Testate Estate of Mota v. SerraFebruary 14, 1925TESTATE ESTATE OF LAZARO MOTA, deceased, ET AL.,plaintiffs-appellants,vs.SALVADOR SERRA,defendant-appellee.

VILLAMOR,J.:

SUMMARY: Serra, as owner of Palma Central, entered into a contract of partnership with Mota et al, as owners of San Isidro Central, for the construction of a railroad line. In said agreement, they stipulated that expenses will be borne by both parties 50-50 although expenses will be initially for the account of Mota et. al. Subsequently however, Serra sold Palma to Whitaker & Concepcion, the latter expressing awareness of above contract and willingness to subrogate themselves into the obligations therefor. Thereafter, Concepcion & Whitaker also bought from Mota et al. the of the railroad line and they agreed that the partnership "Palma" and "San Isidro," formed between Serra & Mota et al, should be dissolved upon the execution of the contract. Serra being unable to pay his obligation under the contract of partnership (1/2 of the expenses), Mota et. al. instituted an action for collection. As defense, Serra alleged that at the termination of the partnership between them, his obligation therein has been extinguished. HELD: Serra is still liable to the partnership.DOCTRINE: The dissolution of a firm does not relieve any of its members from liability for existing obligations, although it does save them from new obligations to which they have not expressly or impliedly assented, and any of them may be discharged from old obligations by novation or other form of release. A partnership continues, even after dissolution, for the purpose of winding up its affairs. At the termination of the object for which it was created the partnership is extinguished, pending the winding up of some incidents and obligations of the partnership, but in such case, the partnership will be reputed as existing until the juridical relations arising out of the contract are dissolved. A partnership cannot be considered as extinguished until all the obligations pertaining to it are fulfilled.FACTS: Feb. 1, 1919: Defendant Salvador Serra, Lazaro Mota, now deceased, and Juan J. Vidaurrazaga for himself and in behalf of his brother, Felix and Dionisio Vidaurrazaga, entered into a contract of partnership for the construction and exploitation of a railroad line of about 10 kms. from the "San Isidro" and "Palma" centrals to the place known as "Nandong." Original capital stipulated: P150,000 to be paid by parties in equal parts Mota et. al. were entrusted with the administration of the partnership. Mota et al owns "San Isidro" Central while Serra owns Palma Central

The expenses until the termination of which shall be for the account of the "San Isidro" Central (Mota et al) of expenses shall be borne by the "Palma" Central (Serra) with the obligation to reimburse Mota et al within 5 years with interest at the rate of 10% p.a. The agreed capital (P150k) however, did not prove sufficient, as the expenses up to May 15, 1920, had reached P226,092.92 Jan. 29, 1920: Serra entered into a contract of sale with Venancio Concepcion, Phil. C. Whitaker, and Eusebio R. de Luzuriaga, Serra sold the estate and central known as "Palma" with its running business, as well as all the improvements, machineries and buildings, real and personal properties, rights, choses in action and interests, including the sugar plantation of the harvest year of 1920 to 1921, covering all his property They were willing to assume the Serra's obligation to Mota et al Contract, par. 5: xxx The vendee hereby obligates himself to respect the aforesaid contract (Contract of Partnership) and all obligations arising therefrom. Before the delivery to the purchasers of thehaciendathus sold, Luzuriaga renounced all his rights under the contract of sale in favor of Concepcion & Whitaker. July 17, 1920: Thus, Concepcion, Whitaker & Serra executed another deed of absolute sale of the said "Palma" Estate for P1,695,961.90.

Serra received at the time of executing the deed and the balance was payable by installments in the form and manner stipulated in the contract. Purchasers guaranteed the unpaid balance of the purchase price by a first and special mortgage in favor of Serra upon thehaciendaand the central with all the improvements, buildings, machineries, and appurtenances then existing on the saidhacienda. Clause 6 of the deed: Whitaker & Concepcion state that they are aware of the contract that Serra has with the proprietors of the "San Isidro" Central and hereby obligate themselves to respect the said contract and subrogate themselves into the rights and obligations thereunder. They also bind themselves to comply with all the contracts heretofore entered by the vendor with the customers, coparceners on shares and employees. Jan. 8, 1921: Concepcion & Whitaker bought from Mota et al. the of the railroad line pertaining to the latter, executing a Contract of Sale. Price: P237,722.15, excluding any amount which Serra might be owing to Mota et al. Of the purchase price, Concepcion & Whitaker paid P47,544.43 only. They agreed that the partnership "Palma" and "San Isidro," formed by the agreement of Feb. 1, 1919 should be dissolved upon the execution of the contract, and that the said partnership agreement should be totally cancelled and of no force and effect whatever. Thus, "Hacienda Palma," with the entire railroad, the subject-matter of the contract of partnership between Mota et al. and Serra, became the property of Whitaker & Concepcion. Whitaker & Concepcion having failed to pay to Serra a part of the purchase price (P750,000), Serra, foreclosed the mortgage upon the saidhacienda. It was adjudicated to him at the public sale for P500,000. He was put in possession including what was planted at the time, together with all the improvements made by Whitaker & Concepcion. Since Serra failed to pay of the amount expended by Mota et al. upon the construction of the railroad line (P113,046.46), as well as Whitaker & Concepcion, Mota et al. instituted the present action. PRAYER: (1) That the deed of Feb. 1, 1919 (Contract of Partnership) be declared valid and binding; (2) That after the execution of the said document, Serra improved economically so as to be able to pay Mota et al. the amount owed, but that he refused to pay either in part or in whole the said amount notwithstanding the several demands made on him for the purpose; and (3) Serra be sentenced to pay Mota et al. P113,046.46, with the stipulated interest at 10% p.a.

Serra set up three special defenses: (1) The novation of the contract by the substitution of the debtor with the conformity of the creditors; (2) the confusion of the rights of the creditor and debtor; and (3) the extinguishment of the contract (Contract of partnership) TC: Absolved Serra from the complaint.

There was a novation of the contract by the substitution of the debtor. Whitaker & Concepcion, upon purchasing the "Palma" Central, were subrogated in the place of the Serra in all his rights and obligations under the contract relating to the railroad line existing between "Palma" and "San Isidro" centrals and Mota et al. agreed to this subrogation

As to the prayer that contract of partnership be declared valid and binding, there was no way of reviving the contract which the parties themselves in interest had spontaneously and voluntarily extinguished thru the Contract of Sale bet. Concepcion, Whitaker & Mota et al. on of the railroad Mota et al. appealed to SC.

ISSUE: Whether Serra cannot be held liable to pay Mota et. al. a part of the cost of the construction of the railroad line stipulated in the contract of partnership by reason of the dissolution of the partnership? (NO, Serra is liable)RATIO:

NOVATION

Serra: By the substitution of the debtor with the consent of the creditor, the obligation of Serra to pay his obligation under the contract of partnership was extinguished since there was a novation of the contract

SC: There was no novation. There was none intended; Mota et. al have not expressly consented to the substitution of Serra.

It should be noted that in order to give novation its legal effect, the law requires that the creditor should consent to the substitution of a new debtor. This consent must be given expressly for the reason that, since novation extinguishes the personality of the first debtor who is to be substituted by new one, it implies on the part of the creditor a waiver of the right that he had before the novation which waiver must be express

The fact that Phil. C. Whitaker and Venancio Concepcion were willing to assume the Serra's obligation to Mota et al. is of no avail, if the latter have not expressly consented to the substitution of the first debtor. Letter presented as proof of alleged consent of Mota et. al to the substitution of Whitaker & Concepcion only shows that they asked the two to be their new partners (not substituted). It is natural that Mota et al. should have done this. Still, there was nothing to show the express consent, the manifest and deliberate intention of Estate of Mota et al. to exempt Serra from his obligation and to transfer it to his successors in interest, Whitaker & Concepcion. Serra transferred hishaciendato C. Whitaker & Concepcion and made it known to Mota et al. that the new owners would hold themselves liable for the cost of constructing the said railroad line. Mota et al. could not prevent the Serra from selling to them his "Hacienda Palma" with the rights that he had over the railroad in question. Serra ceased to be a partner in said line and, therefore, Mota et al. had to take the vendees as their new partners. Mota et al. had to come to an understanding with the new owners of the "Hacienda Palma" in connection with the railroad line "Palma-San Isidro-Nandong." Mota et al. were not a party to the Contract of Sale between Serra, Whittaker, Concepcion & Luzuriaga. No stipulation whereby the obligation of the Serra was novated with the consent of the creditorMERGING OF DEBTOR & CREDITOR

Serra: There was a merger of the rights of debtor and creditor, whereby the fulfillment of the obligation became extinguished. Debt of Serra was transferred to Whitaker & Concepcion by the Contract of Sale bet. Serra, Whittaker, Concepcion & Luzuriaga.

These in turn acquired the credit of the Testate Estate of Lazaro Mota et al. by virtue of the debt (Contract of Sale on of the railroad); thus the rights of the debtor and creditor were merged in one person. SC: No. The rights and titles which Mota et al. sold to Whitaker & Concepcion refer only to one-half of the railroad line. The credit which they had against Serra for of the cost of construction of the said line was not included in the sale contained in the Contract of Sale on of the railroad. That Mota et al. sold their rights and titles over of the line, is evident from the very Contract of Sale. The purchasers, Whitaker and Concepcion, to secure the payment of the price, executed a mortgage in favor of Mota et al. on the same rights and titles that they had bought and also upon what they had purchased from Serra. In other words, Whitaker & Concepcion mortgaged unto Mota et al. what they had bought from Mota et al. and also what they had bought from Serra. The rights and titles transferred by Mota et al. to Whitaker & Concepcion were only those they had over the other half of the railroad line. No novation of the contract between Mota et al. and Serra, as regards the obligation of the latter to pay the former of the cost of the construction of the said railroad line, and since Mota et al. did not include in the sale, evidenced by Contract of Sale, the credit that they had against the Serra.

That the obligation of the Serra became extinguished by the merger of the rights of creditor and debtor by the purchase of Whitaker and Concepcion is wholly untenable.

TERMINATION OF PARTNERSHIP By virtue of the Contract of Sale on of the railroad, the Testate Estate of Lazaro Mota et al. and Phil. C. Whitaker and Venancio Concepcion, by common consent, decided to dissolve the partnership between "Hacienda Palma" and "Hacienda San Isidro," thus cancelling the contract of partnership of February 1, 1919.

TC: By the termination of the partnership, as shown by the Contract of Sale bet. Concepcion, Whitaker & Mota et al, no legal rights can be derived therefrom. Serra: Mota et al. cannot enforce any right arising out of that contract of partnership, which has been annulled, such as the right to claim now a part of the cost of the construction of the railroad line stipulated in that contract. SC: Serra's contention signifies that any person, who has contracted a valid obligation with a partnership, is exempt from complying with his obligation by the mere fact of the dissolution of the partnership. Serra's contention is untenable. The dissolution of a partnership must not be understood in the absolute and strict sense so that at the termination of the object for which it was created the partnership is extinguished, pending the winding up of some incidents and obligations of the partnership, but in such case, the partnership will be reputed as existing until the juridical relations arising out of the contract are dissolved. SC of Spain (Feb. 6, 1903): Upheld this doctrine

FACTS: There was a partnership formed between several persons to purchase some lands sold by the state. The partnership paid the purchase price and distributed among its members the lands so acquired.

After the lapse of some time, one of the partners instituted an action in the court of Badajoz, praying that he be accepted as a partner with the same rights and obligations as the others, for the reason that he had not been allowed all that he had a right to. The court granted the petition, which judgment was affirmed by theAudiencia de Caceres. From that decision, the other partner sued out a writ of error

There is infringement of the Civil Code since all contracts are reputed consummated and therefore extinguished, when the contracting parties fulfill all the obligations arising therefrom By the payment of the money and the granting and distribution of the lands without any opposition, the juridical relations between the contracting parties become extinguished and none of the parties has any right of action under the contract. HELD: Denied the writ. Some corrections and liquidations asked by the actor were still pending. The articles cited were not infringed because a partnership cannot be considered as extinguished until all the obligations pertaining to it are fulfilled. (11 Manresa, page 312.) 30 Cyc., page 659: The dissolution of a firm does not relieve any of its members from liability for existing obligations, although it does save them from new obligations to which they have not expressly or impliedly assented, and any of them may be discharged from old obligations by novation of other form of release. It is often said that a partnership continues, even after dissolution, for the purpose of winding up its affairsINTEREST Serra: As in the articles of partnership on Feb. 1, 1919, it was agreed that Serra would put up of the cost of the railroad line within 5 years from Feb. 1, 1919, with interest at 10% p.a. Present action is premature since, from the execution of the contract until the date of the complaint (Oct. 25, 1922), the 5 years, within which the Serra could pay his part of the cost of the construction of the line, had not yet elapsed. SC: Mora et.al and the successors in interest of the Serra, by mutual consent, dissolved the partnership on June 16, 1920, cancelling the contract of partnership to all of which Serra consented as evidenced by his allegations in his answer. Thus, there is no reason for waiting for the expiration of 5 years which the parties themselves had seen fit to stipulate. The provisions of Art. 113, regarding the fulfillment of pure obligations, must be applied in this case.

DISPOSITIVE: Judgment appealed from Reversed. Serra is indebted to Testate Estate of Lazaro Mota,et al., for P113,046.46 with the agreed interest @ 10% p.a. from the date of the filing of the complaint.