FEU-DLSU JOINT LAW-MBA PROGRAM RANIL M. REYNANTE, Esq.

THE LAW ON PARTNERSHIP, AGENCY, & TRUSTS

Cases Title IX Partnership Chapter 1 General Provisions (1) Art. 1767 1.1 Partnership Defined Evangelista, et al vs. CIR; decided 15 October 1957
EUFEMIA EVANGELISTA, MANUELA EVANGELISTA, and FRANCISCA EVANGELISTA, petitioners, vs. THE COLLECTOR OF INTERNAL REVENUE and THE COURT OF TAX APPEALS, respondents. G.R. No. L-9996, October 15, 1957 Facts: Petitioners borrowed sum of money from their father and together with their own personal funds they used said money to buy several real properties. They then appointed their brother (Simeon) as manager of the said real properties with powers and authority to sell, lease or rent out said properties to third persons. They realized rental income from the said properties for the period 1945-1949. 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. The 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. CTA denied their petition and subsequent MR and New Trials were denied. Hence this petition. Issue: Whether or not petitioners have formed a partnership and consequently, 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. Held: YES. 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 1

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. 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 of the following observations, among others: (1) Said common fund was not something they found already in existence; (2) They invested the same, not merely in one transaction, but in a series of transactions; (3) The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners herein. 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. 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.

Sevilla vs. Court of Appeals (GR No.: 41182-3; 15 April 1988) (2) Art. 1758 (3) Art. 1769 Fortis vs. Gutierrez Hermanos, 6 Philippine Reports 100 John Fortis vs. Gutierrez Hermanos G.R. No. L-2484 April 11, 1906 Doctrine: 1.General rule: receipt by a person of share of profits of business is prima facie evidence that he is a partner; Exception: profit was for payment as wages of employee. 2.Articles of partnership prevail as to the division of profits among partners. 3.It is the net profit, after all expenses (including salary of employee) have been deducted that is shared between partners. Facts: Fortis (plaintiff), an employee of Gutierrez and Hermanos (defendants) from 1900-1902, brought this action to recover a balance due him as salary for the year 1902. He alleged that he was entitled, as salary, to 5% of the net profits of the business of defendants for said year. The complaint also contained a cause of action for the sum of 600 pesos, money expended by him for the defendants during the year 1903. The court ruled in favour of Fortis and found that the 5% net profits for 1902 amounted to 26,378.68 Mexican Pesos (MP), but plaintiff had received on account of such salary only MP 12,811.75. Thus it ordered the defendants to pay Fortis the reduced sum of MP 13,025.40.
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Issue/s: Whether defendants were correct to argue that Fortis is a co-partner Held: No. The judgment of the court below was affirmed. Case was remanded to the lower court for execution. Ratio: First, it was a mere contract of employment. The plaintiff had neither voice nor vote in the management of the affairs of the company. Second, the articles of partnership between the defendants provided that the profits should be divided among the partners named in a certain proportion, and the contract made between the plaintiff and the then manager of the defendant partnership did not in any way vary or modify this provision of the articles of partnership. The profits of the business could not be determined until all of the expenses had been paid. A part of the expenses to be paid for the year 1902 was the salary of the plaintiff. That salary had to be deducted before the net profits of the business, which were to be divided among the partners, could be ascertained. It was necessary to determine what the profits of the business were after paying all of the expenses except his, in order to determine what the salary of the plaintiff was. But such determination does not arrive at the net profits of the business yet. It was only made for the purpose of fixing the basis upon which his compensation should be determined. Bastida vs. Menzi and Company, 58 Philippine Reports 188 Bastida vs Menzi Facts: Bastida offered to assign to Menzi & Co. his contract with Phil Sugar Centrals Agency and to supervise the mixing of the fertilizer and to obtain other orders for 50 % of the net profit that Menzi & Co., Inc., might derive therefrom. J. M. Menzi (gen. manager of Menzi & Co.) accepted the offer. The agreement between the parties was verbal and was confirmed by the letter of Menzi to the plaintiff on January 10, 1922. Pursuant to the verbal agreement, the defendant corporation on April 27, 1922 entered into a written contract with the plaintiff, marked Exhibit A, which is the basis of the present action. Still, the fertilizer business as carried on in the same manner as it was prior to the written contract, but the net profit that the plaintiff herein shall get would only be 35%. The intervention of the plaintiff was limited to supervising the mixing of the fertilizers in the bodegas of Menzi. Prior to the expiration of the contract (April 27, 1927), the manager of Menzi notified the plaintiff that the contract for his services would not be renewed. Subsequently, when the contract expired, Menzi proceeded to liquidate the fertilizer business in question. The plaintiff refused to agree to this. It argued, among others, that the written contract entered into by the parties is a contract of general regular commercial partnership, wherein Menzi was the capitalist and the plaintiff the industrial partner. Issue: Is the relationship between the petitioner and Menzi that of partners?
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Held: The relationship established between the parties was not that of partners, but that of employer and employee, whereby the plaintiff was to receive 35% of the net profits of the fertilizer business of Menzi in compensation for his services for supervising the mixing of the fertilizers. Neither the provisions of the contract nor the conduct of the parties prior or subsequent to its execution justified the finding that it was a contract of copartnership. The written contract was, in fact, a continuation of the verbal agreement between the parties, whereby the plaintiff worked for the defendant corporation for one- half of the net profits derived by the corporation form certain fertilizer contracts. According to Art. 116 of the Code of Commerce, articles of association by which two or more persons obligate themselves to place in a common fund any property, industry, or any of these things, in order to obtain profit, shall be commercial, no matter what it class may be, provided it has been established in accordance with the provisions of the Code. However in this case, there was no common fund. The business belonged to Menzi & Co. The plaintiff was working for Menzi, and instead of receiving a fixed salary, he was to receive 35% of the net profits as compensation for his services. The phrase in the written contract en sociedad con, which is used as a basis of the plaintiff to prove partnership in this case, merely means en reunion con or in association with. It is also important to note that although Menzi agreed to furnish the necessary financial aid for the fertilizer business, it did not obligate itself to contribute any fixed sum as capital or to defray at its own expense the cost of securing the necessary credit. Lyons vs. Rosenstock, 56 Philippine Reports 632 (4) Art. 1770 Arbes vs. Polistico, et al., 53 Philippine Reports 489
ARBES vs POLISTICO FACTS: This is an action to bring about liquidation of the funds and property of the association called "Turnuhan Polistico & Co." The plaintiffs were members or shareholders, and the defendants were designated as president-treasurer, directors and secretary of said association. By agreement of the parties, the court appointed a commissioner to examine all the books, documents, and accounts of "Turnuhan Polistico & Co. The commissioner rendered his report, showing a balance of the cash on hand in the amount of P24,607.80. The trial court in accepting the report, rendered judgment, holding that the association "Turnuhan Polistico & Co." is unlawful, and sentencing the defendants jointly and severally to return the amount of P24,607.80,as well as the documents showing the uncollected credits of the association, to the plaintiffs in this case, and to the rest of the members of the said association 4

represented by said plaintiffs. There is no question that "Turnuhan Polistico & Co." is an unlawful partnership, but the appellants allege that because it is so, some charitable institution to whom the partnership funds may be ordered to be turned over, should be included, as a party defendant. The appellants refer to article 1666 of the Civil Code, particularly the second paragraph, which provides: When the dissolution of an unlawful partnership is decreed, the profits shall be given to charitable institutions of the domicile of the partnership, or, in default of such, to those of the province. ISSUE: WHETHER OR NOT A CHARITABLE INSTITUTION IS A NECESSARY PARTY IN THISCASE. RULING: NO, no charitable institution is a necessary party in the present case of determination of the rights of the parties. The action which may arise from said article, in the case of unlawful partnership, is that for the recovery of the amounts paid by the member from those in charge of the administration of said partnership, and it is not necessary for the said parties to base their action to the existence of the partnership, but on the fact that of having contributed some money to the partnership capital. Hence, the charitable institution of the domicile of the partnership, and in the default thereof, those of the province are not necessary parties in this case. In so ruling, the court had the occasion of explaining the scope and spirit of the provision of Article 1666 of the Civil Code (now Article 1770 of the New CivilCode). With regard to Contributions of an Illegal Partnership: the court holds that (1) The partner who limits himself to demanding only the amount contributed by him need not resort to the partnership contract on which to base his action since said contract does not exist in the eyes of the law, the purpose from which the contribution was made has not come into existence, and the administrator of the partnership holding said contribution retains what belongs to others, without any consideration ; for which reason he is not bound to return it and he who has paid in his share is entitled to recover it. (2) Our Code does not state whether, upon the dissolution of the unlawful partnership, the amounts contributed are to be returned by the partners, because it only deals with the disposition of the profits; but the fact that said contributions are not included in the disposal prescribed profits, shows that in consequences of said exclusion, the general law must be followed, and hence the partners should reimburse the amount of their respective contributions.

(3) Any other solution is immoral, and the law will not consent to the latter remaining in the possession of the manager or administrator who has refused to return them, by denying to the partners the action to demand them. With regard to Profits of an Illegal Partnership: the court holds that (1) The article cited above permits no action for the purpose of obtaining the earnings made by the unlawful partnership, during its existence as result of the business in which it was engaged, because for the purpose, the partner will have to base his action upon the partnership contract, which is to annul and without legal existence by reason of its unlawful object; and it is self evident that what does not exist cannot be a cause of action.(2) Profits earned in the course of the partnership, because they do not constitute or represent the partner's contribution but are the result of the industry, business or speculation which is the object of the partnership, and therefor, in order to demand the proportional part of the said profits, the partner would have to base his action on the contract which is null and void, since this partition or distribution of the profits is one of the juridical effects thereof.(3) Furthermore, it would be immoral and unjust for the law to permit a profit from an industry prohibited by it.

(5) Art. 1771 Magalona vs. Pesayco, 59 Philippine Reports 453 Fernandez vs. dela Rosa, 1 Philippine Reports 671 Agad vs. Mabato, G.R. No. L-24193; 22 June 1968 (6) Art. 1772 (7) Art. 1773 (8) Art. 1774 (9) Art. 1775 (10)Art. 1776 Andres de Jesus, et al. vs. Nicanor Padilla; C.A. L-12191-R; 19 April 1955 (11) Art. 1777 (12) Art. 1778 (13) Art. 1779 (14) Art. 1780 (15) Art. 1781 (16) Art. 1782
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Commissioner of Internal Revenue vs. William J. Suter and CTA L-25532; 28 February 1969
CIR VS. SUTER FACTS: A limited partnership named William J. Suter 'Morcoin' Co., Ltd was formed 30 September 1947 by William J. Suter as the general partner, and Julia Spirig and Gustav Carlson. They contributed, respectively, P20,000.00, P18,000.00 and P2,000.00. it was also duly registered with the SEC. On 1948 Suter and Spirig got married and in effect Carlson sold his share to the couple, the same was also registered with the SEC. 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. ISSUE: Whether or not the limited partnership has been dissolved after the marriage of Suter and Spirig and buying the interest of limited partner Carlson. RULING: No, the limited partnership was not dissolved.

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. What the law prohibits was when the spouses entered into a general partnership. In the case at bar, the partnership was limited.

(17) Art. 1783 (18) Art. 1784 (19) Art. 1785 (20) Art. 1786 (21) Art. 1787
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Sancho vs. Lizarraga, 55 Philippe Reports 601 G.R.No. L-33580 February 6, 1931 MAXIMILIANO SANCHO, Plaintiff-Appellant, vs. SEVERIANO LIZARRAGA, DefendantAppellee. FACTS: The plaintiff brought an action for the rescission of a partnership contract between himself and the defendant, entered into in1920 and the reimbursement of his investment with interest. The defendant denies generally and specifically all the allegations of the complaint and asked for the dissolution of the partnership, and the payment to him as its manager and administrator monthly at the time of the partnership operation until the final dissolution with interest. After trial, the lower court found that the defendant had not contributed all the capital he had bound himself to invest hence it demanded that the defendant liquidate the partnership, declared it dissolved on account of the expiration of the period for which it was constituted, and ordered the defendant, as managing partner, to proceed without delay to liquidate it, submitting to the court the result of the liquidation together with the accounts and vouchers within the period of thirty days from receipt of notice of said judgment. The plaintiff appealed from said decision praying for the rescission of the partnership contract between him and the defendant in accordance with Art. 1124of the Civil Code of the Philippines. ISSUE: WON the plaintiff-appellant acquired the right to demand rescission of the partnership contract according to article 1124 of the Civil Code. HELD: The SC ruled that owing to the defendant's failure to pay to the partnership the whole amount which he bound himself to pay, he became indebted to the partnership for the remainder, with interest and any damages occasioned thereby, but the plaintiff did not thereby acquire the right to demand rescission of the partnership contract according to article 1124 of the Code. Article 1124 cannot be applied to the case in question, because it refers to the resolution of obligations in general, whereas articles 1681 and 1682 specifically refer to the contract of partnership in particular. And it is a well known principle that special provisions prevail over general provisions. Hence, SC dismissed the appeal left the decision appealed from in full force.

Pabalan vs. Velez, 22 Philippine Reports 29 (22) Art. 1787 (23) Art. 1788 Martinez vs. Ong Pong Co, 14 Philippine Reports 726
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Martinez v. Ong Pong Co Facts:

Martinez delivered P1,500 to Ong Pong Co and Ong Lay to invest in a store They agreed that the profits and losses would be equally shared by all of them Martinez was demanding for the two Ongs to render an accounting or to refund him the P1,500 Ong Pong Co alleged that Ong Lay, now deceased, was the one who managed the business, and the capita of P1,500 resulted in a loss so that he should not be made liable
What is the extent of his liability? joint

Issue: WON Ong Pong Co is liable? YES

Held: The 2 partners (Ongs) were the administrators/managers and are obliged to render accounting. Since neither of them rendered an account, nor proved the alleged losses, they are obliged to return the capital to Martinez. Where two partners receive from another a sum of money for the establishment of a business, and agree to share with the latter the profits or losses that may result therefrom, the said two persons, as the apparent administrators of the partnership, acted as agents for the capitalist partner, and by virtue thereof are bound to fulfill the contract which implies the management of the business. Article 1796 is not applicable because no other money than that contributed as capital was involved. The liability of the partners is joint. Ong Pong Co shall only pay P750 to Martinez.

Colbert vs. Bachrach, 12 Philippine Reports 84