deception is practiced through this use.

It must be conceded that in the Philippines, no local custom permits or allows the continued use of a deceased or former partner's name in the firm names of law partnerships. Firm names, under our custom, Identify the more active and/or more senior members or partners of the law firm. A glimpse

at the history of the firms of petitioners and of other law firms in this country would show how their firm names have evolved and changed from time to time as the composition of the partnership changed. têñ.£îhqwâ£

The continued use of a firm name after the death of one or more of the partners designated by it is proper only where sustained by local custom and not where by custom this purports to Identify the active members. ...

There would seem to be a question, under the working of the Canon, as to the propriety of adding the name of a new partner and at the same time retaining that of a deceased partner who was never a partner with the new one. (H.S. Drinker, op. cit., supra, at pp. 207208) (Emphasis supplied).

The possibility of deception upon the public, real or consequential, where the name of a deceased partner continues to be used cannot be ruled out. A person in search of legal counsel might be guided by the familiar ring of a distinguished name appearing in a firm title.

E. Petitioners argue that U.S. Courts have consistently allowed the continued use of a deceased partner's name in the firm name of law partnerships. But that is so because it is sanctioned by custom.

In the case of Mendelsohn v. Equitable Life Assurance Society (33 N.Y.S. 2d 733) which petitioners Salazar, et al. quoted in their memorandum, the New York Supreme Court sustained the use of the firm name Alexander & Green even if none of the present ten partners of the firm bears either name because the practice was sanctioned by custom and did not offend any statutory provision or legislative policy and was adopted by agreement of the parties. The Court stated therein: têñ.£îhqwâ£

The practice sought to be proscribed has the sanction of custom and offends no statutory provision or legislative policy. Canon 33 of the Canons of Professional Ethics of both the American Bar Association and the New York State Bar Association provides in part as follows: "The continued use of the name of a deceased or former partner, when permissible by local custom is not unethical, but care should be taken that no imposition or deception is practiced through this use." There is no question as to local custom. Many firms in the city use the names of deceased members with the approval of other attorneys, bar associations and the courts. The Appellate Division of the First Department has considered the matter and reached The conclusion that such practice should not be prohibited. (Emphasis supplied)

xxx xxx xxx

Neither the Partnership Law nor the Penal Law prohibits the practice in question. The use of the firm name herein is also sustainable by reason of agreement between the partners. 18

Not so in this jurisdiction where there is no local custom that sanctions the practice. Custom has been defined as a rule of conduct formed by repetition of acts, uniformly observed (practiced) as a social rule, legally binding and obligatory. 19 Courts take no judicial notice of custom. A custom must be proved as a fact, according to the rules of evidence. 20 A local custom as a source of right cannot be considered by a court of justice unless such custom is properly established by competent evidence like any other fact. 21 We find such proof of the existence of a local custom, and of the elements requisite to constitute the same, wanting herein. Merely because something is done as a matter of practice does not mean that Courts can rely on the same for purposes of adjudication as a

juridical custom. Juridical custom must be differentiated from social custom. The former can supplement statutory law or be applied in the absence of such statute. Not so with the latter.

Moreover, judicial decisions applying or interpreting the laws form part of the legal system. 22 When the Supreme Court in the Deen and Perkins cases issued its Resolutions directing lawyers to desist from including the names of deceased partners in their firm designation, it laid down a legal rule against which no custom or practice to the contrary, even if proven, can prevail. This is not to speak of our civil law which clearly ordains that a partnership is dissolved by the death of any partner. 23 Custom which are contrary to law, public order or public policy shall not be countenanced. 24

The practice of law is intimately and peculiarly related to the administration of justice and should not be considered like an ordinary "money-making trade." têñ.£îhqwâ£

... It is of the essence of a profession that it is practiced in a spirit of public service. A trade ... aims primarily at personal gain; a profession at the exercise of powers beneficial to mankind. If, as in the era of wide free opportunity, we think of free competitive self assertion as the highest good, lawyer and grocer and farmer may seem to be freely competing with their fellows in their calling in order each to acquire as much of the world's good as he may within the allowed him by law. But the member of a profession does not regard himself as in competition with his professional brethren. He is not bartering his services as is the artisan nor exchanging the products of his skill and learning as the farmer sells wheat or corn. There should be no such thing as a lawyers' or physicians' strike. The best service of the professional man is often rendered for no equivalent or for a trifling equivalent and it is his pride to do what he does in a way worthy of his profession even if done with no expectation of reward, This spirit of public service in which the profession of law is and ought to be exercised is a prerequisite of sound administration of justice according to law. The other two elements of a profession, namely, organization and pursuit of a learned art have their justification in that they secure and maintain that spirit. 25

In fine, petitioners' desire to preserve the Identity of their firms in the eyes of the public must bow to legal and ethical impediment.

ACCORDINGLY, the petitions filed herein are denied and petitioners advised to drop the names "SYCIP" and "OZAETA" from their respective firm names. Those names may, however, be included in the listing of individuals who have been partners in their firms indicating the years during which they served as such.

SO ORDERED.

G.R. No. L-4811             July 31, 1953

CHARLES F. WOODHOUSE, plaintiff-appellant, vs.FORTUNATO F. HALILI, defendant-appellant.

Tañada, Pelaez & Teehankee for defendant and appellant.Gibbs, Gibbs, Chuidian & Quasha for plaintiff and appellant.

LABRADOR, J.:

On November 29, 1947, the plaintiff entered on a written agreement, Exhibit A, with the defendant, the most important provisions of which are (1) that they shall organize a partnership for the bottling and distribution of Mision soft drinks, plaintiff to act as industrial partner or manager, and the defendant as a capitalist, furnishing the capital necessary therefor; (2) that the defendant was to decide matters of general policy regarding the business, while the plaintiff was to attend to the operation and development of the bottling plant; (3) that the plaintiff was to secure the Mission Soft Drinks franchise for and in behalf of the proposed partnership; and (4) that the plaintiff was to receive 30 per cent of the net profits of the business. The above agreement was arrived at after various conferences and consultations by and between them, with the assistance of their respective attorneys. Prior to entering into this agreement, plaintiff had informed the Mission Dry Corporation of Los Angeles, California, U.S.A., manufacturers of the bases and ingridients of the beverages bearing its name, that he had interested a prominent financier (defendant herein) in the business, who was willing to invest half a million dollars in the bottling and distribution of the said beverages, and requested, in order that he may close the deal with him, that the right to bottle and distribute be granted him for a limited time under the condition that it will finally be transferred to the corporation (Exhibit H). Pursuant for this request, plaintiff was given "a thirty-days" option on exclusive bottling and distribution rights for the Philippines" (Exhibit J). Formal negotiations between plaintiff and defendant began at a meeting on November 27, 1947, at the Manila Hotel, with their lawyers attending. Before this meeting plaintiff's lawyer had prepared the draft of the agreement, Exhibit II or OO, but this was not satisfactory because a partnership, instead of a corporation, was desired. Defendant's lawyer prepared after the meeting his own draft, Exhibit HH. This last draft appears to be the main basis of the agreement, Exhibit A.

The contract was finally signed by plaintiff on December 3, 1947. Plaintiff did not like to go to the United States without the agreement being not first signed. On that day plaintiff and defendant went to the United States, and on December 10, 1947, a franchise agreement (Exhibit V) was entered into the Mission Dry Corporation and Fortunato F. Halili and/or Charles F. Woodhouse, granted defendant the exclusive right, license, and authority to produce, bottle, distribute, and sell Mision beverages in the Philippines. The plaintiff and the defendant thereafter returned to the Philippines. Plaintiff reported for duty in January, 1948, but operations were not begun until the first week of February, 1948. In January plaintiff was given as advance, on account of profits, the sum of P2,000, besides the use of a car; in February, 1948, also P2,000, and in March only P1,000. The car was withdrawn from plaintiff on March 9, 1948.

When the bottling plant was already on operation, plaintiff demanded of defendant that the partnership papers be executed. At first defendant executed himself, saying there was no hurry. Then he promised to do so after the sales of the product had been increased to P50,000. As nothing definite was forthcoming, after this condition was attained, and as defendant refused to give further allowances to plaintiff, the latter caused his attorneys to take up the matter with the defendant with a view to a possible settlement. as none could be arrived at, the present action was instituted.

In his complaint plaintiff asks for the execution of the contract of partnership, an accounting of the profits, and a share thereof of 30 per cent, as well as damages in the amount of P200,000. In his answer defendant alleges by way of defense (1) that defendant's consent to the agreement, Exhibit A, was secured by the representation of plaintiff that he was the owner, or was about to become owner of an exclusive bottling franchise, which representation was false, and plaintiff did not secure the franchise, but was given to defendant himself; (2) that defendant did not fail to carry out his undertakings, but that it was plaintiff who failed; (3) that plaintiff agreed to contribute the exclusive franchise to the partnership, but plaintiff failed to do so. He also presented a counter-claim for P200,000 as damages. On these issues the parties went to trial, and thereafter the Court of First Instance rendered judgment ordering defendant to render an accounting of the profits of the bottling and distribution business, subject of the action, and to pay plaintiff 15 percent thereof. it held that the execution of the contract of partnership could not be enforced upon the parties, but it also held that the defense of fraud was not proved. Against this judgment both parties have appealed.

The most important question of fact to be determined is whether defendant had falsely represented that he had an exclusive franchise to bottle Mission beverages, and whether this false representation or fraud, if it existed, annuls the agreement to form the partnership. The trial court found that it is improbable that defendant was never shown the letter, Exhibit J, granting plaintiff had; that the drafts of the contract prior to the final one can not be considered for the purpose of determining the issue, as they are presumed to have been already integrated into the final agreement; that fraud is never presumed and must be proved; that the parties were represented by attorneys, and that if any party thereto got the worse part of the bargain, this fact alone would not invalidate the agreement. On this appeal the defendant, as appellant, insists that plaintiff did represent to the defendant that he had an exclusive franchise, when as a matter of fact, at the time of its execution, he no longer had it as the same had expired, and that, therefore, the consent of the defendant to the contract was vitiated by fraud and it is, consequently, null and void.

Our study of the record and a consideration of all the surrounding circumstances lead us to believe that defendant's contention is not without merit. Plaintiff's attorney, Mr. Laurea, testified that Woodhouse presented himself as being the exclusive grantee of a franchise, thus:

A. I don't recall any discussion about that matter. I took along with me the file of the office with regards to this matter. I notice from the first draft of the document which I prepared which calls for the organization of a corporation, that the manager, that is, Mr. Woodhouse, is represented as being the exclusive grantee of a franchise from the Mission Dry Corporation. . . . (t.s.n., p.518)

As a matter of fact, the first draft that Mr. Laurea prepared, which was made before the Manila Hotel conference on November 27th, expressly states that plaintiff had the exclusive franchise. Thus, the first paragraph states:

Whereas, the manager is the exclusive grantee of a franchise from the Mission Dry Corporation San Francisco, California, for the bottling of Mission products and their sale to the public throughout the Philippines; . . . .

3. The manager, upon the organization of the said corporation, shall forthwith transfer to the said corporation his exclusive right to bottle Mission products and to sell them throughout the Philippines. . . . .

(Exhibit II; emphasis ours)

The trial court did not consider this draft on the principle of integration of jural acts. We find that the principle invoked is inapplicable, since the purpose of considering the prior draft is not to vary, alter, or modify the agreement, but to discover the intent of the parties thereto and the circumstances surrounding the execution of the contract. The issue of fact is: Did plaintiff represent to defendant that he had an exclusive franchise? Certainly, his acts or statements prior to the agreement are essential and relevant to the determination of said issue. The act or statement of the plaintiff was not sought to be introduced to change or alter the terms of the agreement, but to prove how he induced the defendant to enter into it — to prove the representations or inducements, or fraud, with which or by which he secured the other party's consent thereto. These are expressly excluded from the parol evidence rule. (Bough and Bough vs. Cantiveros and Hanopol, 40 Phil., 209; port Banga Lumber Co. vs. Export & Import Lumber Co., 26 Phil., 602; III Moran 221,1952 rev. ed.) Fraud and false representation are an incident to the creation of a jural act, not to its integration, and are not governed by the rules on integration. Were parties prohibited from proving said representations or inducements, on the ground that the agreement had already been entered into, it would be impossible to prove misrepresentation or fraud. Furthermore, the parol evidence rule expressly allows the evidence to be introduced when the validity of an instrument is put in issue by the pleadings (section 22, par. (a), Rule 123, Rules of Court),as in this case.

That plaintiff did make the representation can also be easily gleaned from his own letters and his own testimony. In his letter to Mission Dry Corporation, Exhibit H, he said:.

. . . He told me to come back to him when I was able to speak with authority so that we could come to terms as far as he and I were concerned. That is the reason why the cable was sent. Without this authority, I am in a poor bargaining position. . .

I would propose that you grant me the exclusive bottling and distributing rights for a limited period of time, during which I may consummate my plants. . . .

By virtue of this letter the option on exclusive bottling was given to the plaintiff on October 14, 1947. (See Exhibit J.) If this option for an exclusive franchise was intended by plaintiff as an instrument with which to bargain with defendant and close the deal with him, he must have used his said option for the above-indicated purpose, especially as it appears that he was able to secure, through its use, what he wanted.

Plaintiff's own version of the preliminary conversation he had with defendant is to the effect that when plaintiff called on the latter, the latter answered, "Well, come back to me when you have the authority to operate. I am definitely interested in the bottling business." (t. s. n., pp. 60-61.) When after the elections of 1949 plaintiff went to see the defendant (and at that time he had already the option), he must have exultantly told defendant that he had the authority already. It is improbable and incredible for him to have disclosed the fact that he had only an optionto the exclusive franchise, which was to last thirty days only, and still more improbable for him to have disclosed that, at the time of the signing of the formal agreement, his option had already expired. Had he done so, he would have destroyed all his bargaining power and authority, and in all probability lost the deal itself.

The trial court reasoned, and the plaintiff on this appeal argues, that plaintiff only undertook in the agreement "to secure the Mission Dry franchise for and in behalf of the proposed partnership." The existence of this provision in the final agreement does not militate against plaintiff having represented that he had the exclusive franchise; it rather strengthens belief that he did actually make the representation. How could plaintiff assure defendant that he would get the franchise for the latter if he had not actually obtained it for himself? Defendant would not have gone into the business unless the franchise was raised in his name, or at least in the name of the partnership. Plaintiff assured defendant he could get the franchise. Thus, in the draft prepared by defendant's attorney,

Exhibit HH, the above provision is inserted, with the difference that instead of securing the franchise for the defendant, plaintiff was to secure it for the partnership. To show that the insertion of the above provision does not eliminate the probability of plaintiff representing himself as the exclusive grantee of the franchise, the final agreement contains in its third paragraph the following:

. . . and the manager is ready and willing to allow the capitalists to use the exclusive franchise . . .

and in paragraph 11 it also expressly states:

1. In the event of the dissolution or termination of the partnership, . . . the franchise from Mission Dry Corporation shall be reassigned to the manager.

These statements confirm the conclusion that defendant believed, or was made to believe, that plaintiff was the grantee of an exclusive franchise. Thus it is that it was also agreed upon that the franchise was to be transferred to the name of the partnership, and that, upon its dissolution or termination, the same shall be reassigned to the plaintiff.

Again, the immediate reaction of defendant, when in California he learned that plaintiff did not have the exclusive franchise, was to reduce, as he himself testified, plaintiff's participation in the net profits to one half of that agreed upon. He could not have had such a feeling had not plaintiff actually made him believe that he (plaintiff) was the exclusive grantee of the franchise.

The learned trial judge reasons in his decision that the assistance of counsel in the making of the contract made fraud improbable. Not necessarily, because the alleged representation took place before the conferences were had, in other words, plaintiff had already represented to defendant, and the latter had already believed in, the existence of plaintiff's exclusive franchise before the formal negotiations, and they were assisted by their lawyers only when said formal negotiations actually took place. Furthermore, plaintiff's attorney testified that plaintiff had said that he had the exclusive franchise; and defendant's lawyer testified that plaintiff explained to him, upon being asked for the franchise, that he had left the papers evidencing it.(t.s.n., p. 266.)

We conclude from all the foregoing that plaintiff did actually represent to defendant that he was the holder of the exclusive franchise. The defendant was made to believe, and he actually believed, that plaintiff had the exclusive franchise. Defendant would not perhaps have gone to California and incurred expenses for the trip, unless he believed that plaintiff did have that exclusive privilege, and that the latter would be able to get the same from the Mission Dry Corporation itself. Plaintiff knew what defendant believed about his (plaintiff's) exclusive franchise, as he induced him to that belief, and he may not be allowed to deny that defendant was induced by that belief. (IX Wigmore, sec. 2423; Sec. 65, Rule 123, Rules of Court.)

We now come to the legal aspect of the false representation. Does it amount to a fraud that would vitiate the contract? It must be noted that fraud is manifested in illimitable number of degrees or gradations, from the innocent praises of a salesman about the excellence of his wares to those malicious machinations and representations that the law punishes as a crime. In consequence, article 1270 of the Spanish Civil Code distinguishes two kinds of (civil) fraud, the causal fraud, which may be a ground for the annulment of a contract, and the incidental deceit, which only renders the party who employs it liable for damages. This Court had held that in order that fraud may vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo causante), inducement to the making of the contract. (Article 1270, Spanish Civil Code; Hill vs. Veloso, 31 Phil. 160.) The record abounds with circumstances indicative that the fact that the principal consideration, the main cause that induced defendant to enter into the partnership agreement with plaintiff, was the

ability of plaintiff to get the exclusive franchise to bottle and distribute for the defendant or for the partnership. The original draft prepared by defendant's counsel was to the effect that plaintiff obligated himself to secure a franchise for the defendant. Correction appears in this same original draft, but the change is made not as to the said obligation but as to the grantee. In the corrected draft the word "capitalist"(grantee) is changed to "partnership." The contract in its final form retains the substituted term "partnership." The defendant was, therefore, led to the belief that plaintiff had the exclusive franchise, but that the same was to be secured for or transferred to the partnership. The plaintiff no longer had the exclusive franchise, or the option thereto, at the time the contract was perfected. But while he had already lost his option thereto (when the contract was entered into), the principal obligation that he assumed or undertook was to secure said franchise for the partnership, as the bottler and distributor for the Mission Dry Corporation. We declare, therefore, that if he was guilty of a false representation, this was not the causal consideration, or the principal inducement, that led plaintiff to enter into the partnership agreement.

But, on the other hand, this supposed ownership of an exclusive franchise was actually the consideration or price plaintiff gave in exchange for the share of 30 percent granted him in the net profits of the partnership business. Defendant agreed to give plaintiff 30 per cent share in the net profits because he was transferring his exclusive franchise to the partnership. Thus, in the draft prepared by plaintiff's lawyer, Exhibit II, the following provision exists:

3. That the MANAGER, upon the organization of the said corporation, shall forthwith transfer to the said corporation his exclusive right to bottle Mission products and to sell them throughout the Philippines. As a consideration for such transfer, the CAPITALIST shall transfer to the Manager fully paid non assessable shares of the said corporation . . . twenty-five per centum of the capital stock of the said corporation. (Par. 3, Exhibit II; emphasis ours.)

Plaintiff had never been a bottler or a chemist; he never had experience in the production or distribution of beverages. As a matter of fact, when the bottling plant being built, all that he suggested was about the toilet facilities for the laborers.

We conclude from the above that while the representation that plaintiff had the exclusive franchise did not vitiate defendant's consent to the contract, it was used by plaintiff to get from defendant a share of 30 per cent of the net profits; in other words, by pretending that he had the exclusive franchise and promising to transfer it to defendant, he obtained the consent of the latter to give him (plaintiff) a big slice in the net profits. This is the dolo incidentedefined in article 1270 of the Spanish Civil Code, because it was used to get the other party's consent to a big share in the profits, an incidental matter in the agreement.

El dolo incidental no es el que puede producirse en el cumplimiento del contrato sino que significa aqui, el que concurriendoen el consentimiento, o precediendolo, no influyo para arrancar porsi solo el consentimiento ni en la totalidad de la obligacion, sinoen algun extremo o accidente de esta, dando lugar tan solo a una accion para reclamar indemnizacion de perjuicios. (8 Manresa 602.)

Having arrived at the conclusion that the agreement may not be declared null and void, the question that next comes before us is, May the agreement be carried out or executed? We find no merit in the claim of plaintiff that the partnership was already a fait accompli from the time of the operation of the plant, as it is evident from the very language of the agreement that the parties intended that the execution of the agreement to form a partnership was to be carried out at a later date. They expressly agreed that they shall form a partnership. (Par. No. 1, Exhibit A.) As a matter of fact, from the time that the franchise from the Mission Dry Corporation was obtained in California, plaintiff

himself had been demanding that defendant comply with the agreement. And plaintiff's present action seeks the enforcement of this agreement. Plaintiff's claim, therefore, is both inconsistent with their intention and incompatible with his own conduct and suit.

As the trial court correctly concluded, the defendant may not be compelled against his will to carry out the agreement nor execute the partnership papers. Under the Spanish Civil Code, the defendant has an obligation to do, not to give. The law recognizes the individual's freedom or liberty to do an act he has promised to do, or not to do it, as he pleases. It falls within what Spanish commentators call a very personal act (acto personalismo), of which courts may not compel compliance, as it is considered an act of violence to do so.

Efectos de las obligaciones consistentes en hechos personalismo.—Tratamos de la ejecucion de las obligaciones de hacer en el solocaso de su incumplimiento por parte del deudor, ya sean los hechos personalisimos, ya se hallen en la facultad de un tercero; porque el complimiento espontaneo de las mismas esta regido por los preceptos relativos al pago, y en nada les afectan las disposiciones del art. 1.098.

Esto supuesto, la primera dificultad del asunto consiste en resolver si el deudor puede ser precisado a realizar el hecho y porque medios.

Se tiene por corriente entre los autores, y se traslada generalmente sin observacion el principio romanonemo potest precise cogi ad factum. Nadie puede ser obligado violentamente a haceruna cosa. Los que perciben la posibilidad de la destruccion deeste principio, añaden que, aun cuando se pudiera obligar al deudor, no deberia hacerse, porque esto constituiria una violencia, y noes la violenciamodo propio de cumplir las obligaciones (Bigot, Rolland, etc.). El maestro Antonio Gomez opinaba lo mismo cuandodecia que obligar por la violencia seria infrigir la libertad eimponer una especie de esclavitud.

x x x           x x x           x x x

En efecto; las obligaciones contractuales no se acomodan biencon el empleo de la fuerza fisica, no ya precisamente porque seconstituya de este modo una especie de esclavitud, segun el dichode Antonio Gomez, sino porque se supone que el acreedor tuvo encuenta el caracter personalisimo del hecho ofrecido, y calculo sobre laposibilidad de que por alguna razon no se realizase. Repugna,ademas, a la conciencia social el empleo de la fuerza publica, mediante coaccion sobre las personas, en las relaciones puramente particulares; porque la evolucion de las ideas ha ido poniendo masde relieve cada dia el respeto a la personalidad humana, y nose admite bien la violencia sobre el individuo la cual tiene caracter visiblemente penal, sino por motivos que interesen a la colectividad de ciudadanos. Es, pues, posible y licita esta violencia cuando setrata de las obligaciones que hemos llamado ex lege, que afectanal orden social y a la entidad de Estado, y aparecen impuestas sinconsideracion a las conveniencias particulares, y sin que por estemotivo puedan tampoco ser modificadas; pero no debe serlo cuandola obligacion reviste un interes puramente particular, como sucedeen las contractuales, y cuando, por consecuencia, paraceria salirseel Estado de su esfera propia, entrado a dirimir, con apoyo dela fuerza colectiva, las diferencias producidas entre los ciudadanos. (19 Scaevola 428, 431-432.)

The last question for us to decide is that of damages,damages that plaintiff is entitled to receive because of defendant's refusal to form the partnership, and damages that defendant is also entitled to collect because of the falsity of plaintiff's representation. (Article 1101, Spanish Civil Code.) Under article 1106 of the Spanish Civil Code the measure of damages is the actual loss suffered and the profits reasonably expected to be received, embraced in the terms daño emergente and lucro

cesante. Plaintiff is entitled under the terms of the agreement to 30 per cent of the net profits of the business. Against this amount of damages, we must set off the damage defendant suffered by plaintiff's misrepresentation that he had obtained a very high percentage of share in the profits. We can do no better than follow the appraisal that the parties themselves had adopted.

When defendant learned in Los Angeles that plaintiff did not have the exclusive franchise which he pretended he had and which he had agreed to transfer to the partnership, his spontaneous reaction was to reduce plaintiff's share form 30 per cent to 15 per cent only, to which reduction defendant appears to have readily given his assent. It was under this understanding, which amounts to a virtual modification of the contract, that the bottling plant was established and plaintiff worked as Manager for the first three months. If the contract may not be considered modified as to plaintiff's share in the profits, by the decision of defendant to reduce the same to one-half and the assent thereto of plaintiff, then we may consider the said amount as a fair estimate of the damages plaintiff is entitled to under the principle enunciated in the case of Varadero de Manila vs. Insular Lumber Co., 46 Phil. 176. Defendant's decision to reduce plaintiff's share and plaintiff's consent thereto amount to an admission on the part of each of the reasonableness of this amount as plaintiff's share. This same amount was fixed by the trial court. The agreement contains the stipulation that upon the termination of the partnership, defendant was to convey the franchise back to plaintiff (Par. 11, Exhibit A). The judgment of the trial court does not fix the period within which these damages shall be paid to plaintiff. In view of paragraph 11 of Exhibit A, we declare that plaintiff's share of 15 per cent of the net profits shall continue to be paid while defendant uses the franchise from the Mission Dry Corporation.

G.R. No. L-4935             May 28, 1954

J. M. TUASON & CO., INC., represented by it Managing PARTNER, GREGORIA ARANETA, INC., plaintiff-appellee, vs.QUIRINO BOLAÑOS, defendant-appellant.

Araneta and Araneta for appellee.Jose A. Buendia for appellant.

REYES, J.:

This is an action originally brought in the Court of First Instance of Rizal, Quezon City Branch, to recover possesion of registered land situated in barrio Tatalon, Quezon City.

Plaintiff's complaint was amended three times with respect to the extent and description of the land sought to be recovered. The original complaint described the land as a portion of a lot registered in plaintiff's name under Transfer Certificate of Title No. 37686 of the land record of Rizal Province and as containing an area of 13 hectares more or less. But the complaint was amended by reducing the area of 6 hectares, more or less, after the defendant had indicated the plaintiff's surveyors the portion of land claimed and occupied by him. The second amendment became necessary and was allowed following the testimony of plaintiff's surveyors that a portion of the area was embraced in another certificate of title, which was plaintiff's Transfer Certificate of Title No. 37677. And still later, in the course of trial, after defendant's surveyor and witness, Quirino Feria, had testified that the area occupied and claimed by defendant was about 13 hectares, as shown in his Exhibit 1, plaintiff again, with the leave of court, amended its complaint to make its allegations conform to the evidence.

Defendant, in his answer, sets up prescription and title in himself thru "open, continuous, exclusive and public and notorious possession (of land in dispute) under claim of ownership, adverse to the entire world by defendant and his predecessor in interest" from "time in-memorial". The answer further alleges that registration of the land in dispute was obtained by plaintiff or its predecessors in interest thru "fraud or error and without knowledge (of) or interest either personal or thru publication to defendant and/or predecessors in interest." The answer therefore prays that the complaint be dismissed with costs and plaintiff required to reconvey the land to defendant or pay its value.

After trial, the lower court rendered judgment for plaintiff, declaring defendant to be without any right to the land in question and ordering him to restore possession thereof to plaintiff and to pay the latter a monthly rent of P132.62 from January, 1940, until he vacates the land, and also to pay the costs.

Appealing directly to this court because of the value of the property involved, defendant makes the following assignment or errors:

I. The trial court erred in not dismissing the case on the ground that the case was not brought by the real property in interest.

II. The trial court erred in admitting the third amended complaint.

III. The trial court erred in denying defendant's motion to strike.

IV. The trial court erred in including in its decision land not involved in the litigation.

V. The trial court erred in holding that the land in dispute is covered by transfer certificates of Title Nos. 37686 and 37677.

Vl. The trial court erred in not finding that the defendant is the true and lawful owner of the land.

VII. The trial court erred in finding that the defendant is liable to pay the plaintiff the amount of P132.62 monthly from January, 1940, until he vacates the premises.

VIII. The trial court erred in not ordering the plaintiff to reconvey the land in litigation to the defendant.

As to the first assigned error, there is nothing to the contention that the present action is not brought by the real party in interest, that is, by J. M. Tuason and Co., Inc. What the Rules of Court require is that an action be broughtin the name of, but not necessarily by, the real party in interest. (Section 2, Rule 2.) In fact the practice is for an attorney-at-law to bring the action, that is to file the complaint, in the name of the plaintiff. That practice appears to have been followed in this case, since the complaint is signed by the law firm of Araneta and Araneta, "counsel for plaintiff" and commences with the statement "comes now plaintiff, through its undersigned counsel." It is true that the complaint also states that the plaintiff is "represented herein by its Managing Partner Gregorio Araneta, Inc.", another corporation, but there is nothing against one corporation being represented by another person, natural or juridical, in a suit in court. The contention that Gregorio Araneta, Inc. can not act as managing partner for plaintiff on the theory that it is illegal for two corporations to enter into a partnership is without merit, for the true rule is that "though a corporation has no power to enter into a partnership, it may nevertheless enter into a joint venture with another where the nature of that venture is in line with the business authorized by its charter." (Wyoming-Indiana Oil Gas Co. vs. Weston, 80 A. L. R., 1043, citing 2 Fletcher Cyc. of Corp., 1082.) There is nothing in the record to indicate that the venture in which plaintiff is represented by Gregorio Araneta, Inc. as "its managing partner" is not in line with the corporate business of either of them.

Errors II, III, and IV, referring to the admission of the third amended complaint, may be answered by mere reference to section 4 of Rule 17, Rules of Court, which sanctions such amendment. It reads:

Sec. 4. Amendment to conform to evidence. — When issues not raised by the pleadings are tried by express or implied consent of the parties, they shall be treated in all respects, as if they had been raised in the pleadings. Such amendment of the pleadings as may be necessary to cause them to conform to the evidence and to raise these issues may be made upon motion of any party at my time, even of the trial of these issues. If evidence is objected to at the trial on the ground that it is not within the issues made by the pleadings, the court may allow the pleadings to be amended and shall be so freely when the presentation of the merits of the action will be subserved thereby and the objecting party fails to satisfy the court that the admission of such evidence would prejudice him in maintaining his action or defense upon the merits. The court may grant a continuance to enable the objecting party to meet such evidence.

Under this provision amendment is not even necessary for the purpose of rendering judgment on issues proved though not alleged. Thus, commenting on the provision, Chief Justice Moran says in this Rules of Court:

Under this section, American courts have, under the New Federal Rules of Civil Procedure, ruled that where the facts shown entitled plaintiff to relief other than that asked for, no amendment to the complaint is necessary, especially where defendant has himself raised the

point on which recovery is based, and that the appellate court treat the pleadings as amended to conform to the evidence, although the pleadings were not actually amended. (I Moran, Rules of Court, 1952 ed., 389-390.)

Our conclusion therefore is that specification of error II, III, and IV are without merit..

Let us now pass on the errors V and VI. Admitting, though his attorney, at the early stage of the trial, that the land in dispute "is that described or represented in Exhibit A and in Exhibit B enclosed in red pencil with the name Quirino Bolaños," defendant later changed his lawyer and also his theory and tried to prove that the land in dispute was not covered by plaintiff's certificate of title. The evidence, however, is against defendant, for it clearly establishes that plaintiff is the registered owner of lot No. 4-B-3-C, situate in barrio Tatalon, Quezon City, with an area of 5,297,429.3 square meters, more or less, covered by transfer certificate of title No. 37686 of the land records of Rizal province, and of lot No. 4-B-4, situated in the same barrio, having an area of 74,789 square meters, more or less, covered by transfer certificate of title No. 37677 of the land records of the same province, both lots having been originally registered on July 8, 1914 under original certificate of title No. 735. The identity of the lots was established by the testimony of Antonio Manahan and Magno Faustino, witnesses for plaintiff, and the identity of the portion thereof claimed by defendant was established by the testimony of his own witness, Quirico Feria. The combined testimony of these three witnesses clearly shows that the portion claimed by defendant is made up of a part of lot 4-B-3-C and major on portion of lot 4-B-4, and is well within the area covered by the two transfer certificates of title already mentioned. This fact also appears admitted in defendant's answer to the third amended complaint.

As the land in dispute is covered by plaintiff's Torrens certificate of title and was registered in 1914, the decree of registration can no longer be impugned on the ground of fraud, error or lack of notice to defendant, as more than one year has already elapsed from the issuance and entry of the decree. Neither court the decree be collaterally attacked by any person claiming title to, or interest in, the land prior to the registration proceedings. (Soroñgon vs. Makalintal,1 45 Off. Gaz., 3819.) Nor could title to that land in derogation of that of plaintiff, the registered owner, be acquired by prescription or adverse possession. (Section 46, Act No. 496.) Adverse, notorious and continuous possession under claim of ownership for the period fixed by law is ineffective against a Torrens title. (Valiente vs. Judge of CFI of Tarlac,2 etc., 45 Off. Gaz., Supp. 9, p. 43.) And it is likewise settled that the right to secure possession under a decree of registration does not prescribed. (Francisco vs. Cruz, 43 Off. Gaz., 5105, 5109-5110.) A recent decision of this Court on this point is that rendered in the case of Jose Alcantara et al., vs. Mariano et al., 92 Phil., 796. This disposes of the alleged errors V and VI.

As to error VII, it is claimed that `there was no evidence to sustain the finding that defendant should be sentenced to pay plaintiff P132.62 monthly from January, 1940, until he vacates the premises.' But it appears from the record that that reasonable compensation for the use and occupation of the premises, as stipulated at the hearing was P10 a month for each hectare and that the area occupied by defendant was 13.2619 hectares. The total rent to be paid for the area occupied should therefore be P132.62 a month. It is appears from the testimony of J. A. Araneta and witness Emigdio Tanjuatco that as early as 1939 an action of ejectment had already been filed against defendant. And it cannot be supposed that defendant has been paying rents, for he has been asserting all along that the premises in question 'have always been since time immemorial in open, continuous, exclusive and public and notorious possession and under claim of ownership adverse to the entire world by defendant and his predecessors in interest.' This assignment of error is thus clearly without merit.

Error No. VIII is but a consequence of the other errors alleged and needs for further consideration.

During the pendency of this case in this Court appellant, thru other counsel, has filed a motion to dismiss alleging that there is pending before the Court of First Instance of Rizal another action between the same parties and for the same cause and seeking to sustain that allegation with a copy of the complaint filed in said action. But an examination of that complaint reveals that appellant's allegation is not correct, for the pretended identity of parties and cause of action in the two suits does not appear. That other case is one for recovery of ownership, while the present one is for recovery of possession. And while appellant claims that he is also involved in that order action because it is a class suit, the complaint does not show that such is really the case. On the contrary, it appears that the action seeks relief for each individual plaintiff and not relief for and on behalf of others. The motion for dismissal is clearly without merit.

Wherefore, the judgment appealed from is affirmed, with costs against the plaintiff.

G.R. No. L-59956 October 31, 1984

ISABELO MORAN, JR., petitioner, vs.THE HON. COURT OF APPEALS and MARIANO E. PECSON, respondents.

 

GUTIERREZ, JR., J.:ñé+.£ªwph!1

This is a petition for review on certiorari of the decision of the respondent Court of Appeals which ordered petitioner Isabelo Moran, Jr. to pay damages to respondent Mariano E, Pecson.

As found by the respondent Court of Appeals, the undisputed facts indicate that: têñ.£îhqwâ£

xxx xxx xxx

... on February 22, 1971 Pecson and Moran entered into an agreement whereby both would contribute P15,000 each for the purpose of printing 95,000 posters (featuring the delegates to the 1971 Constitutional Convention), with Moran actually supervising the work; that Pecson would receive a commission of P l,000 a month starting on April 15, 1971 up to December 15, 1971; that on December 15, 1971, a liquidation of the accounts in the distribution and printing of the 95,000 posters would be made, that Pecson gave Moran P10,000 for which the latter issued a receipt; that only a few posters were printed; that on or about May 28, 1971, Moran executed in favor of Pecson a promissory note in the amount of P20,000 payable in two equal installments (P10,000 payable on or before June 15, 1971 and P10,000 payable on or before June 30, 1971), the whole sum becoming due upon default in the payment of the first installment on the date due, complete with the costs of collection.

Private respondent Pecson filed with the Court of First Instance of Manila an action for the recovery of a sum of money and alleged in his complaint three (3) causes of action, namely: (1) on the alleged partnership agreement, the return of his contribution of P10,000.00, payment of his share in the profits that the partnership would have earned, and, payment of unpaid commission; (2) on the alleged promissory note, payment of the sum of P20,000.00; and, (3) moral and exemplary damages and attorney's fees.

After the trial, the Court of First Instance held that: têñ.£îhqwâ£

From the evidence presented it is clear in the mind of the court that by virtue of the partnership agreement entered into by the parties-plaintiff and defendant the plaintiff did contribute P10,000.00, and another sum of P7,000.00 for the Voice of the Veteran or Delegate Magazine. Of the expected 95,000 copies of the posters, the defendant was able to print 2,000 copies only authorized of which, however, were sold at P5.00 each. Nothing more was done after this and it can be said that the venture did not really get off the ground. On the other hand, the plaintiff failed to give his full contribution of P15,000.00. Thus, each party is entitled to rescind the contract which right is implied in reciprocal obligations under Article 1385 of the Civil Code whereunder 'rescission creates the obligation to return the things which were the object of the contract ...

WHEREFORE, the court hereby renders judgment ordering defendant Isabelo C. Moran, Jr. to return to plaintiff Mariano E. Pecson the sum of P17,000.00, with interest at the legal rate from the filing of the complaint on June 19, 1972, and the costs of the suit.

For insufficiency of evidence, the counterclaim is hereby dismissed.

From this decision, both parties appealed to the respondent Court of Appeals. The latter likewise rendered a decision against the petitioner. The dispositive portion of the decision reads: têñ.£îhqwâ£

PREMISES CONSIDERED, the decision appealed from is hereby SET ASIDE, and a new one is hereby rendered, ordering defendant-appellant Isabelo C. Moran, Jr. to pay plaintiff- appellant Mariano E. Pecson:

(a) Forty-seven thousand five hundred (P47,500) (the amount that could have accrued to Pecson under their agreement);

(b) Eight thousand (P8,000), (the commission for eight months);

(c) Seven thousand (P7,000) (as a return of Pecson's investment for the Veteran's Project);

(d) Legal interest on (a), (b) and (c) from the date the complaint was filed (up to the time payment is made)

The petitioner contends that the respondent Court of Appeals decided questions of substance in a way not in accord with law and with Supreme Court decisions when it committed the following errors:

I

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER ISABELO C. MORAN, JR. LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF P47,500 AS THE SUPPOSED EXPECTED PROFITS DUE HIM.

II

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER ISABELO C. MORAN, JR. LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF P8,000, AS SUPPOSED COMMISSION IN THE PARTNERSHIP ARISING OUT OF PECSON'S INVESTMENT.

III

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING PETITIONER ISABELO C. MORAN, JR. LIABLE TO RESPONDENT MARIANO E. PECSON IN THE SUM OF P7,000 AS A SUPPOSED RETURN OF INVESTMENT IN A MAGAZINE VENTURE.

IV

ASSUMING WITHOUT ADMITTING THAT PETITIONER IS AT ALL LIABLE FOR ANY AMOUNT, THE HONORABLE COURT OF APPEALS DID NOT EVEN OFFSET PAYMENTS ADMITTEDLY RECEIVED BY PECSON FROM MORAN.

V

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN NOT GRANTING THE PETITIONER'S COMPULSORY COUNTERCLAIM FOR DAMAGES.

The first question raised in this petition refers to the award of P47,500.00 as the private respondent's share in the unrealized profits of the partnership. The petitioner contends that the award is highly speculative. The petitioner maintains that the respondent court did not take into account the great risks involved in the business undertaking.

We agree with the petitioner that the award of speculative damages has no basis in fact and law.

There is no dispute over the nature of the agreement between the petitioner and the private respondent. It is a contract of partnership. The latter in his complaint alleged that he was induced by the petitioner to enter into a partnership with him under the following terms and conditions: têñ.£îhqwâ£

1. That the partnership will print colored posters of the delegates to the Constitutional Convention;

2. That they will invest the amount of Fifteen Thousand Pesos (P15,000.00) each;

3. That they will print Ninety Five Thousand (95,000) copies of the said posters;

4. That plaintiff will receive a commission of One Thousand Pesos (P1,000.00) a month starting April 15, 1971 up to December 15, 1971;

5. That upon the termination of the partnership on December 15, 1971, a liquidation of the account pertaining to the distribution and printing of the said 95,000 posters shall be made.

The petitioner on the other hand admitted in his answer the existence of the partnership.

The rule is, 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 (Art. 1786, Civil Code) and for interests and damages from the time he should have complied with his obligation (Art. 1788, Civil Code). Thus in Uy v. Puzon (79 SCRA 598), which interpreted Art. 2200 of the Civil Code of the Philippines, we allowed a total of P200,000.00 compensatory damages in favor of the appellee because the appellant therein was remiss in his obligations as a partner and as prime contractor of the construction projects in question. This case was decided on a particular set of facts. We awarded compensatory damages in the Uy case because there was a finding that the constructing business is a profitable one and that the UP construction company derived some profits from its contractors in the construction of roads and bridges despite its deficient capital." Besides, there was evidence to show that the partnership made some profits during the periods from July 2, 1956 to December 31, 1957 and from January 1, 1958 up to September 30, 1959. The profits on two government contracts worth P2,327,335.76 were not speculative. In the instant case, there is no evidence whatsoever that the partnership between the petitioner and the private respondent would

have been a profitable venture. In fact, it was a failure doomed from the start. There is therefore no basis for the award of speculative damages in favor of the private respondent.

Furthermore, in the Uy case, only Puzon failed to give his full contribution while Uy contributed much more than what was expected of him. In this case, however, there was mutual breach. Private respondent failed to give his entire contribution in the amount of P15,000.00. He contributed only P10,000.00. The petitioner likewise failed to give any of the amount expected of him. He further failed to comply with the agreement to print 95,000 copies of the posters. Instead, he printed only 2,000 copies.

Article 1797 of the Civil Code provides: têñ.£îhqwâ£

The losses and profits shall be distributed in conformity with the agreement. If only the share of each partner in the profits has been agreed upon, the share of each in the losses shall be in the same proportion.

Being a contract of partnership, each partner must share in the profits and losses of the venture. That is the essence of a partnership. And even with an assurance made by one of the partners that they would earn a huge amount of profits, in the absence of fraud, the other partner cannot claim a right to recover the highly speculative profits. It is a rare business venture guaranteed to give 100% profits. In this case, on an investment of P15,000.00, the respondent was supposed to earn a guaranteed P1,000.00 a month for eight months and around P142,500.00 on 95,000 posters costing P2.00 each but 2,000 of which were sold at P5.00 each. The fantastic nature of expected profits is obvious. We have to take various factors into account. The failure of the Commission on Elections to proclaim all the 320 candidates of the Constitutional Convention on time was a major factor. The petitioner undesirable his best business judgment and felt that it would be a losing venture to go on with the printing of the agreed 95,000 copies of the posters. Hidden risks in any business venture have to be considered.

It does not follow however that the private respondent is not entitled to recover any amount from the petitioner. The records show that the private respondent gave P10,000.00 to the petitioner. The latter used this amount for the printing of 2,000 posters at a cost of P2.00 per poster or a total printing cost of P4,000.00. The records further show that the 2,000 copies were sold at P5.00 each. The gross income therefore was P10,000.00. Deducting the printing costs of P4,000.00 from the gross income of P10,000.00 and with no evidence on the cost of distribution, the net profits amount to only P6,000.00. This net profit of P6,000.00 should be divided between the petitioner and the private respondent. And since only P4,000.00 was undesirable by the petitioner in printing the 2,000 copies, the remaining P6,000.00 should therefore be returned to the private respondent.

Relative to the second alleged error, the petitioner submits that the award of P8,000.00 as Pecson's supposed commission has no justifiable basis in law.

Again, we agree with the petitioner.

The partnership agreement stipulated that the petitioner would give the private respondent a monthly commission of Pl,000.00 from April 15, 1971 to December 15, 1971 for a total of eight (8) monthly commissions. The agreement does not state the basis of the commission. The payment of the commission could only have been predicated on relatively extravagant profits. The parties could not have intended the giving of a commission inspite of loss or failure of the venture. Since the venture was a failure, the private respondent is not entitled to the P8,000.00 commission.

Anent the third assigned error, the petitioner maintains that the respondent Court of Appeals erred in holding him liable to the private respondent in the sum of P7,000.00 as a supposed return of investment in a magazine venture.

In awarding P7,000.00 to the private respondent as his supposed return of investment in the "Voice of the Veterans" magazine venture, the respondent court ruled that: têñ.£îhqwâ£

xxx xxx xxx

... Moran admittedly signed the promissory note of P20,000 in favor of Pecson. Moran does not question the due execution of said note. Must Moran therefore pay the amount of P20,000? The evidence indicates that the P20,000 was assigned by Moran to cover the following: têñ.£îhqwâ£

(a) P 7,000 — the amount of the PNB check given by Pecson to Moran representing Pecson's investment in Moran's other project (the publication and printing of the 'Voice of the Veterans');

(b) P10,000 — to cover the return of Pecson's contribution in the project of the Posters;

(c) P3,000 — representing Pecson's commission for three months (April, May, June, 1971).

Of said P20,000 Moran has to pay P7,000 (as a return of Pecson's investment for the Veterans' project, for this project never left the ground) ...

As a rule, the findings of facts of the Court of Appeals are final and conclusive and cannot be reviewed on appeal to this Court (Amigo v. Teves, 96 Phil. 252), provided they are borne out by the record or are based on substantial evidence (Alsua-Betts v. Court of Appeals, 92 SCRA 332). However, this rule admits of certain exceptions. Thus, inCarolina Industries Inc. v. CMS Stock Brokerage, Inc., et al., (97 SCRA 734), we held that this Court retains the power to review and rectify the findings of fact of the Court of Appeals when (1) the conclusion is a finding grounded entirely on speculation, surmises and conjectures; (2) when the inference made is manifestly mistaken absurd and impossible; (3) where there is grave abuse of discretion; (4) when the judgment is based on a misapprehension of facts; and (5) when the court, in making its findings, went beyond the issues of the case and the same are contrary to the admissions of both the appellant and the appellee.

In this case, there is misapprehension of facts. The evidence of the private respondent himself shows that his investment in the "Voice of Veterans" project amounted to only P3,000.00. The remaining P4,000.00 was the amount of profit that the private respondent expected to receive.

The records show the following exhibits- têñ.£îhqwâ£

E — Xerox copy of PNB Manager's Check No. 234265 dated March 22, 1971 in favor of defendant. Defendant admitted the authenticity of this check and of his receipt of the proceeds thereof (t.s.n., pp. 3-4, Nov. 29, 1972). This exhibit is being offered for the purpose of showing plaintiff's capital investment in the printing of the "Voice of the Veterans" for which he was promised a fixed profit of P8,000. This investment of P6,000.00 and the promised profit of P8,000 are covered by

defendant's promissory note for P14,000 dated March 31, 1971 marked by defendant as Exhibit 2 (t.s.n., pp. 20-21, Nov. 29, 1972), and by plaintiff as Exhibit P. Later, defendant returned P3,000.00 of the P6,000.00 investment thereby proportionately reducing the promised profit to P4,000. With the balance of P3,000 (capital) and P4,000 (promised profit), defendant signed and executed the promissory note for P7,000 marked Exhibit 3 for the defendant and Exhibit M for plaintiff. Of this P7,000, defendant paid P4,000 representing full return of the capital investment and P1,000 partial payment of the promised profit. The P3,000 balance of the promised profit was made part consideration of the P20,000 promissory note (t.s.n., pp. 22-24, Nov. 29, 1972). It is, therefore, being presented to show the consideration for the P20,000 promissory note.

F — Xerox copy of PNB Manager's check dated May 29, 1971 for P7,000 in favor of defendant. The authenticity of the check and his receipt of the proceeds thereof were admitted by the defendant (t.s.n., pp. 3-4, Nov. 29, 1972). This P 7,000 is part consideration, and in cash, of the P20,000 promissory note (t.s.n., p. 25, Nov. 29, 1972), and it is being presented to show the consideration for the P20,000 note and the existence and validity of the obligation.

xxx xxx xxx

L-Book entitled "Voice of the Veterans" which is being offered for the purpose of showing the subject matter of the other partnership agreement and in which plaintiff invested the P6,000 (Exhibit E) which, together with the promised profit of P8,000 made up for the consideration of the P14,000 promissory note (Exhibit 2; Exhibit P). As explained in connection with Exhibit E. the P3,000 balance of the promised profit was later made part consideration of the P20,000 promissory note.

M-Promissory note for P7,000 dated March 30, 1971. This is also defendant's Exhibit E. This document is being offered for the purpose of further showing the transaction as explained in connection with Exhibits E and L.

N-Receipt of plaintiff dated March 30, 1971 for the return of his P3,000 out of his capital investment of P6,000 (Exh. E) in the P14,000 promissory note (Exh. 2; P). This is also defendant's Exhibit 4. This document is being offered in support of plaintiff's explanation in connection with Exhibits E, L, and M to show the transaction mentioned therein.

xxx xxx xxx

P-Promissory note for P14,000.00. This is also defendant's Exhibit 2. It is being offered for the purpose of showing the transaction as explained in connection with Exhibits E, L, M, and N above.

Explaining the above-quoted exhibits, respondent Pecson testified that: têñ.£îhqwâ£

Q During the pre-trial of this case, Mr. Pecson, the defendant presented a promissory note in the amount of P14,000.00 which has been marked as Exhibit 2. Do you know this promissory note?

A Yes, sir.

Q What is this promissory note, in connection with your transaction with the defendant?

A This promissory note is for the printing of the "Voice of the Veterans".

Q What is this "Voice of the Veterans", Mr. Pecson?

A It is a book.têñ.£îhqwâ£

(T.S.N., p. 19, Nov. 29, 1972)

Q And what does the amount of P14,000.00 indicated in the promissory note, Exhibit 2, represent?

A It represents the P6,000.00 cash which I gave to Mr. Moran, as evidenced by the Philippine National Bank Manager's check and the P8,000.00 profit assured me by Mr. Moran which I will derive from the printing of this "Voice of the Veterans" book.

Q You said that the P6,000.00 of this P14,000.00 is covered by, a Manager's check. I show you Exhibit E, is this the Manager's check that mentioned?

A Yes, sir.

Q What happened to this promissory note of P14,000.00 which you said represented P6,000.00 of your investment and P8,000.00 promised profits?

A Latter, Mr. Moran returned to me P3,000.00 which represented one-half (1/2) of the P6,000.00 capital I gave to him.

Q As a consequence of the return by Mr. Moran of one-half (1/2) of the P6,000.00 capital you gave to him, what happened to the promised profit of P8,000.00?

A It was reduced to one-half (1/2) which is P4,000.00.

Q Was there any document executed by Mr. Moran in connection with the Balance of P3,000.00 of your capital investment and the P4,000.00 promised profits?

A Yes, sir, he executed a promissory note.

Q I show you a promissory note in the amount of P7,000.00 dated March 30, 1971 which for purposes of Identification I request the same to be marked as Exhibit M. . .

Court têñ.£îhqwâ£

Mark it as Exhibit M.

Q (continuing) is this the promissory note which you said was executed by Mr. Moran in connection with your transaction regarding the printing of the "Voice of the Veterans"?

A Yes, sir. (T.S.N., pp. 20-22, Nov. 29, 1972).

Q What happened to this promissory note executed by Mr. Moran, Mr. Pecson?

A Mr. Moran paid me P4,000.00 out of the P7,000.00 as shown by the promissory note.

Q Was there a receipt issued by you covering this payment of P4,000.00 in favor of Mr. Moran?

A Yes, sir.

(T.S.N., p. 23, Nov. 29, 1972).

Q You stated that Mr. Moran paid the amount of P4,000.00 on account of the P7,000.00 covered by the promissory note, Exhibit M. What does this P4,000.00 covered by Exhibit N represent?

A This P4,000.00 represents the P3,000.00 which he has returned of my P6,000.00 capital investment and the P1,000.00 represents partial payment of the P4,000.00 profit that was promised to me by Mr. Moran.

Q And what happened to the balance of P3,000.00 under the promissory note, Exhibit M?

A The balance of P3,000.00 and the rest of the profit was applied as part of the consideration of the promissory note of P20,000.00.

(T.S.N., pp. 23-24, Nov. 29, 1972).

The respondent court erred when it concluded that the project never left the ground because the project did take place. Only it failed. It was the private respondent himself who presented a copy of the book entitled "Voice of the Veterans" in the lower court as Exhibit "L". Therefore, it would be error to state that the project never took place and on this basis decree the return of the private respondent's investment.

As already mentioned, there are risks in any business venture and the failure of the undertaking cannot entirely be blamed on the managing partner alone, specially if the latter exercised his best business judgment, which seems to be true in this case. In view of the foregoing, there is no reason to pass upon the fourth and fifth assignments of errors raised by the petitioner. We likewise find no valid basis for the grant of the counterclaim.

WHEREFORE, the petition is GRANTED. The decision of the respondent Court of Appeals (now Intermediate Appellate Court) is hereby SET ASIDE and a new one is rendered ordering the petitioner Isabelo Moran, Jr., to pay private respondent Mariano Pecson SIX THOUSAND (P6,000.00) PESOS representing the amount of the private respondent's contribution to the partnership but which remained unused; and THREE THOUSAND (P3,000.00) PESOS representing one half (1/2) of the net profits gained by the partnership in the sale of the two thousand (2,000) copies of the posters, with interests at the legal rate on both amounts from the date the complaint was filed until full payment is made.

SO ORDERED.1äwphï1.ñët

G.R. No. L-23241             March 14, 1925

HENRY FLEISCHER, plaintiff-appellee, vs.BOTICA NOLASCO CO., INC., defendant-appellant.

Antonio Gonzalez for appellant.Emilio M. Javier for appellee.

JOHNSON, J.:

This action was commenced in the Court of First Instance of the Province of Oriental Negros on the 14th day of August, 1923, against the board of directors of the Botica Nolasco, Inc., a corporation duly organized and existing under the laws of the Philippine Islands. The plaintiff prayed that said board of directors be ordered to register in the books of the corporation five shares of its stock in the name of Henry Fleischer, the plaintiff, and to pay him the sum of P500 for damages sustained by him resulting from the refusal of said body to register the shares of stock in question. The defendant filed a demurrer on the ground that the facts alleged in the complaint did not constitute sufficient cause of action, and that the action was not brought against the proper party, which was the Botica Nolasco, Inc. The demurrer was sustained, and the plaintiff was granted five days to amend his complaint.

On November 15, 1923, the plaintiff filed an amended complaint against the Botica Nolasco, Inc., alleging that he became the owner of five shares of stock of said corporation, by purchase from their original owner, one Manuel Gonzalez; that the said shares were fully paid; and that the defendant refused to register said shares in his name in the books of the corporation in spite of repeated demands to that effect made by him upon said corporation, which refusal caused him damages amounting to P500. Plaintiff prayed for a judgment ordering the Botica Nolasco, Inc. to register in his name in the books of the corporation the five shares of stock recorded in said books in the name of Manuel Gonzalez, and to indemnify him in the sum of P500 as damages, and to pay the costs. The defendant again filed a demurrer on the ground that the amended complaint did not state facts sufficient to constitute a cause of action, and that said amended complaint was ambiguous, unintelligible, uncertain, which demurrer was overruled by the court.

The defendant answered the amended complaint denying generally and specifically each and every one of the material allegations thereof, and, as a special defense, alleged that the defendant, pursuant to article 12 of its by-laws, had preferential right to buy from the plaintiff said shares at the par value of P100 a share, plus P90 as dividends corresponding to the year 1922, and that said offer was refused by the plaintiff. The defendant prayed for a judgment absolving it from all liability under the complaint and directing the plaintiff to deliver to the defendant the five shares of stock in question, and to pay damages in the sum of P500, and the costs.

Upon the issue presented by the pleadings above stated, the cause was brought on for trial, at the conclusion of which, and on August 21, 1924, the Honorable N. Capistrano, judge, held that, in his opinion, article 12 of the by-laws of the corporation which gives it preferential right to buy its shares from retiring stockholders, is in conflict with Act No. 1459 (Corporation Law), especially with section 35 thereof; and rendered a judgment ordering the defendant corporation, through its board of directors, to register in the books of said corporation the said five shares of stock in the name of the plaintiff, Henry Fleischer, as the shareholder or owner thereof, instead of the original owner, Manuel Gonzalez, with costs against the defendant.

The defendant appealed from said judgment, and now makes several assignment of error, all of which, in substance, raise the question whether or not article 12 of the by-laws of the corporation is in conflict with the provisions of the Corporation Law (Act No. 1459).

There is no controversy as to the facts of the present case. They are simple and may be stated as follows:

That Manuel Gonzalez was the original owner of the five shares of stock in question, Nos. 16, 17, 18, 19 and 20 of the Botica Nolasco, Inc.; that on March 11, 1923, he assigned and delivered said five shares to the plaintiff, Henry Fleischer, by accomplishing the form of endorsement provided on the back thereof, together with other credits, in consideration of a large sum of money owed by Gonzalez to Fleischer (Exhibits A, B, B-1, B-2, B-3, B-4); that on March 13, 1923, Dr. Eduardo Miciano, who was the secretary-treasurer of said corporation, offered to buy from Henry Fleischer, on behalf of the corporation, said shares of stock, at their par value of P100 a share, for P500; that by virtue of article 12 of the by-laws of Botica Nolasco, Inc., said corporation had the preferential right to buy from Manuel Gonzalez said shares (Exhibit 2); that the plaintiff refused to sell them to the defendant; that the plaintiff requested Doctor Miciano to register said shares in his name; that Doctor Miciano refused to do so, saying that it would be in contravention of the by-laws of the corporation.

It also appears from the record that on the 13th day of March, 1923, two days after the assignment of the shares to the plaintiff, Manuel Gonzales made a written statement to the Botica Nolasco, Inc., requesting that the five shares of stock sold by him to Henry Fleischer be noted transferred to Fleischer's name. He also acknowledged in said written statement the preferential right of the corporation to buy said five shares (Exhibit 3). On June 14, 1923, Gonzalez wrote a letter to the Botica Nolasco, withdrawing and cancelling his written statement of March 13, 1923 (Exhibit C), to which letter the Botica Nolasco on June 15, 1923, replied, declaring that his written statement was in conformity with the by-laws of the corporation; that his letter of June 14th was of no effect, and that the shares in question had been registered in the name of the Botica Nolasco, Inc., (Exhibit X).

As indicated above, the important question raised in this appeal is whether or not article 12 of the by-laws of the Botica Nolasco, Inc., is in conflict with the provisions of the Corporation Law (Act No. 1459). Appellant invoked said article as its ground for denying the request of the plaintiff that the shares in question be registered in his (plaintiff's) name, and for claiming that it (Botica Nolasco, Inc.) had the preferential right to buy said shares from Gonzalez. Appellant now contends that article 12 of the said by-laws is in conformity with the provisions of Act No. 1459. Said article is as follows:

ART. 12. Las acciones de la Corporacion pueden ser transferidas a otra persona, pero para que estas transferencias tengan validez legal, deben constar en los registros de la Corporacion con el debido endoso del accionista a cuyo nombre se ha expedido la accion o acciones que se transfieran, o un documento de transferencia. Entendiendose que, ningun accionista transferira accion alguna a otra persona sin participar antes por escrito al Secretario-Tesorero. En igualdad de condiciones, la sociedad tendra el derecho de adquirir para si la accion o acciones que se traten de transferir. (Exhibit 2.)

The above-quoted article constitutes a by-law or regulation adopted by the Botica Nolasco, Inc., governing the transfer of shares of stock of said corporation. The latter part of said article creates in favor of the Botica Nolasco, Inc., a preferential right to buy, under the same conditions, the share or shares of stock of a retiring shareholder. Has said corporation any power, under the Corporation Law (Act. No. 1459), to adopt such by-law?

The particular provisions of the Corporation Law referring to transfer of shares of stock are as follows:

SEC. 13. Every corporation has the power:

x x x           x x x           x x x

(7) To make by-laws, not inconsistent with any existing law, for the fixing or changing of the number of its officers and directors within the limits prescribed by law, and for the transferring of its stock, the administration of its corporate affairs, etc.

x x x           x x x           x x x

SEC. 35. The capital stock of stock corporations shall de divided into shares for which certificates signed by the president or the vice-president, countersigned by the secretary or clerk and sealed with the seal of the corporation, shall be issued in accordance with the by-laws. Shares of stock so issued are personal property and may be transferred by delivery of the certificate indorsed by the owner or his attorney in fact or other person legally authorized to make the transfer. No transfer, however, shall be valid, except as between the parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, that date of the transfer, the number of the certificate, and the number of shares transferred.

No share of stock against which the corporation holds any unpaid claim shall be transferable on the books of the corporation.

Section 13, paragraph 7, above-quoted, empowers a corporation to make by-laws, not inconsistent with any existing law, for the transferring of its stock. It follows from said provision, that a by-law adopted by a corporation relating to transfer of stock should be in harmony with the law on the subject of transfer of stock. The law on this subject is found in section 35 of Act No. 1459 above quoted. Said section specifically provides that the shares of stock "are personal property and may be transferred by delivery of the certificate indorsed by the owner, etc." Said section 35 defines the nature, character and transferability of shares of stock. Under said section they are personal property and may be transferred as therein provided. Said section contemplates no restriction as to whom they may be transferred or sold. It does not suggest that any discrimination may be created by the corporation in favor or against a certain purchaser. The holder of shares, as owner of personal property, is at liberty, under said section, to dispose of them in favor of whomsoever he pleases, without any other limitation in this respect, than the general provisions of law. Therefore, a stock corporation in adopting a by-law governing transfer of shares of stock should take into consideration the specific provisions of section 35 of Act No. 1459, and said by-law should be made to harmonize with said provisions. It should not be inconsistent therewith.

The by-law now in question was adopted under the power conferred upon the corporation by section 13, paragraph 7, above quoted; but in adopting said by-law the corporation has transcended the limits fixed by law in the same section, and has not taken into consideration the provisions of section 35 of Act No. 1459.

As a general rule, the by-laws of a corporation are valid if they are reasonable and calculated to carry into effect the objects of the corporation, and are not contradictory to the general policy of the laws of the land. (Supreme Commandery of the Knights of the Golden Rule vs. Ainsworth, 71 Ala., 436; 46 Am. Rep., 332.)

On the other hand, it is equally well settled that by-laws of a corporation must be reasonable and for a corporate purpose, and always within the charter limits. They must always be strictly subordinate to the constitution and the general laws of the land. They must not infringe the policy of the state, nor be hostile to public welfare. (46 Am. Rep., 332.) They must not disturb vested rights or impair the obligation of a contract, take away or abridge the substantial rights of stockholder or member, affect rights of property or create obligations unknown to the law. (People's Home Savings Bank vs. Superior Court, 104 Cal., 649; 43 Am. St. Rep., 147; Ireland vs. Globe Milling Co., 79 Am. St. Rep., 769.)

The validity of the by-law of a corporation is purely a question of law. (South Florida Railroad Co. vs. Rhodes, 25 Fla., 40.)

The power to enact by-laws restraining the sale and transfer of stock must be found in the governing statute or the charter. Restrictions upon the traffic in stock must have their source in legislative enactment, as the corporation itself cannot create such impediments. By-law are intended merely for the protection of the corporation, and prescribe regulation and not restriction; they are always subject to the charter of the corporation. The corporation, in the absence of such a power, cannot ordinarily inquire into or pass upon the legality of the transaction by which its stock passes from one person to another, nor can it question the consideration upon which a sale is based. A by-law cannot take away or abridge the substantial rights of stockholder. Under a statute authorizing by- laws for the transfer of stock, a corporation can do no more than prescribe a general mode of transfer on the corporate books and cannot justify an unreasonable restriction upon the right of sale. (4 Thompson on Corporations, sec. 4137, p. 674.

The right of unrestrained transfer of shares inheres in the very nature of a corporation, and courts will carefully scrutinize any attempt to impose restrictions or limitations upon the right of stockholders to sell and assign their stock. The right to impose any restraint in this respect must be conferred upon the corporation either by the governing statute or by the articles of the corporation. It cannot be done by a by-law without statutory or charter authority. (4 Thompson on Corporations, sec. 4334, pp. 818, 819.)

The jus disponendi, being an incident of the ownership of property, the general rule (subject to exceptions hereafter pointed out and discussed) is that every owner of corporate shares has the same uncontrollable right to alien them which attaches to the ownership of any other species of property. A shareholder is under no obligation to refrain from selling his shares at the sacrifice of his personal interest, in order to secure the welfare of the corporation, or to enable another shareholder to make gains and profits. (10 Cyc., p. 577.)

It follows from the foregoing that a corporation has no power to prevent or to restrain transfers of its shares, unless such power is expressly conferred in its charter or governing statute. This conclusion follows from the further consideration that by-laws or other regulations restraining such transfers, unless derived from authority expressly granted by the legislature, would be regarded as impositions in restraint of trade. (10 Cyc., p. 578.)

The foregoing authorities go farther than the stand we are taking on this question. They hold that the power of a corporation to enact by-laws restraining the sale and transfer of shares, should not only be in harmony with the law or charter of the corporation, but such power should be expressly granted in said law or charter.

The only restraint imposed by the Corporation Law upon transfer of shares is found in section 35 of Act No. 1459, quoted above, as follows: "No transfer, however, shall be valid, except as between the

parties, until the transfer is entered and noted upon the books of the corporation so as to show the names of the parties to the transaction, the date of the transfer, the number of the certificate, and the number of shares transferred." This restriction is necessary in order that the officers of the corporation may know who are the stockholders, which is essential in conducting elections of officers, in calling meeting of stockholders, and for other purposes. but any restriction of the nature of that imposed in the by-law now in question, is ultra vires, violative of the property rights of shareholders, and in restraint of trade.

And moreover, the by-laws now in question cannot have any effect on the appellee. He had no knowledge of such by-law when the shares were assigned to him. He obtained them in good faith and for a valuable consideration. He was not a privy to the contract created by said by-law between the shareholder Manuel Gonzalez and the Botica Nolasco, Inc. Said by-law cannot operate to defeat his rights as a purchaser.

An unauthorized by-law forbidding a shareholder to sell his shares without first offering them to the corporation for a period of thirty days is not binding upon an assignee of the stock as a personal contract, although his assignor knew of the by-law and took part in its adoption. (10 Cyc., 579; Ireland vs. Globe Milling Co., 21 R.I., 9.)

When no restriction is placed by public law on the transfer of corporate stock, a purchaser is not affected by any contractual restriction of which he had no notice. (Brinkerhoff-Farris Trust and Savings Co. vs. Home Lumber Co., 118 Mo., 447.)

The assignment of shares of stock in a corporation by one who has assented to an unauthorized by-law has only the effect of a contract by, and enforceable against, the assignor; the assignee is not bound by such by-law by virtue of the assignment alone. (Ireland vs. Globe Milling Co., 21 R.I., 9.)

A by-law of a corporation which provides that transfers of stock shall not be valid unless approved by the board of directors, while it may be enforced as a reasonable regulation for the protection of the corporation against worthless stockholders, cannot be made available to defeat the rights of third persons. (Farmers' and Merchants' Bank of Lineville vs. Wasson, 48 Iowa, 336.)

Counsel for defendant incidentally argues in his brief, that the plaintiff does not have any right of action against the defendant corporation, but against the president and secretary thereof, inasmuch as the signing and registration of shares is incumbent upon said officers pursuant to section 35 of the Corporation Law. This contention cannot be sustained now. The question should have been raised in the lower court. It is too late to raise it now in this appeal. Besides, as stated above, the corporation was made defendant in this action upon the demurrer of the attorney of the original defendant in the lower court, who contended that the Botica Nolasco, Inc., should be made the party defendant in this action. Accordingly, upon order of the court, the complaint was amended and the said corporation was made the party defendant.

Whenever a corporation refuses to transfer and register stock in cases like the present, mandamus will lie to compel the officers of the corporation to transfer said stock upon the books of the corporation. (26 Cyc. 347; Hager vs. Bryan, 19 Phil., 138.)

In view of all the foregoing, we are of the opinion, and so hold, that the decision of the lower court is in accordance with law and should be and is hereby affirmed, with costs. So ordered.

G.R. No. L-19342 May 25, 1972

LORENZO T. OÑA and HEIRS OF JULIA BUÑALES, namely: RODOLFO B. OÑA, MARIANO B. OÑA, LUZ B. OÑA, VIRGINIA B. OÑA and LORENZO B. OÑA, JR., petitioners, vs.THE COMMISSIONER OF INTERNAL REVENUE, respondent.

Orlando Velasco for petitioners.

Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete, and Special Attorney Purificacion Ureta for respondent.

 

BARREDO, J.:p

Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled as above, holding that petitioners have constituted an unregistered partnership and are, therefore, subject to the payment of the deficiency corporate income taxes assessed against them by respondent Commissioner of Internal Revenue for the years 1955 and 1956 in the total sum of P21,891.00, plus 5% surcharge and 1% monthly interest from December 15, 1958, subject to the provisions of Section 51 (e) (2) of the Internal Revenue Code, as amended by Section 8 of Republic Act No. 2343 and the costs of the suit, 1 as well as the resolution of said court denying petitioners' motion for reconsideration of said decision.

The facts are stated in the decision of the Tax Court as follows:

Julia Buñales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oña and her five children. In 1948, Civil Case No. 4519 was instituted in the Court of First Instance of Manila for the settlement of her estate. Later, Lorenzo T. Oña the surviving spouse was appointed administrator of the estate of said deceased (Exhibit 3, pp. 34-41, BIR rec.). On April 14, 1949, the administrator submitted the project of partition, which was approved by the Court on May 16, 1949 (See Exhibit K). Because three of the heirs, namely Luz, Virginia and Lorenzo, Jr., all surnamed Oña, were still minors when the project of partition was approved, Lorenzo T. Oña, their father and administrator of the estate, filed a petition in Civil Case No. 9637 of the Court of First Instance of Manila for appointment as guardian of said minors. On November 14, 1949, the Court appointed him guardian of the persons and property of the aforenamed minors (See p. 3, BIR rec.).

The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs have undivided one-half (1/2) interest in ten parcels of land with a total assessed value of P87,860.00, six houses with a total assessed value of P17,590.00 and an undetermined amount to be collected from the War Damage Commission. Later, they received from said Commission the amount of P50,000.00, more or less. This amount was not divided among them but was used in the rehabilitation of properties owned by them in common (t.s.n., p. 46). Of the ten parcels of land aforementioned, two were acquired after the death of the decedent with money borrowed from the Philippine Trust Company in the amount of P72,173.00 (t.s.n., p. 24; Exhibit 3, pp. 31-34 BIR rec.).

The project of partition also shows that the estate shares equally with Lorenzo T. Oña, the administrator thereof, in the obligation of P94,973.00, consisting of loans contracted by the latter with the approval of the Court (see p. 3 of Exhibit K; or see p. 74, BIR rec.).

Although the project of partition was approved by the Court on May 16, 1949, no attempt was made to divide the properties therein listed. Instead, the properties remained under the management of Lorenzo T. Oña who used said properties in business by leasing or selling them and investing the income derived therefrom and the proceeds from the sales thereof in real properties and securities. As a result, petitioners' properties and investments gradually increased from P105,450.00 in 1949 to P480,005.20 in 1956 as can be gleaned from the following year-end balances:

Year

Investment

Land

Building

  Account

Account

Account

1949 — P87,860.00 P17,590.00

1950 P24,657.65 128,566.72 96,076.26

1951 51,301.31 120,349.28 110,605.11

1952 67,927.52 87,065.28 152,674.39

1953 61,258.27 84,925.68 161,463.83

1954 63,623.37 99,001.20 167,962.04

1955 100,786.00 120,249.78 169,262.52

1956 175,028.68 135,714.68 169,262.52

(See Exhibits 3 & K t.s.n., pp. 22, 25-26, 40, 50, 102-104)

From said investments and properties petitioners derived such incomes as profits from installment sales of subdivided lots, profits from sales of stocks, dividends, rentals and interests (see p. 3 of Exhibit 3; p. 32, BIR rec.; t.s.n., pp. 37-38). The said incomes are recorded in the books of account kept by Lorenzo T. Oña where the corresponding shares of the petitioners in the net income for the year are also known. Every year, petitioners returned for income tax purposes their shares in the net income derived from said properties and securities and/or from transactions involving them (Exhibit 3,supra; t.s.n., pp. 25-26). However, petitioners did not actually receive their shares in the yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The income was always left in the hands of Lorenzo T. Oña who, as heretofore pointed out, invested them in real properties and securities. (See Exhibit 3, t.s.n., pp. 50, 102-104).

On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue) decided that petitioners formed an unregistered partnership and therefore, subject to

the corporate income tax, pursuant to Section 24, in relation to Section 84(b), of the Tax Code. Accordingly, he assessed against the petitioners the amounts of P8,092.00 and P13,899.00 as corporate income taxes for 1955 and 1956, respectively. (See Exhibit 5, amended by Exhibit 17, pp. 50 and 86, BIR rec.). Petitioners protested against the assessment and asked for reconsideration of the ruling of respondent that they have formed an unregistered partnership. Finding no merit in petitioners' request, respondent denied it (See Exhibit 17, p. 86, BIR rec.). (See pp. 1-4, Memorandum for Respondent, June 12, 1961).

The original assessment was as follows:

1955

Net income as per investigation ................ P40,209.89

Income tax due thereon ............................... 8,042.0025% surcharge .............................................. 2,010.50Compromise for non-filing .......................... 50.00Total ............................................................... P10,102.50

1956

Net income as per investigation ................ P69,245.23

Income tax due thereon ............................... 13,849.0025% surcharge .............................................. 3,462.25Compromise for non-filing .......................... 50.00Total ............................................................... P17,361.25

(See Exhibit 13, page 50, BIR records)

Upon further consideration of the case, the 25% surcharge was eliminated in line with the ruling of the Supreme Court in Collector v. Batangas Transportation Co., G.R. No. L-9692, Jan. 6, 1958, so that the questioned assessment refers solely to the income tax proper for the years 1955 and 1956 and the "Compromise for non-filing," the latter item obviously referring to the compromise in lieu of the criminal liability for failure of petitioners to file the corporate income tax returns for said years. (See Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to Petition)

Petitioners have assigned the following as alleged errors of the Tax Court:

I.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS FORMED AN UNREGISTERED PARTNERSHIP;

II.

THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE CO-OWNERS OF THE PROPERTIES INHERITED AND (THE) PROFITS DERIVED FROM TRANSACTIONS THEREFROM (sic);

III.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE LIABLE FOR CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN UNREGISTERED PARTNERSHIP;

IV.

ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS WERE AN UNREGISTERED PARTNERSHIP TO THE EXTENT ONLY THAT THEY INVESTED THE PROFITS FROM THE PROPERTIES OWNED IN COMMON AND THE LOANS RECEIVED USING THE INHERITED PROPERTIES AS COLLATERALS;

V .

ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS PAID BY THE PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE SHARES OF THE PROFITS ACCRUING FROM THE PROPERTIES OWNED IN COMMON, FROM THE DEFICIENCY TAX OF THE UNREGISTERED PARTNERSHIP.

In other words, petitioners pose for our resolution the following questions: (1) Under the facts found by the Court of Tax Appeals, should petitioners be considered as co-owners of the properties inherited by them from the deceased Julia Buñales and the profits derived from transactions involving the same, or, must they be deemed to have formed an unregistered partnership subject to tax under Sections 24 and 84(b) of the National Internal Revenue Code? (2) Assuming they have formed an unregistered partnership, should this not be only in the sense that they invested as a common fund the profits earned by the properties owned by them in common and the loans granted to them upon the security of the said properties, with the result that as far as their respective shares in the inheritance are concerned, the total income thereof should be considered as that of co-owners and not of the unregistered partnership? And (3) assuming again that they are taxable as an unregistered partnership, should not the various amounts already paid by them for the same years 1955 and 1956 as individual income taxes on their respective shares of the profits accruing from the properties they owned in common be deducted from the deficiency corporate taxes, herein involved, assessed against such unregistered partnership by the respondent Commissioner?

Pondering on these questions, the first thing that has struck the Court is that whereas petitioners' predecessor in interest died way back on March 23, 1944 and the project of partition of her estate was judicially approved as early as May 16, 1949, and presumably petitioners have been holding their respective shares in their inheritance since those dates admittedly under the administration or management of the head of the family, the widower and father Lorenzo T. Oña, the assessment in question refers to the later years 1955 and 1956. We believe this point to be important because, apparently, at the start, or in the years 1944 to 1954, the respondent Commissioner of Internal Revenue did treat petitioners as co-owners, not liable to corporate tax, and it was only from 1955 that he considered them as having formed an unregistered partnership. At least, there is nothing in the record indicating that an earlier assessment had already been made. Such being the case, and We see no reason how it could be otherwise, it is easily understandable why petitioners' position that they are co-owners and not unregistered co-partners, for the purposes of the impugned assessment,

cannot be upheld. Truth to tell, petitioners should find comfort in the fact that they were not similarly assessed earlier by the Bureau of Internal Revenue.

The Tax Court found that instead of actually distributing the estate of the deceased among themselves pursuant to the project of partition approved in 1949, "the properties remained under the management of Lorenzo T. Oña who used said properties in business by leasing or selling them and investing the income derived therefrom and the proceed from the sales thereof in real properties and securities," as a result of which said properties and investments steadily increased yearly from P87,860.00 in "land account" and P17,590.00 in "building account" in 1949 to P175,028.68 in "investment account," P135.714.68 in "land account" and P169,262.52 in "building account" in 1956. And all these became possible because, admittedly, petitioners never actually received any share of the income or profits from Lorenzo T. Oña and instead, they allowed him to continue using said shares as part of the common fund for their ventures, even as they paid the corresponding income taxes on the basis of their respective shares of the profits of their common business as reported by the said Lorenzo T. Oña.

It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit themselves to holding the properties inherited by them. Indeed, it is admitted that during the material years herein involved, some of the said properties were sold at considerable profit, and that with said profit, petitioners engaged, thru Lorenzo T. Oña, in the purchase and sale of corporate securities. It is likewise admitted that all the profits from these ventures were divided among petitioners proportionately in accordance with their respective shares in the inheritance. In these circumstances, it is Our considered view that from the moment petitioners allowed not only the incomes from their respective shares of the inheritance but even the inherited properties themselves to be used by Lorenzo T. Oña as a common fund in undertaking several transactions or in business, with the intention of deriving profit to be shared by them proportionally, such act was tantamonut to actually contributing such incomes to a common fund and, in effect, they thereby formed an unregistered partnership within the purview of the above-mentioned provisions of the Tax Code.

It is but logical that in cases of inheritance, there should be a period when the heirs can be considered as co-owners rather than unregistered co-partners within the contemplation of our corporate tax laws aforementioned. Before the partition and distribution of the estate of the deceased, all the income thereof does belong commonly to all the heirs, obviously, without them becoming thereby unregistered co-partners, but it does not necessarily follow that such status as co-owners continues until the inheritance is actually and physically distributed among the heirs, for it is easily conceivable that after knowing their respective shares in the partition, they might decide to continue holding said shares under the common management of the administrator or executor or of anyone chosen by them and engage in business on that basis. Withal, if this were to be allowed, it would be the easiest thing for heirs in any inheritance to circumvent and render meaningless Sections 24 and 84(b) of the National Internal Revenue Code.

It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding the appellants therein to be unregistered co-partners for tax purposes, that their common fund "was not something they found already in existence" and that "it was not a property inherited by them pro indiviso," but it is certainly far fetched to argue therefrom, as petitioners are doing here, that ergo, in all instances where an inheritance is not actually divided, there can be no unregistered co-partnership. As already indicated, for tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding. The reason for this is simple. From the moment of

such partition, the heirs are entitled already to their respective definite shares of the estate and the incomes thereof, for each of them to manage and dispose of as exclusively his own without the intervention of the other heirs, and, accordingly he becomes liable individually for all taxes in connection therewith. If after such partition, he allows his share to be held in common with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no document or instrument were executed for the purpose, for tax purposes, at least, an unregistered partnership is formed. This is exactly what happened to petitioners in this case.

In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing that: "The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived," and, for that matter, on any other provision of said code on partnerships is unavailing. In Evangelista, supra, this Court clearly differentiated the concept of partnerships under the Civil Code from that of unregistered partnerships which are considered as "corporations" under Sections 24 and 84(b) of the National Internal Revenue Code. Mr. Justice Roberto Concepcion, now Chief Justice, elucidated on this point thus:

To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are distinct and different from "partnerships". When our Internal Revenue Code includes "partnerships" among the entities subject to the tax on "corporations", said Code must allude, therefore, to organizations which are not necessarily "partnerships", in the technical sense of the term. Thus, for instance, section 24 of said Code exempts from the aforementioned tax "duly registered general partnerships," which constitute precisely one of the most typical forms of partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation includes partnerships, no matter how created or organized." This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in confirmity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporation. Again, pursuant to said section 84(b),the term "corporation" includes, among others, "joint accounts,(cuentas en participacion)" and "associations", none of which has a legal personality of its own, independent of that of its members. Accordingly, the lawmaker could not have regarded that personality as a condition essential to the existence of the partnerships therein referred to. In fact, as above stated, "duly registered general co-partnerships" — which are possessed of the aforementioned personality — have been expressly excluded by law (sections 24 and 84[b]) from the connotation of the term "corporation." ....

xxx xxx xxx

Similarly, the American Law

... provides its own concept of a partnership. Under the term "partnership" it includes not only a partnership as known in common law but, as well, a syndicate, group, pool, joint venture, or other unincorporated organization which carries on any business, financial operation, or venture, and which is not, within the meaning of the Code, a trust, estate, or a corporation. ... . (7A Merten's Law of Federal Income Taxation, p. 789; emphasis ours.)

The term "partnership" includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on. ... . (8 Merten's Law of Federal Income Taxation, p. 562 Note 63; emphasis ours.)

For purposes of the tax on corporations, our National Internal Revenue Code includes these partnerships — with the exception only of duly registered general copartnerships — within the purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute a partnership, insofar as said Code is concerned, and are subject to the income tax for corporations.

We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue, G. R. Nos. L-24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory of co-ownership pursued by appellants therein.

As regards the second question raised by petitioners about the segregation, for the purposes of the corporate taxes in question, of their inherited properties from those acquired by them subsequently, We consider as justified the following ratiocination of the Tax Court in denying their motion for reconsideration:

In connection with the second ground, it is alleged that, if there was an unregistered partnership, the holding should be limited to the business engaged in apart from the properties inherited by petitioners. In other words, the taxable income of the partnership should be limited to the income derived from the acquisition and sale of real properties and corporate securities and should not include the income derived from the inherited properties. It is admitted that the inherited properties and the income derived therefrom were used in the business of buying and selling other real properties and corporate securities. Accordingly, the partnership income must include not only the income derived from the purchase and sale of other properties but also the income of the inherited properties.

Besides, as already observed earlier, the income derived from inherited properties may be considered as individual income of the respective heirs only so long as the inheritance or estate is not distributed or, at least, partitioned, but the moment their respective known shares are used as part of the common assets of the heirs to be used in making profits, it is but proper that the income of such shares should be considered as the part of the taxable income of an unregistered partnership. This, We hold, is the clear intent of the law.

Likewise, the third question of petitioners appears to have been adequately resolved by the Tax Court in the aforementioned resolution denying petitioners' motion for reconsideration of the decision of said court. Pertinently, the court ruled this wise:

In support of the third ground, counsel for petitioners alleges:

Even if we were to yield to the decision of this Honorable Court that the herein petitioners have formed an unregistered partnership and, therefore, have to be taxed as such, it might be recalled that the petitioners in their individual income tax returns reported their shares of the profits of the unregistered partnership. We think it only fair and equitable that the various amounts paid by the individual petitioners as income tax on their respective shares of the unregistered

partnership should be deducted from the deficiency income tax found by this Honorable Court against the unregistered partnership. (page 7, Memorandum for the Petitioner in Support of Their Motion for Reconsideration, Oct. 28, 1961.)

In other words, it is the position of petitioners that the taxable income of the partnership must be reduced by the amounts of income tax paid by each petitioner on his share of partnership profits. This is not correct; rather, it should be the other way around. The partnership profits distributable to the partners (petitioners herein) should be reduced by the amounts of income tax assessed against the partnership. Consequently, each of the petitioners in his individual capacity overpaid his income tax for the years in question, but the income tax due from the partnership has been correctly assessed. Since the individual income tax liabilities of petitioners are not in issue in this proceeding, it is not proper for the Court to pass upon the same.

Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might have paid as individual income tax cannot be credited as part payment of the taxes herein in question. It is argued that to sanction the view of the Tax Court is to oblige petitioners to pay double income tax on the same income, and, worse, considering the time that has lapsed since they paid their individual income taxes, they may already be barred by prescription from recovering their overpayments in a separate action. We do not agree. As We see it, the case of petitioners as regards the point under discussion is simply that of a taxpayer who has paid the wrong tax, assuming that the failure to pay the corporate taxes in question was not deliberate. Of course, such taxpayer has the right to be reimbursed what he has erroneously paid, but the law is very clear that the claim and action for such reimbursement are subject to the bar of prescription. And since the period for the recovery of the excess income taxes in the case of herein petitioners has already lapsed, it would not seem right to virtually disregard prescription merely upon the ground that the reason for the delay is precisely because the taxpayers failed to make the proper return and payment of the corporate taxes legally due from them. In principle, it is but proper not to allow any relaxation of the tax laws in favor of persons who are not exactly above suspicion in their conduct vis-a-vis their tax obligation to the State.

IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is affirm with costs against petitioners.

G.R. Nos. L-11483-11484             February 14, 1958

In the matter of the Testate Estate of the deceased Edward E. Christensen, ADOLFO CRUZ AZNAR,petitioner.MARIA LUCY CHRISTENSEN DANEY and ADOLFO CRUZ AZNAR, petitioners-appellants, vs.MARIA HELEN CHRISTENSEN GARCIA and BERNARDA CAMPOREDONDO, oppositors-appellees.

BERNARDA CAMPOREDONDO, plaintiff-appellee, vs.ADOLFO CRUZ AZNAR, as Executor of the Deceased EDWARD E. CHRISTENSEN, defendant-appellant.

M. R. Sotelo for appellants.Leopoldo M. abellera and Amado A. Munda for appellee Maria Heliuen Christensen Garcia.Pedro P. Suarez and Oscar Breva for appellee Bernarda Camporedondo.

FELIX, J.:

From the records of the above-entitled cases, it appears that as of 1913,Edward E. Christensen, an American citizen, was already residing in Davao and on the following year became the manager of Mindanao Estates located in the municipality of Padada of the same province. At a certain time, which the lower court placed at 1917, a group of laborers recruited from Argao, Cebu, arrived to work in the said plantation. Among the group was a young girl,Bernarda Camporendondo, who became an assistant to the cook. Thereafter, thegirl and Edward E. Christensen, who was also unmarried staring living together as husband and wife and although the records failed to establishthe exact date when such relationship commenced, the lower court found the same to have been continous for over 30 years until the death of Christensen occurecd on April 30, 1953. Out of said relations, 2 children, Lucy and Helen Christensen, were allegedly born.

G. R. NO. L-11484.

Upon the demise of the American, who had left a considerable amount of properties his will naming Adolfo Cruz Aznar as executor was duly presented for probate in court and became the subject of Special Proceedings No. 622 of the Court of First Instance of Davao. Said will contains, among others, the following provisions:

xxx             xxx             xxx.

3. I declare . . . that I have but one (1) child, named MARIA LUCY CHRISTENSEN (now Mrs. Bernard Daney), who was born in the Philippines about twenty-eight years ago, and who is now residing at No. 665 Rodger Young Village, Los Angeles, California, U.S.A.

4. I further declare that I have no living ascendants, andno descendantsexcept my above named daughter, MARIA LUCY CHRISTENSEN DANEY.

xxx             xxx             xxx.

7. I give, devise and bequeath unto MARIA LUCY CHRISTENSEN, now married toEduardo Garcia, about eighteen years of age and who, notwithstanding the factthat she was baptized Christensen, is not in any way related to me, nor hasshe been at any time adopted to me, and who, from all information I have now resides in Egipt, Digos, Davao, Philippines, the sum of THREEE THOUSAND SIXHUNDRED PESOS (P3,600) Philippine Currency, the same to be deposited in trustfor said Maria Lucy Christensen with the Davao Branch of the PhilippineNational Bank, and paid to her at the rate of One Hundred Pesos (P100), Philippine Currency per month until the the principal thereof as well as any interest which may have accrued thereon, is exhausted.

8. I give devise and bequeath unto BERNARDA CAMPORENDONDO, now residing inPadada, Davao, Philippines, the sum of One Thousand Pesos (P1,000), Philippine Currency.

xxx             xxx             xxx.

12. I hereby give, devise and bequeath, unto my well-beloved daughter, the said MARIA Lucy CHRISTENSEN DANEY (Mrs. Bernard Daney), now residing as aforesaid at No. 665 Rodger Young Village Los Angeles, California, U.S.A., all the income from the rest, remainder, and residue of my property and estate, real, personal and/or mixed, of whatsoever kind or character, andwheresover situated; of which I may be possessed at any death and which mayhave come to me from any source whatsoever, during her lifetime,Provided, honvever, that should the said MARIA LUCY CHRISTENSEN DANEY at any time prior to her decease having living issue, then, and in that event, the life interest herein given shall terminate, and if so terminated, then I give, devise, and bequeath to my said daughter, the said MARIA LUCY CHRISTENSEN DANEY, the rest remainder and residue of my property, with the same force and effectas if I had originally so given, devised and bequeathedit to her; and provided, further, that should be said Maria Lucy ChristensenDaney die without living issue then, and in that event, I give, devise and bequeath all the rest, remainder and residue of my property, one-half (1/2) to my well-beloved sister, Mrs. CARRIE LOIUSE C. BORTON, now residing at No. 2124 Twentieth Street, Bakersfield, California, U.S.A. and one-half (1/2) to the children of my deceased brother, JOSEPH C. CRISTENSEN, . . .

13. I hereby nominate and appoint Mr Adolfo Cruz Aznar, of Davao City, Philippines, my executor, and the executor of this, my last will and testament.

. . . (Exh. A).

Oppositions to the probate of this will were separately filed by Maria Helen Christensen Garcia and Bernarda Camporendondo, the first contending that thewill lacked the formalities required by law; that granting that he had, thedispositions made therein were illegal because although she and Lucy Christensen were both children had by the deceased with Bernarda Camporendondo, yet she was given only a meager sum of P3,600 out of an estate valued at $485,000 while Lucy would get the rest of the properties;and that the petitioner Adolfo Cruz Aznar was not qualified to be appointed as administrator of the estate because he had an interest adverse to thatof the estate. It was therefore

prayed by his oppositor that the application for probate be denied and the will disallowed; that the proceeding be declared intestate and that another disinterested person be appointed as administrator.

Bernarda Camporedondo, on the other hand, claimed ownership over one-halfof the entire estate in virtue of her relationship with the deceased, it being alleged that she and the testator having lived together as husband andwife continuously for a period of over 30 years, the properties acquired during such cohabitation should be governed by the rules on co-ownership. This opposition was dismissed by the probate court on the ground that shehad no right to intervene in said proceeding, for as such common-law wife she had no successional right that might be affected by the probate of thewill, and likewise, she could not be allowed to establish her title and co-ownership over the properties therein for such questions must be ventilated in a court of general jurisdiction. In view of this ruling of the Court and in order to attain the purpose sought by her overruled opposition Bernarda Camporedondo had to institute, as she did institute Civil Case No. 1076 of the Court of First Instance of Davao (G.R. No. L-11483) which we will consider and discuss hereinafter.

In the meantime, Adolfo Cruz Aznar was appointed special adminsitrator of the estate after filing a bond for P5,000 pending the appointment of a regular one, and letters of special administrition were correspondingly issued to him on May 21, 1953.

The records further show that subsequent to her original opposition. Helen Christensen Garcia filed a supplemental opposition and motion to declare her an acknowledged natural child of Edward E. Christensen, alleging that shewas conceived during the time when her mother Bernarda Camporendondo was living with the deceased as his common-law wife; that she had been in continous possession of the status of a natural child of the deceased; thatahe had in her favor evidence and/or proof that Edward Christensen was her father; and that she and Lucy had the same civil status as children of the decedent and Bernarda Camporedondo. This motion was opposed jointly by the executor and Maria Lucy Christensen Daney asserting that before, during and after the conception and birth of Helen Christensen Garcia, her mother was generally known to be carrying relations with 3 different men; that during the lifetime of the decedent and even years before his death, Edward Christensen verbally as well as in writing disavowed relationship with said oppositor; that oppositor appropriated and used the surname Christensen illegally and without permission from the deceased. Thus they prayed the Court that the will be allowed; that Maria Helen Christensen Garcia be declared not in any way related to the deceased; and that the motion of said oppositor be denied.

After due hearing, the lower court in a decision dated February 28, 1953, found that oppositor Maria Helen Cristensen had been in continous possession of the status of a natural child of the deceased Edward Christensen notwithstanding the fact that she was disowned by him in his will, for such action must have been brought about by the latter's disaproval of said oppositor's marriage to a man he did not like. But taking into considerationthat such possession of the status of a natural child did not itself constitute acknowledgment but may only be availed of to compel acknowledgment, the lower Court directed Maria Lucy Christensen Daney toacknowledge the oppositor as a natural child of Edward E. Christensen. Thewill was, however, allowed the letters testamentary consequently issued toAdolfo Cruz Aznar, the executor named therein. From the portion of the decision requiring Lucy Christensen to acknowledge Helen as a natural child of the testator, the former and the executor interposed an appeal to the Court of Appeals (CA-G. R. No. 13421-R), but the appellate tribunal elevatedthe same to Us on the ground that the case involves an estate the value of which far exceeds P50,000.00 and thus falls within the exclusive appellate jurisdiction of this Court pursuant to Section 17 (5), Republic Act No. 296.

The principal issue in this litigation is whether the lower court erred in finding that the oppositor Maria Helen Christensen Garcia had been in continous possession of the status of a natural child of the deceased EdwardE. Christensen and in directing Maria Lucy Christensen Daney, recognizeddaughter and instituted heirs of the decedent, to acknowledge the former assuch natural child.

Maria Lucy Christensen was born on April 25, 1922, and Maria Helen Christensen on July 2, 1934, of the same mother, Bernarda Camporedondo, during the period when the latter was publicly known to have been living as common-law wife of Edward E. Chrisiensen. From the facts of the case there can be no question as to Lucy's parentage, but controversy arose when Edward Christensen, in making his last will and testament, disavowed such paternity to Helen and gave her only a legacy of P3,600. ln the course of the proceeding for the probate of the will (Exh, A), Helen introduced documentary and testimonial evidence to support her claim that she, Lucy,was a natural child of the deceased and, therefore, entitled to the hereditaryshare corresponding to such descendant. Several witness testified in herfavor, including the mother Bernarda Camporendondo, her former teachers andother residents of the community, tending to prove that she was known in the locality as a child of the testator and was introduced by the latter to the circle of his friends and acquaintances as his daughter. Family portraits, greeting cards and letters were likewise presented to bolster herassertion that she had always been treated by the deceased and by Lucy herself as a member of the family.

Lucy Christensen and Adolfo Cruz Aznar, as executor, tried to repudiate herclaim by introducing evidence to prove that on or about the period when shewas conceived and born, her mother was carrying an affair with another man,Zosimo Silva, a former laborer in her Paligue plantation. Silva executed an affidavit and even took the witness stand to testify to this effect. Appellants also strived to show that the defendant's solicitations for Helen's welfare and the help extended to her merely sprang out generosity and hammered on the fact that on several occasions, the deceased disclaimed any relationship with her (Exh. O-Daney, Exh. Q-Daney, Exh. Z-Daney, Exh. 8-Helen).

Going over the evidence adduced during the trial, it appears indubitable that on or about the period when Helen was born, Bernarda Camporendondo had established residence at her plantation at Paligue, Davao, and that although Edward Christensen stayed in Davao City to manage his merchandising business, he spent the weekends with the former and their child Lucy in the Christensenplantation. Even granting that Zosimo Silva at his stage fitted himself intothe picture, it cannot be denied that Helen's mother and the deceased weregenerally and publicly known to be living together as husband and wife. Thismust have been the reason why Christensen from Helen's birth in 1934 providedfor her maintenance; shouldered the expenses for her education to the extentthat she was even enrolled as an intern in an exclusive college for girls inManila; tolerated or allowed her carrying the surname "Christensen", and ineffect gaver her the attention and care that a father would only do to this offspring. We should take note that nothing appears on record to show thatChristensen ever entertained any doubt or disputed Helen's paternity. Hisrepudations of her relationship with him came about only after he andBernarda Comperodondo parted ways in March, 1950, and apparently after Helentook sides with her mother. Furthermore, it seems that despite that decedent's desire that she continue her studies, Helen ignored the same andgot married to a man for Christensen held no high esteem. We may state at hisjuncture that while it is true that herein appellants introduced witnesses todisprove oppositor'r claim, the lower Court that had the opportunity to observe the conduct of the witnesses while testifying and could better gaugetheir credibility and impartiality in the case, arrived at the conclusion that Maria Helen Christensen had established that she had been in continouspossessions of the status of a natural child of the deceased. Considering the preponderant evidence on record, We see no reason to reverse said ruling.The testator' lastacts cannot be made the criterion in determining whether oppositor was his child or not, for human frailty and parental arrogance maydraw a person to adopt unnatural or harsh measures against an erring child orone who displeases just so the weight of his authority could be felt. In theconsideration of a claim that one is a natural child, the attitude or directacts of the person

against whom such action is directed or that of his family before the controversy arose or during his lifetime if he predeceases the claimant, and not a single opportunity or an isolated occasions but as a whole, must be taken into account. The possession of such status is one of the cases that gives rise to the right, in favor of the child, of coumpulsaryrecognition. (Art. 283, Civil Code).

The lower Court, however, after making its finding directed Maria Lucy Christensen Daney, an heir of the decedent, to recognize oppositor as a natural child of the deceased. This seems improper. The Civil Code for 2 kinds of acknowledgement of a natural child: voluntary and compulsory. In the first instance, which may be effected in the record of birth, a will, a statement before a court of record or in an authentic writing (Art. 278,Civil Code), court intervention is very nil and not altogether wanting, whereas in the second, judicial pronouncement is essential, and while it is true that the effect of a voluntary and a compulsory acknowledgment onthe right of the child so recognized is the same, to maintain the view of thelower Court would eliminate the distinction between voluntary acts and those brought about by judicial dicta. And if We consider that in the case, where, the presumed parent dies ahead of the child and action for compulsory recogniton is brought against the heirs of the deceased, as in the instant case, the situation would take absurd turn, for the heirs would be compelled to recognize such child as a natural child of the deceased without a properprovision of the law, for as it now stands, the Civil Code only requires a declaration by the court of the child's status as a natural child of the parent who, if living, would be compelled to recognize his offspring as such.Therefore, We hold that in cases of compulsory recognition, as in the case at bar, it would be sufficient that a competent court, after taking into account all the evidence on record, would declare that under any of the circumstances specified by Article 283 of the Civil Code, a child has acquired the status of a natural child of the presumptive parent and as such is entitled to all rights granted it by law, for such declaration is by itself already a judicial recognition of the paternity of the parent concerned which is her against whom the action is directed, are bound to respect.

G.R. No. L-11483

Coming now to Civil Case No. 1076 of the Court of First Instance of Davao, Bernarda Camporendondo claimed in her complaint 1/2 of the properties of thedeceased as co-owner thereof in virtue of her relations with the deceased. She alleged as basis for action that she and the deceased Edward E. Christensen had lived and cohabitated as husband and wife, continously and openly for a period for more than 30 years; that within said period, plaintiff and the deceased acquired real and personal properties through their common effort and industry; and that in virtue of such relationship, she was a co-owner of said properties. As the executor refused to account forand deliver the share allegedly belonging to her despite her repeated demands, she prayed the court that said executor be ordered to submit an inventory and render an accounting of the entire estate of the deceased;to divide the same into 2 equal parts and declare that one of them lawfully belonged to plaintiff; and for such other reliefs as may be deemed just and equitable in the premises. In his answer, the executor denied the avermentsof the complaint, contending that the decedent was the sole owner of the properties left by him as they were acquired through his own efforts; thatplaintiff had never been a co-owner of any property acquired or possessed by the late Edward christensen during his lifetime; that the personal relationship between plaintiff and the deceased was purely clandestinebecause the former habitually lived in her plantation at Paligue, Davao, from the time she acquired the same in 1928; that she also maintained relations with 2 other men; and that the claim of plaintiff would violate the provisions of Article 2253 of the Civil Code as the vested rights of the compulsory heirs of the deceased would be impaired. Defendant thus prayed for the dismissal of the complaint and as counterclaim demanded the sum ofP70.000.00 representing actual, moral and exemplary damages.

Due hearing was conducted thereon and after the parties ad submitted theirrespective memoranda, the lower Court on August 25, 1954, rendered judgmentfinding that the deceased Edward

Christensen and Bernarda Camporendondo,not otherwise suffering from any impediment to contract marriage, lived together as husband and wife without marital ties continously for over 30years until the former's death in 1953; that out of such relations 2 childrenwere born; and that the properties in controversy were acquired by either orboth of them through their work or industry. Relying on Section 144 of theCivil Code which said court considered to have created another mode ofacquiring ownership, plaintiff was held to be entitled to one-half of saidproperties as co-owner thereof in view of her relationship with the deceasedand ordered the executor to account for and deliver the same by her. Fromthis decision, defendant Aznar, as Executor of the will, perfected an appealto the Court of Appeals, but as the property involved in the litigation exceeds P50,000.00 said tribunal elevated the case to Us for consideration.

It is not controverted that at the time of his death, Edward Christensen was the owner of certain properties, including shares of stock in the plantation bearing his name and a general merchandising store in Davao City. It is also undeniable that the deceased and appellee, both capacitated to enter into the married state, maintained relations as husband and wife, continuously and publicly for a considerable number of years which the lower Court declared to be until the death of Christensen in 1953. While as a general rule appellate courts do not usually disturb the lower court's findings of fact, unless said finding is not supported by or totally devoid of or inconsistent with the evidence on record, such finding must ofnecessity be modified to confrom with the evidence if the reviewing tribunalwere to arrive at the proper and just solution of the controversy. In theinstant case, the court a quo overlooked or failed to consider the testimonies of both Lucy and Helen Christensen to the effect that the deceased and their mother Bernarda Camporendondo had some sort of quarrel or misunderstanding and parted ways as of March, 1950, a fact which appelleewas not able to overcome. Taking into account the circumstances of this caseas found by the trial court, with the modification that the cohabitation should appear as continuous from the early 20's until March, 1950, the question left for our determination is whether Bernarda Camporedondo, byreason of such relationship, may be considered as a co-owner of the properties acquired by the deceased during said period and thus entitledto one-half thereof after the latter's death.

Presumably taking judicial notice of the existence in our society of a certain kind of relationship brought about by couples living together as husbands and wives without the benefit of marriage, acquiring and bringingproperties unto said union, and probably realizing that while same may not beacceptable from the moral point of view they are as much entitled to theprotection of the laws as any other property owners, the lawmakersincorporated Article 144 in Republic Act No. 386 (Civil Code of the Philippines) to govern their property relations. Said article read as follows:

ART. 114. When a man and a woman live together as husband and wife, but they are not married, or their marriage is void from the beginning, the property acquired by either or both of them through their work or industry or their wages and salaries shall be governed by the rules of co-ownership.

It must be noted that such form of co-ownership requires that the man and the woman thus living together must not in any way be incapacitated to contract marriage and that the properties realized during their cohabitation be acquired through the work, industry, employment or occupation of both or either of them. And the same thing may be said of whose marriages are by provision of law declared void ab intio. While it is true that these requisites are fully met and satisfied in the case at bar, We must remember that the deceased and herein appellee were already estranged as of March, 1950. There being no provision of law governing the cessation of such informal civil partnership, if ever existed, same may be considered terminated upon their separation or desistance to continue said relations.The Spanish Civil Code which was then enforce contains to counterpart of Article 144 and as the records in the instant case failed to show show thata subsequent reconciliation ever took place and considering that Republic ActNo. 386 which recognizeed such

form of co-ownership went into operation onlyon August 30, 1950, evidently, this later enactment cannot be invoked as basis for appellee's claim.

In determining the question poised by this action We may look upon the jurisprudence then obtaining on the matter. As early as 1925, this Court already declared that where a man and a woman, not suffering from any impediment to contract marriage, live together as husband and wife, an informal civil partnership exists and made the pronouncement that each of them has an intereat in the properties acquired during said union and is entitled to participate therein if said properties were the product oftheir JOINT efforts (Marata vs. Dionio G.R. No. 24449, Dec. 31, 1925). In another case, this Court similarly held that although there is no technical marital partnership between person living maritally without being lawfully married, nevertheless there is between them an informalcivil partnership, and the parties would be entitled to an equal interest where the property is acquired through their JOINT efforts (Lesaca vs. FelixVda. de Lesaca, 91 Phil., 135).

Appellee, claiming that the properties in controversy were the product of their joint industry apparently in her desire to tread on the doctrine laiddown in the aforementioned cases, would lead Us to believe that her help wassolicited or she took a hand in the management of and/or acquisition of thesame. But such assertion appears incredible if We consider that she wasobserved by the trial Court as an illiterate woman who cannot even remembersimple things as the date when she arrived at the Mindanao Estate, when shecommenced relationship with the deceased, not even her approximate age orthat of her children. And considering that aside from her own declaration, which We find to be highly improbable, there appears no evidence to proveher alleged contribution or participation in the acquisition of the properties involved therein, and that in view of the holding of this Courtthat for a claim to one-half of such property to be allowed it must be provedthat the same was acquired through their joint efforts and labor (Flores vs.Rehabilitation Finance Corporation, * 50 Off. Gaz. 1029), We have no recoursebut reverse the holding of the lower Court and deny the claim of BernardaCampredondo. We may further state that even granting, for the sake ofargument, that this case falls under the provisions of Article 144 of theCivil Code, same would be applicable only as far as properties acquiredafter the effectivity of Republic Act 386 are concerned and to no other, forsuch law cannot be given retroactive effect to govern those already possessedbefore August 30, 1950. It may be argued, however, that being a newly created right, the provisions of Section 144 should be made to retroact if only toenforce such right. Article 2252 of the same Code is explicit in thisrespect when it states:

SEC. 2252. Changes made and new provisions and rules laid down by this Code which may prejudice or impair vested or acquired rights in accordance with the old legislation, shall have ro retroactive effect.

xxx             xxx             xxx.

As it cannot be denied that the rights and legitimes of the compulsory heirsof the deceased Edward Christensen would be impaired or diminished if the claim of herein appellee would succeed, the answer to such argument wouldbe simply obvious.

With regard to appellant Aznar's contention that the lower Court erred in admitting the testimony of appellee Bernarda Camporedondo dealing with facts that transpired before the death of Edward Christensen on the ground that it is prohibited by Section 26-(c), Rule 123 of the Rules of Court. We deem it unnecessary to delve on the same because even admitting that the court a quo committed the error assigned, yet it will not affect anymore the outcome of the case in view of the conclusion We have already arrived at on the main issue.

On the strength of the foregoing considerations, We affirm the decision of the lower Court in case G.R. No. L-11484, with the modification that MariaLucy Christensen Daney need not be compelled to acknowledge her sister Maria Helen Christensen Garcia as a natural child of her father Edward E. Christensen, the declaration of the Court in this respect being sufficient to enable her to all the rights inherent to such status.

The decision appealed from in case G.R. No. L-11483 is hereby reversed and another one rendered, dismissing plaintiff's complaint.

Costs are taxed against appellants in G.R. No. L-11484 and against appellee Bernarda Camporedondo in G.R. No. L-11483. It is so ordered.

G.R. No. L-25532             February 28, 1969

COMMISSIONER OF INTERNAL REVENUE, petitioner, vs.WILLIAM J. SUTER and THE COURT OF TAX APPEALS, respondents.

Office of the Solicitor General Antonio P. Barredo, Assistant Solicitor General Felicisimo R. Rosete and Special Attorneys B. Gatdula, Jr. and T. Temprosa Jr. for petitioner. A. S. Monzon, Gutierrez, Farrales and Ong for respondents.

REYES, J.B.L., J.:

          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:

          (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. wasnot 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 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 (compañias 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 (compañia 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 compañias 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.; Arañas, Anno. & Juris. on the N.I.R.C., As Amended, Vol. 1, pp. 88-89). lawphi1.nêt

          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.

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

LAGUNA TRANSPORTATION CO., INC., petitioner-appellant, vs.SOCIAL SECURITY SYSTEM, respondent-appellee.

Yatco & Yatco for appellant.Solicitor General Edilberto Barot, Solicitor Camilo Quiason and Crispin Baizas for appellee.

BARRERA, J.:

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

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

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

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

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

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

5. That after the sale, the said vendees formed an unregistered partnership under the name of Laguna Transportation Company which continued to operate the lines and equipment

bought from the Biñan Transportation Company, in addition to new lines which it was able to secure from the Public Service Commission;

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

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

Name No. of Shares

Amount Subscribed

Amount Paid

Dominador Cruz 333 shares P33,300.00 P9,160.81

Maura Mendoza 333 shares 33,300.00 9,160.81

Gonzalo Mercado 66 shares 6,600.00 1,822.49

Artemio Mercado 94 shares 9,400.00 2,565.90

Florentino Mata 110 shares 11,000.00 3,021.54

Sabina Borja     64 shares       6,400.00       1,750.00

1,000 shares P100,000.00 P27,481.55

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

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

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

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

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

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

Wherefore, the Court is of the opinion and so declares that the petitioner was an employer engaged in business as common carrier which had been in operation for at least two years

prior to the enactment of Republic Act No. 1161, as amended by Republic Act 1792 and by virtue thereof, it was subject to compulsory coverage under said law. . . .

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

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

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

SEC. 9 Compulsory Coverage. — Coverage in the System shall be compulsory upon all employees between the ages of sixteen and sixty years, inclusive, if they have been for at least six months in the service of an employer who is a member of the System. Provided, That the Commission may not compel any employer to become a member of the System unless he shall have been in operation for at least two years . . . . (Italics supplied.).

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

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

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

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

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

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

G.R. No. L-9996           October 15, 1957

EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA, petitioners, vs.THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents.

Santiago F. Alidio and Angel S. Dakila, Jr., for petitioner.Office of the Solicitor General Ambrosio Padilla, Assistant Solicitor General Esmeraldo Umali and Solicitor Felicisimo R. Rosete for Respondents.

CONCEPCION, J.:

This is a petition filed by Eufemia Evangelista, Manuela Evangelista and Francisca Evangelista, for review of a decision of the Court of Tax Appeals, the dispositive part of which reads:

FOR ALL THE FOREGOING, we hold that the petitioners are liable for the income tax, real estate dealer's tax and the residence tax for the years 1945 to 1949, inclusive, in accordance with the respondent's assessment for the same in the total amount of P6,878.34, which is hereby affirmed and the petition for review filed by petitioner is hereby dismissed with costs against petitioners.

It appears from the stipulation submitted by the parties:

1. That the petitioners borrowed from their father the sum of P59,1400.00 which amount together with their personal monies was used by them for the purpose of buying real properties,.

2. That on February 2, 1943, they bought from Mrs. Josefina Florentino a lot with an area of 3,713.40 sq. m. including improvements thereon from the sum of P100,000.00; this property has an assessed value of P57,517.00 as of 1948;

3. That on April 3, 1944 they purchased from Mrs. Josefa Oppus 21 parcels of land with an aggregate area of 3,718.40 sq. m. including improvements thereon for P130,000.00; this property has an assessed value of P82,255.00 as of 1948;

4. That on April 28, 1944 they purchased from the Insular Investments Inc., a lot of 4,353 sq. m. including improvements thereon for P108,825.00. This property has an assessed value of P4,983.00 as of 1948;

5. That on April 28, 1944 they bought form Mrs. Valentina Afable a lot of 8,371 sq. m. including improvements thereon for P237,234.34. This property has an assessed value of P59,140.00 as of 1948;

6. That in a document dated August 16, 1945, they appointed their brother Simeon Evangelista to 'manage their properties with full power to lease; to collect and receive rents; to issue receipts therefor; in default of such payment, to bring suits against the defaulting tenants; to sign all letters, contracts, etc., for and in their behalf, and to endorse and deposit all notes and checks for them;

7. That after having bought the above-mentioned real properties the petitioners had the same rented or leases to various tenants;

8. That from the month of March, 1945 up to an including December, 1945, the total amount collected as rents on their real properties was P9,599.00 while the expenses amounted to P3,650.00 thereby leaving them a net rental income of P5,948.33;

9. That on 1946, they realized a gross rental income of in the sum of P24,786.30, out of which amount was deducted in the sum of P16,288.27 for expenses thereby leaving them a net rental income of P7,498.13;

10. That in 1948, they realized a gross rental income of P17,453.00 out of the which amount was deducted the sum of P4,837.65 as expenses, thereby leaving them a net rental income of P12,615.35.

It further appears that on September 24, 1954 respondent Collector of Internal Revenue demanded the payment of income tax on corporations, real estate dealer's fixed tax and corporation residence tax for the years 1945-1949, computed, according to assessment made by said officer, as follows:

INCOME TAXES

1945 14.84

1946 1,144.71

1947 10.34

1948 1,912.30

1949 1,575.90

Total including surcharge and compromise

P6,157.09

REAL ESTATE DEALER'S FIXED TAX

1946 P37.50

1947 150.00

1948 150.00

1949 150.00

Total including penalty P527.00

RESIDENCE TAXES OF CORPORATION

1945 P38.75

1946 38.75

1947 38.75

1948 38.75

1949 38.75

Total including surcharge P193.75

TOTAL TAXES DUE P6,878.34.

Said letter of demand and corresponding assessments were delivered to petitioners on December 3, 1954, whereupon they instituted the present case in the Court of Tax Appeals, with a prayer that "the decision of the respondent contained in his letter of demand dated September 24, 1954" be reversed, and that they be absolved from the payment of the taxes in question, with costs against the respondent.

After appropriate proceedings, the Court of Tax Appeals the above-mentioned decision for the respondent, and a petition for reconsideration and new trial having been subsequently denied, the case is now before Us for review at the instance of the petitioners.

The issue in this case whether petitioners are subject to the tax on corporations provided for in section 24 of Commonwealth Act. No. 466, otherwise known as the National Internal Revenue Code, as well as to the residence tax for corporations and the real estate dealers fixed tax. With respect to the tax on corporations, the issue hinges on the meaning of the terms "corporation" and "partnership," as used in section 24 and 84 of said Code, the pertinent parts of which read:

SEC. 24. Rate of tax on corporations.—There shall be levied, assessed, collected, and paid annually upon the total net income received in the preceding taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, no matter how created or organized but not including duly registered general co-partnerships (compañias colectivas), a tax upon such income equal to the sum of the following: . . .

SEC. 84 (b). The term 'corporation' includes partnerships, no matter how created or organized, joint-stock companies, joint accounts (cuentas en participacion), associations or insurance companies, but does not include duly registered general copartnerships. (compañias colectivas).

Article 1767 of the Civil Code of the Philippines provides:

By the contract of partnership two or more persons bind themselves to contribute money, properly, or industry to a common fund, with the intention of dividing the profits among themselves.

Pursuant to the article, the essential elements of a partnership are two, namely: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent to divide the profits among the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions for monetary gain and then divide the same among themselves, because:

1. Said common fund was not something they found already in existence. It was not property inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial portion thereof in order to establish said common fund.

2. They invested the same, not merely not merely in one transaction, but in a series of transactions. On February 2, 1943, they bought a lot for P100,000.00. On April 3, 1944, they purchased 21 lots for P18,000.00. This was soon followed on April 23, 1944, by the acquisition of another real estate for P108,825.00. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24) acquired and transactions undertaken, as well as the brief interregnum between each, particularly the last three purchases, is strongly indicative of a pattern or common design that was not limited to the conservation and preservation of the aforementioned common fund or even of the property acquired by the petitioners in February, 1943. In other words, one cannot but perceive a character of habitually peculiar to business transactions engaged in the purpose of gain.

3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners herein. The properties were leased separately to several persons, who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for petitioners do not even suggest that there has been any change in the utilization thereof.

4. Since August, 1945, the properties have been under the management of one person, namely Simeon Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have been handled as if the same belonged to a corporation or business and enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15) years, since the first property was acquired, and over twelve (12) years, since Simeon Evangelista became the manager.

6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set up already adverted to, or on the causes for its continued existence. They did not even try to offer an explanation therefor.

Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, the collective effect of these circumstances is such as to leave no room for doubt on the existence of said intent in petitioners herein. Only one or two of the aforementioned circumstances were present in the cases cited by petitioners herein, and, hence, those cases are not in point.

Petitioners insist, however, that they are mere co-owners, not copartners, for, in consequence of the acts performed by them, a legal entity, with a personality independent of that of its members, did not come into existence, and some of the characteristics of partnerships are lacking in the case at bar. This pretense was correctly rejected by the Court of Tax Appeals.

To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking, are distinct and different from "partnerships". When our Internal Revenue Code includes "partnerships" among the entities subject to the tax on "corporations", said Code must allude, therefore, to organizations which are not necessarily "partnerships", in the technical sense of the term. Thus, for instance, section 24 of said Code exempts from the aforementioned tax "duly registered general partnerships which constitute precisely one of the most typical forms of partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term corporation includes partnerships, no matter how created or organized." This qualifying expression clearly indicates that a joint venture need not be undertaken in any of the standard forms, or in conformity with the usual requirements of the law on partnerships, in order that one could be deemed constituted for purposes of the tax on corporations. Again, pursuant to said section 84(b), the term "corporation" includes, among other, joint accounts, (cuentas en participation)" and "associations," none of which has a legal personality of its own, independent of that of its members. Accordingly, the lawmaker could not have regarded that personality as a condition essential to the existence of the partnerships therein referred to. In fact, as above stated, "duly registered general copartnerships" — which are possessed of the aforementioned personality — have been expressly excluded by law (sections 24 and 84 [b] from the connotation of the term "corporation" It may not be amiss to add that petitioners' allegation to the effect that their liability in connection with the leasing of the lots above referred to, under the management of one person — even if true, on which we express no opinion — tends to increase the similarity between the nature of their venture and that corporations, and is, therefore, an additional argument in favor of the imposition of said tax on corporations.

Under the Internal Revenue Laws of the United States, "corporations" are taxed differently from "partnerships". By specific provisions of said laws, such "corporations" include "associations, joint-stock companies and insurance companies." However, the term "association" is not used in the aforementioned laws.

. . . in any narrow or technical sense. It includes any organization, created for the transaction of designed affairs, or the attainment of some object, which like a corporation, continues notwithstanding that its members or participants change, and the affairs of which, like corporate affairs, are conducted by a single individual, a committee, a board, or some other group, acting in a representative capacity. It is immaterial whether such organization is created by an agreement, a declaration of trust, a statute, or otherwise. It includes a voluntary association, a joint-stock corporation or company, a 'business' trusts a 'Massachusetts' trust, a 'common law' trust, and 'investment' trust (whether of the fixed or the management type), an interinsuarance exchange operating through an attorney in fact, a partnership association, and any other type of organization (by whatever name known) which is not, within the meaning of the Code, a trust or an estate, or a partnership. (7A Mertens Law of Federal Income Taxation, p. 788; emphasis supplied.).

Similarly, the American Law.

. . . provides its own concept of a partnership, under the term 'partnership 'it includes not only a partnership as known at common law but, as well, a syndicate, group, pool, joint venture or other unincorporated organizations which carries on any business financial operation, or venture, and which is not, within the meaning of the Code, a trust, estate, or a corporation. . . (7A Merten's Law of Federal Income taxation, p. 789; emphasis supplied.)

The term 'partnership' includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on, . . .. ( 8 Merten's Law of Federal Income Taxation, p. 562 Note 63; emphasis supplied.) .

For purposes of the tax on corporations, our National Internal Revenue Code, includes these partnerships — with the exception only of duly registered general copartnerships — within the purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein constitute a partnership, insofar as said Code is concerned and are subject to the income tax for corporations.

As regards the residence of tax for corporations, section 2 of Commonwealth Act No. 465 provides in part:

Entities liable to residence tax.-Every corporation, no matter how created or organized, whether domestic or resident foreign, engaged in or doing business in the Philippines shall pay an annual residence tax of five pesos and an annual additional tax which in no case, shall exceed one thousand pesos, in accordance with the following schedule: . . .

The term 'corporation' as used in this Act includes joint-stock company, partnership, joint account (cuentas en participacion), association or insurance company, no matter how created or organized. (emphasis supplied.)

Considering that the pertinent part of this provision is analogous to that of section 24 and 84 (b) of our National Internal Revenue Code (commonwealth Act No. 466), and that the latter was approved on June 15, 1939, the day immediately after the approval of said Commonwealth Act No. 465 (June 14, 1939), it is apparent that the terms "corporation" and "partnership" are used in both statutes with substantially the same meaning. Consequently, petitioners are subject, also, to the residence tax for corporations.

Lastly, the records show that petitioners have habitually engaged in leasing the properties above mentioned for a period of over twelve years, and that the yearly gross rentals of said properties from June 1945 to 1948 ranged from P9,599 to P17,453. Thus, they are subject to the tax provided in section 193 (q) of our National Internal Revenue Code, for "real estate dealers," inasmuch as, pursuant to section 194 (s) thereof:

'Real estate dealer' includes any person engaged in the business of buying, selling, exchanging, leasing, or renting property or his own account as principal and holding himself out as a full or part time dealer in real estate or as an owner of rental property or properties rented or offered to rent for an aggregate amount of three thousand pesos or more a year. . . (emphasis supplied.)

Wherefore, the appealed decision of the Court of Tax appeals is hereby affirmed with costs against the petitioners herein. It is so ordered.

Bengzon, Paras, C.J., Padilla, Reyes, A., Reyes, J.B.L., Endencia and Felix, JJ., concur.

BAUTISTA ANGELO, J., concurring:

I agree with the opinion that petitioners have actually contributed money to a common fund with express purpose of engaging in real estate business for profit. The series of transactions which they had undertaken attest to this. This appears in the following portion of the decision:

2. They invested the same, not merely in one transaction, but in a series of transactions. On February 2, 1943, they bought a lot for P100,000. On April 3, 1944, they purchase 21 lots for P18,000. This was soon followed on April 23, 1944, by the acquisition of another real state for P108,825. Five (5) days later (April 28, 1944), they got a fourth lot for P237,234.14. The number of lots (24) acquired and transactions undertaken, as well as the brief interregnum between each, particularly the last three purchases, is strongly indicative of a pattern or common design that was not limited to the conservation and preservation of the aforementioned common fund or even of the property acquired by the petitioner in February, 1943, In other words, we cannot but perceive a character of habitually peculiar to business transactions engaged in for purposes of gain.

I wish however to make to make the following observation:

Article 1769 of the new Civil Code lays down the rule for determining when a transaction should be deemed a partnership or a co-ownership. Said article paragraphs 2 and 3, provides:

(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of the property;

(3) The sharing of gross returns does not of itself establish partnership, whether or not the person sharing them have a joint or common right or interest in any property from which the returns are derived;

From the above it appears that the fact that those who agree to form a co-ownership shared or do not share any profits made by the use of property held in common does not convert their venture into a partnership. Or the sharing of the gross returns does not of itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. This only means that, aside from the circumstance of profit, the presence of other elements constituting partnership is necessary, such as the clear intent to form a partnership, the existence of a judicial personality different from that of the individual partners, and the freedom to transfer or assign any interest in the property by one with the consent of the others (Padilla, Civil Code of the Philippines Annotated, Vol. I, 1953 ed., pp. 635- 636).

It is evident that an isolated transaction whereby two or more persons contribute funds to buy certain real estate for profit in the absence of other circumstances showing a contrary intention cannot be considered a partnership.

Persons who contribute property or funds for a common enterprise and agree to share the gross returns of that enterprise in proportion to their contribution, but who severally retain the title to their respective contribution, are not thereby rendered partners. They have no common stock or capital, and no community of interest as principal proprietors in the business itself which the proceeds derived. (Elements of the law of Partnership by Floyd R. Mechem, 2n Ed., section 83, p. 74.)

A joint venture purchase of land, by two, does not constitute a copartnership in respect thereto; nor does not agreement to share the profits and loses on the sale of land create a partnership; the parties are only tenants in common. (Clark vs. Sideway, 142 U.S. 682, 12 S Ct. 327, 35 L. Ed., 1157.)

Where plaintiff, his brother, and another agreed to become owners of a single tract of reality, holding as tenants in common, and to divide the profits of disposing of it, the brother and the other not being entitled to share in plaintiff's commissions, no partnership existed as between

the parties, whatever relation may have been as to third parties. (Magee vs. Magee, 123 N. E. 6763, 233 Mass. 341.)

In order to constitute a partnership inter sese there must be: (a) An intent to form the same; (b) generally a participating in both profits and losses; (c) and such a community of interest, as far as third persons are concerned as enables each party to make contract, manage the business, and dispose of the whole property. (Municipal Paving Co. vs Herring, 150 P. 1067, 50 Ill. 470.)

The common ownership of property does not itself create a partnership between the owners, though they may use it for purpose of making gains; and they may, without becoming partners, agree among themselves as to the management and use of such property and the application of the proceeds therefrom. (Spurlock vs. Wilson, 142 S. W. 363, 160 No. App. 14.)

This is impliedly recognized in the following portion of the decision: "Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, the collective effect of these circumstances (referring to the series of transactions) such as to leave no room for doubt on the existence of said intent in petitioners herein."

FORTIS VS GUTIERREZ HERMANOS

LYONS VS. ROSENDALE

G.R. No. L-27741           July 29, 1968

R.B. INDUSTRIAL DEVELOPMENT COMPANY, LIMITED, and RAY N. KITTILSTVEDT, petitioners, vs.HON. MANUEL LOPEZ ENAGE, Judge of the Court of First Instance of Agusan, Branch II, and EASTERN TIMBER CORPORATION, respondents.

Simon F. Puyot, Edelmiro A. Amante and Virgilio N. Atega, Sr. for petitioners.Honorato S. Hermosisima and Ruben L. Roxas, for respondents.

SANCHEZ, J.:

This original action for certiorari and prohibition asks us to strike down the power of the Court of First Instance of Agusan to proceed with its Civil Case 1087.1 Petitioners R.B. Industrial Development Company, Limited (Industrialfor short) and Ray N. Kittilstvedt, with vehemence say, inter alia, that private respondent Eastern Timber Corporation (hereinafter referred to simply as Eastern) has no cause of action against them; and, that the lower court is without jurisdiction to take cognizance of said case. Petitioners express grave concern over the great probability that the lower court would issue an injunction to prevent Industrial from logging within the forest area covered by its concession. We, accordingly, issued a cease and-desist order upon petitioners' application.

The present controversy has its roots in facts now to be recited:

Ray N. Kittilstvedt was granted by the Bureau of Forestry a forest concession in Cabadbaran, Agusan, with an area of 6,850 hectares under Ordinary Timber License 1286-'59 (New) dated January 22, 1959 to expire on June 30, 1959. Said license was on its face non-transferable. And yet, on December 22, 1959, i.e., five months and twenty-nine days after the license expired, Eastern, at the time still in the process of organization,2 became Kittilstvedt's assignee of the lapsed license aforesaid in exchange for 400 shares with a par value of P40,000 of Eastern's capital stock. Soon thereafter, that is, on March 30, 1960, Kittilstvedt sold his 400 shares in Eastern for the same consideration of P40,000 to Democrito O. Plaza, now Eastern's stockholder. Of interest is that immediately after the transfer of the license, Kittilstvedt was made vice-president of Eastern. Claim is now advanced that inspite of the fact that Kittilsvedt is supposed to own 96.15% of the paid-up capital stock,3 he (vice-president) did not share in the corporation's management.

Kittilstvedt's timber license was extended on March 6, 1963, denominated as Ordinary Timber License 878-'63 in his name. It was again renewed, likewise in his name, on October 27, 1965, this time as Ordinary Timber License 847-61566. While the license appears in Kittilstvedt's name, averment is made by Eastern that the expenses for the renewal of the license such as application fees, license fees, forestry bonds and other incidental expenses were paid for by Eastern.

The day following the issuance of the last renewal license (847-61566), or on October 28, 1965, Kittilstvedt transferred the same to Industrial.

Industrial thus obtained its own Ordinary Timber License 981-103166 (New).

On December 21, 1965, Eastern lodged a complaint with the Director of Forestry against R.B. Mining Co., Ltd. (instead of Industrial) and Kittilstvedt, praying for (1) the cancellation of the ordinary timber license allegedly issued in the name of R.B. Mining Co., Ltd., and (2) the issuance in lieu thereof of another license in the name of Eastern; and (3) in the meantime, for an order stopping R.B. Mining Co., Ltd. or any person to conduct logging operations within the forest area covered by Ordinary Timber License 981-103166 (New). The remedy pursued in the Bureau of Forestry was thereafter abandoned.

Came the court case (Civil Case 1087) filed on February 4, 1966 in the court of first instance adverted to at the beginning of this opinion.4 This time, Eastern sued Kittilstvedt and Industrial asking for the following reliefs: (1) preliminary injunction to stop logging operations in the area under Industrial's timber license; (2) nullification of the transfer of Kittilstvedt to Industrial; (3) declaration that plaintiff is the owner of the said timber license appearing in the name of Industrial; (4) directing defendants to transfer said license in Eastern's name; and, (5) accounting by defendants of logs and forest products, damages, attorneys' fees, and costs.

This complaint was met by defendants' motion to dismiss mainly upon the two grounds heretofore mentioned. The court held in abeyance resolution on the motion to dismiss. Defendants moved to reconsider.

Then, on May 2, 1967, the trial court issued an order5 (1) denying the motion to reconsider; (2) denying plaintiff'sex-parte motion to declare defendants in default; (3) ordering defendants to answer the complaint within the reglementary period; and (4) setting for on June 5, 1967 plaintiff's urgent motion for preliminary injunction.

On June 1, 1967, defendants went to the Court of Appeals on certiorari (CA-G.R. 31431-R). Since jurisdiction was the main question involved therein, cognizable only by the Supreme Court, the Court of Appeals, on June 14, 1967, dismissed the petition.

Meanwhile, on June 5, 1967, at a time when the certiorari petition was pending consideration by the Court of Appeals, respondent judge issued two orders: the first, declaring defendants in default and denying their counsel's request to defer the proceedings, and giving leave to plaintiff to present evidence before the deputy clerk of court; the second, authorizing the deputy clerk of court to receive plaintiff's evidence in connection with the latter's (Eastern's) application for a preliminary injunction.

Defendants below, Industrial and Kittilstvedt, lost no time in coming to this Court on certiorari and prohibition aforesaid.

We will now proceed to discuss the legal issues tendered by the petition and the return, and the written arguments of the parties. 1äwphï1.ñët

1. The forefront question is whether or not Eastern, plaintiff below (respondent here), has a cause of action against defendants (herein petitioners) Industrial and Kittilstvedt. For, indeed, if Eastern did not have a cause of action, it would be futile to proceed any further.

Eastern's cause of action is anchored on the deed of assignment and affidavit both executed by Kittilstvedt on December 29, 1959 conveying to Eastern all his rights under Ordinary Timber License 1286-'59 (New). But did Eastern acquire any right under these documents to entitle it to sue for the performance of any prestation thereunder by Kittilstvedt?

Our answer is No. First, the license had already expired. There was no license to transfer. Second, the license itself says that such license is non-transferable. And, Eastern is duty bound to be guided by that prohibition. Third, the conveyance was illegal. Ex dolo malo non oritur actio. A party to an illegal contract cannot come to court and ask to have his illegal objects carried out.6 Forestry Administrative Order No. 21, dated September 18, 1954,7expressly prohibits such transfer. This order reads:

The transfer, sale or conveyance of any license, permit or lease issued by the Director of Forestry, now or hereafter authorized under the forest laws, rules and regulations in favor of any individual, companies or private corporations within the period of three years after the issuance of such license, permit or lease, or any transaction under any guise which will allow or permit others to enjoy the privilege granted therein, ishereby prohibited.

After the period of three years from the issuance of the license, permit or lease, the licensee, permittee or lessee may, with the approval of the Secretary of Agriculture and Natural Resources, be allowed to transfer, sell or convey his license, permit or lease in favor of qualified persons, companies or corporations, providedthat the licensee, permittee or lessee has fully complied with all the requirements of the law and the rules and regulations thereunder promulgated by the Director of Forestry; and provided further, that there is no evidence that such transfer, sale or conveyance is being made for purposes of speculation.8

Forestry Administrative Order No. 21 was issued by the Secretary of Agriculture and Natural Resources upon recommendation of the Director of Forestry on authority of Sections 79(b) and 1817 of the Revised administrative Code. Judicial test has since recognized that administrative orders of this nature have the force and effect of law.9

Why then should transfer of licenses be regulated, by the Bureau of Forestry?

We look at Forestry Administrative Order No. 21 just transcribed. We perceive that it is not without reason. By Section 1824 of the Revised Administrative Code, the governing principle is that the public forests of the Philippines "shall be held and administered for the protection of the public interests, the utility and safety of the forests, and the perpetuation thereof in productive condition by wise use". This is but an echo, of Section 1817, of the same Code which, speaking of regulations of the Bureau of Forestry, states that such "regulations of the Bureau of Forestry with the approval of the Department Head first had, shall, among other things contain provisions deemed expedient or necessary to secure the protection and conservation of the public forests in such manner as to insure a continued supply of valuable timber and other forest products for the future, and regulating the use and occupancy of the forests and forest reserves, to the same end".

We have recently said that there is the pressing need for forest preservation, conservation, protection, development and reforestation.10 And, it is to be observed that in the administrative order heretofore adverted to, there is a discernible purpose at once laudable. With tremendous profits that logging operations may bring, the probability of the government having to cope with unscrupulous loggers is not altogether remote. The transfer, sale or conveyance of forest concessions, so the rule says, should not be "made for purposes of speculation".One without a legitimate purpose to operate a logging concession may obtain a license to be able to peddle it and thus make the proverbial quick peso. There is the other concessionaire already with a license covering a sufficient area, who may

be driven by greed to acquire more with detriment to public interests. Is it then too far-fetched to say that it is the bounden duty of those called upon to enforce our forest laws to minimize, if not totally curb, the activities or emergence of those speculators and dummies?

It is within the area of the State's concern to encourage the exploitation of our natural resources by honest, qualified licensees who are willing and able to exert their utmost efforts and dare the risks and privations concomitant to the opening of frontiers. Likewise, it is the State's responsibility to see to it that benefits accrue both to the concessionaire and the country in general. It is not out of place then to say that the law may grant or withhold the transfer of timber licenses.

To repeat, Eastern seeks relief in the court below upon a deed of conveyance of a forest license eleven months and seven days after the issuance thereof, and after its term has expired. This is contrary to the prohibition in Forestry Administrative Order No. 21. It is illegal. Eastern acquired no rights therefrom. Eastern cannot compel Kittilstvedt to comply with the terms of that contract. For, there is no duty where the law forbids.11 And even if we concede that the transfer were valid, the same would not produce any effect until and unless approved by the Director of Forestry and the Secretary of Agriculture and Natural Resources.

And the suit below being one for specific performance of an illegal conveyance will not prosper for lack of cause of action.

2. Eastern may complain about its investment. We are in no position to bring to the surface what has actually transpired in the relations between Eastern and Kittilstvedt. We observe though that the consideration in shares of stock for P40,000 was purportedly given on December 29, 1959. Quite interesting to note is that there is in the record a statement that the same shares of stock were transferred by Kittilstvedt to Democrito O. Plaza on March 30, 1960 in consideration of P40,000. And yet, surprisingly enough, the first payment of P10,000 (on the P40,000) was made by Democrito O. Plaza on December 4, 1959 in cash, which according to the receipt signed by Kittilstvedt was for "partial payment of the purchase price of my 400 shares of stock with the Eastern Timber Corporation". That payment to Kittilstvedt of P10,000, it thus appears, preceded even the transfer of the license and the acquisition by Kittilstvedt of the stocks sold. Not escaping our notice also is the fact that for over five years, Eastern made no move to transfer to its name Kittilstvedt's license. But, by its own representations to the Bureau of Forestry and to this Court, Eastern says that it spent "for the renewal of the license such as application fees, license fees, forestry bonds and other incidental expenses involved in the renewal of the O.T. License issued to Kittilstvedt".12 It is a wonder, too, why, despite his clear majority in stockholdings, Kittilstvedt would complain of being shut off from Eastern's management, when he can easily dispose of the other directors or whip them into line.

The conduct observed by the parties but emphasizes the unique relationship between Kittilstvedt and Eastern and the latter's stockholders.

Those are matters that should first be looked into by the Bureau of Forestry. Then the Bureau of Forestry, on the basis of its findings of fact, must first rule on whether or not transfer of license should be allowed, and its conclusions if favorable must be approved by the Secretary of Agriculture and Natural Resources. It is only after all these shall have happened — and they have not — that Eastern can lay claim, if any it has, to the transfer of the license in its name. And again we say that Eastern has no cause of action.

3. We now come to the jurisdictional issue. The thrust of the reliefs sought by Eastern is that it be, declared owner of the timber license now in the name of Industrial, and that, in consequence, the transfer thereof by Kittilstvedt to Industrial be annulled. But the question of whether or not Industrial's timber license should be cancelled and a new one issue in Eastern's name in lieu thereof is

one, upon the facts of record, beyond the reach of the courts. Such a prerogative is vested in the Bureau of Forestry by Section 1816 of the Revised Administrative Code. This codal provision reads:

SEC. 1816. Jurisdiction of Bureau of Forestry. — The Bureau of Forestry shall have jurisdiction and authority over the demarcation protection, management, reproduction, reforestation, occupancy, and use of all public forests and forest reserves and over the granting of licenses for game, and fish, and for the taking of forest products, including stone and earth, therefrom.

A doctrine long recognized is that where the law confines in an administrative office the power to determine particular questions or matters, upon the facts to be presented, the jurisdiction of such office shall prevail over the courts.13 Respondent Eastern had gone to the Bureau of Forestry. It withdrew its complaint. Eastern may not go to the courts of justice which have no jurisdiction in the first instance to approve the alleged transfer and to direct the issuance of the license in favor of Eastern. At this stage, the jurisdiction of the court may not be invoked.

Absent a cause of action and the lower court's jurisdiction, there was grave abuse of discretion in that court's refusal to dismiss the case under review. For the reasons given, the petition for certiorari and prohibition is hereby granted; the writ of preliminary injunction heretofore issued is made permanent; and the respondent judge or whoever takes his place is hereby directed to dismiss Civil Case 1087 of the Court of First Instance of Agusan entitled "Eastern Timber Corporation, Plaintiff, vs. Ray N. Kittilstvedt and R. B. Industrial Development Company, Limited, Defendants".

Costs against private respondent Eastern Timber Corporation. So ordered.

MAGBANUA VS PESAYO