VILLAREAL v RAMIREZ

July 14 2003 | Panganiban, J. | Petition for Review on Certiorari | Settling of Accounts & Liquidation
PETITIONER: Luzviminda Villareal, Diogenes Villareal, Carmelito Jose
RESPONDENT: Donaldo Efren Ramirez & Spouses Cesar and Carmelita Ramirez
SUMMARY: The partnership involved in this case is Aquarius Food House & Catering Services. The partners at the
time of dissolution were 2 of the petitioners and respondent Donaldo. After dissolution, Donaldo requested the return of
his P250k capital contribution, but this was unheeded by the other partners because of alleged business losses. Donaldo
& his parents filed a complaint for collection of sum of money against the other individual partners. RTC found for
petitioners. CA, however, computed respondents share (Capital Contribution Outstanding Obligation) / 3) & adjudged
this as the petitioners liability. SC set aside the CAs decision.
DOCTRINE:.Total capital contribution is not the same w/ gross assets. The capital contribution at the beginning of the
partnership does not remain intact, unimpaired and available for distribution or return to the partners. In the pursuit of a
partnership business, its capital is either increased by profits earned or decreased by losses sustained.

FACTS: of the partnership accounts for liquidation purposes

1. July 1984: Luzviminda Villareal, Carmelito Jose, and
Jesus Jose formed a partnership for the operation of a
restaurant and catering business under the name of
Aquarius Food House and Catering Services. The
partnership had P750K capital. In September,
Respondent Donaldo Ramirez joined as a partner. His
P250k capital contribution came from his parents,
also respondents.
2. In Jan 1987, Jesus Jose withdrew from the
partnership and his P250k capital contribution was
refunded to him in cash by agreement of the partners.
In the same month, without the respondents prior
knowledge, petitioners closed down the restaurant
because of an alleged rental increase. The restaurant
furniture and equipment were deposited in the
respondents house for storage.
3. On March 1 1987, respondent spouses wrote
petitioners, saying they were no longer interested in
continuing their partnership or in reopening the
restaurant, and that they were accepting the latter's
offer to return their capital contribution. By October,
Carmelita Ramirez informed petitioners of the
deterioration of the restaurant furniture and
equipment stored in their house & reiterated the
request for the return of their 1/3 share in the equity
of the partnership. The repeated oral and written
requests were, however, left unheeded.
4. Respondents filed for the collection of a sum of
money against petitioners in the RTC. Petitioners
contended that respondents had called for dissolution
of the partnership, respondents were paid upon the
turnover to them of P400,000 worth of furniture and
equipment, and that respondents had no right to
demand a return of their equity because their share,
together with the rest of the partnership capital, has
been spent because of irreversible losses.
5. RTC: Partnership was clearly intended to be
dissolved upon closing of the restaurant. Respondents
liable for actual damages to petitioners.
6. CA: Although respondents had no right to demand
the return of their capital contribution, partnership
was nonetheless dissolved when petitioners lsot
interest in continuing the restaurant business.
Because petitioners never gave a proper accounting
& no sufficient evidence was presented to show
financial losses, the CA computed liability by
deducting P240, 658 (representing the partnerships
outstanding obligations) from P1 Million
(partnerships remaining capitalization), which
yielded P759, 342. The said amount was divided into
3 shares. Each partner was entitled to P253, 114 each.
7. Petitioners question (1) why the CA ordered the
distribution of the capital contribution, instead of the
net capital after the dissolution and liquidation of a
partnership and (2) that the amount of P253, 114 they
were ordered to pay was not supported by evidence.
ISSUE/S:
1. WON Petitioners (individual partners) are liable to
respondents for latters share in the partnership NO.
2. WON CAs computation of P253, 114 as
respondents share is correct NO.
RULING: Petition GRANTED. Decision & Resolution
SET ASIDE, w/o prejudice to proper proceedings for
accounting, liquidation, and distribution of remaining
partnership assets, if any.
RATIO:
1. Dissolution of the partnership took place when
respondents informed petitioners of the intention to
discontinue it b/c of the formers dissatisfaction &
loss of trust in the latters management of the
partnership affairs.
2. Respondents have no right to demand from
petitioners the return of their equity share. Except as
managers of the partnership, petitioners did not
personally hold its equity or assets. The partnership
has a juridical personality separate and distinct from
that of each of the partners. Since the capital was
contributed to the partnership, not to petitioners, it is
the partnership that must refund the equity of the
retiring partners.
3. Since it is the partnership, as a separate and distinct
entity, that must refund the shares of the partners, the
amount to be refunded is necessarily limited to its
total resources. In other words, it can only pay out
what it has in its coffers, which consists of all its
 assets. However, before the partners can be paid their 5. Petitioners argue that respondents acted negligently
shares, the creditors of the partnership must first be by permitting the partnership assets in their custody
compensated. After all the creditors have been paid, to deteriorate to the point of being almost worthless.
whatever is left of the partnership assets becomes & that the latter should have liquidated these sole
available for the payment of the partners' shares. tangible assets of the partnership and considered the
As applied, the exact amount of refund proceeds as payment of their net capital. They claim
equivalent to respondents' 1/3 share in the partnership that the turnover of the remaining partnership assets
cannot be determined until all partnership assets have to respondents was precisely the manner of
been liquidated in other words, sold and converted liquidating the partnership and fully settling the
to cash and all partnership creditors, if any, paid. latter's share in the partnership. But the delivery of
CA's computation of the amount to be refunded to the store furniture and equipment to private
respondents was erroneous for the ff. reasons: respondents was clearly for the purpose of storage.
They were unaware that the restaurant would no
(1) Total capital contribution =/= Gross Assets longer be reopened by petitioners. Hence, the former
cannot be faulted for not disposing of the stored items
CA erroneously equated total capital contribution w/ the to recover their capital investment.
gross assets to be distributed to the partners at the time of
the dissolution of the partnership. However, the capital
contribution at the beginning of the partnership does not
remain intact, unimpaired and available for distribution or
return to the partners. In the pursuit of a partnership
business, its capital is either increased by profits earned or
decreased by losses sustained.
Here, the financial statements showed that
business had meager profits. Notably, there was no
provision for depreciation of the furniture & equipment,
nor was the amortization of good will (initially valued at
P500k reflected. Properly taking these non-cash items
into account will show that the partnership was actually
sustaining substantial losses, decreasing the capital of the
partnership. TC & CA, while recognizing the decrease of
the partnership assets to almost nil, failed to recognize the
consequent corresponding decrease of the capital.

(2) CA's finding that the partnership had an P240,

658 outstanding obligation is not supported by
evidence. The RTC found that the P240, 658
obligation did not belong to the partnership. A
Certification issued by Mercator Finance shows
that it was the Spouses Villareal (petitioners)
who obtained a P355k loan on Oct. 1983, when
the original partnership was not yet formed.
(3) CA failed to reduce the capitalization by P250k,
which the partnership paid Jesus Jose when he
withdrew from the partnership

4. Because of the above-mentioned transactions, the

partnership capital substantially dwindled. The
original amount of P250,000 which they had invested
could no longer be returned to them, because 1/3 of
the partnership properties at the time of dissolution
did not amount to that much. The law does not
relieve parties from the effects of unwise, foolish or
disastrous contracts they have entered into with all
the required formalities and with full awareness of
what they were doing.