Singsong v. Isabela Sawmill G.R. No. L-27343, February 28, 1979, Fernandez, J.

Facts:

In 1951, defendants entered into a contract of partnership under the firm name “Isabela Sawmill”. In 1956 the
plaintiff sold to the partnership a motor truck and two tractors. The partnership was not able to pay their whole
balance even after demand was made. One of the partners withdrew from the partnership but instead of
terminating the said partnership it was continued by the two remaining partners under the same firm name.
Plaintiffs also seek the annulment of the assignment of right with chattel mortgage entered into by the
withdrawing partner and the remaining partners. The appellants contend that the chattel mortgage may no
longer be nullified because it had been judicially approved and said chattel mortgage had been judicially
foreclosed.

Issue:

Whether the withdrawal of one of the partners dissolved the partnership.

Ruling:

It does not appear that the withdrawal of the partner was not published in the newspapers. The appellees and
the public in general had a right to expect that whatever, credit they extended to the remaining partners could be
enforced against the properties of the partnership. The withdrawing partner cannot be relieved from her liability
to the creditor of the partnership due to her own fault by not insisting on the liquidation of the partnership.
Though she had acted in good faith, the appellees also acted in good faith in extending credit to the partnership.
Where one of two innocent persons must suffer, that person who gave occasion for the damages to be caused
must bear the consequences. Technically, the partnership was dissolved by the withdrawal of one of the partners.
Through her acts of entering into a memorandum with the remaining partners misled the creditors that they
were doing business with the partnership. Hence, from the order of the lower court ordering the withdrawing
partner to pay the plaintiffs, she is thus entitled for reimbursement from the remaining partners.

Villareal v. Ramirez
G.R. No. 144214, 14 July 2003

FACTS:

Petitioners formed a partnership for the operation of a restaurant and catering business. Respondent joined as a
partner in the business. Subsequently, one of the partners withdrew from the partnership, and his capital
contribution of 1/4 was refunded to him in cash by agreement of the partners.

Meanwhile, without prior knowledge of respondents, petitioners closed down the restaurant, allegedly because
of increased rental. Respondent informed petitioners that they were no longer interested in continuing their
partnership or in reopening the restaurant, and that they were accepting the latters offer to return their capital
contribution consisting of 1/3 share. However, all their written requests left unheeded.

Respondents subsequently filed a Complaint for the collection of a sum of money from petitioners.

Petitioners contended that respondents had no right to demand a return of their equity because their share,
together with the rest of the capital of the partnership, had been spent as a result of irreversible business losses.
On the other hand, Respondents alleged that they did not know of any loan encumbrance on the restaurant.
According to them, the loans incurred by petitioners should be regarded as purely personal and, as such, not
chargeable to the partnership. Respondents further averred that they had not received any regular report or
accounting from the latter, who had solely managed the business.

Hence, this Petition.

ISSUE:

Whether petitioners are liable to respondents for the latters share in the partnership.

RULING:

NO. We hold that respondents have no right to demand from petitioners the return of their equity share.

Both the trial and the appellate courts found that a partnership had indeed existed, and that it was dissolved
when respondents informed petitioners of the intention to discontinue it because of the formers dissatisfaction
with, and loss of trust in, the latters management of the partnership affairs. 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, 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 shares, the creditors of the
partnership must first be compensated. After all the creditors have been paid, whatever is left of the partnership
assets becomes available for the payment of the partners shares.

The records show that the partnership capital was actually reduced. When petitioners and respondents ventured
into business together, they should have prepared for the fact that their investment would either grow or shrink.
In the present case, the investment of respondents substantially dwindled. The original amount of P250,000
which they had invested could no longer be returned to them, because one third of the partnership properties at
the time of dissolution did not amount to that much.

It is a long established doctrine that 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. Courts have no power to relieve them from obligations they have voluntarily assumed, simply
because their contracts turn out to be disastrous deals or unwise investments.

GREGORIO MAGDUSA v. GERUNDIO ALBARAN DECISION

REYES, J.B.L., J.:

Appeal from a decision of the Court of Appeals (R.G. No. 24248-R) reversing a judgment of the Court of First
Instance of Bohol and ordering appellant Gregorio Magdusa to pay to appellees, by way of refund of their shares
as partners, the following amounts: Gerundio Albaran, P8,223.10; Pascual Albaran, P5,394,78; Zosimo Albaran,
11,979.28; and Telesforo Bebero, P3,020.24, plus legal interests from the filing of the complaint, and costs. The
Court of Appeals found that appellant and appellees, together with various other persons, had verbally formed a
partnership de facto, for the sale of general merchandise in Surigao, Surigao, to which appellant contributed
P2,000 as capital, and the others contributed their labor, under the condition that out of the net profits of the
business 25% would be added to the original capital, and the remaining 75% would be divided among the
members in proportion to the length of service of each. Sometime in 1953 and 1954, the appellees expressed
their desire to withdraw from the partnership, and appellant thereupon made a computation to determine the
value of the partners' shares to that date. The results of the computation were embodied in the document Exhibit
"C", drawn in the handwriting of appellant. Appellees thereafter made demands upon appellant for payment, but
appellant having refused, they filed the initial complaint in the court below. Appellant defended by denying any
partnership with appellees, whom he claimed to be mere employees of his.
The Court of First Instance of Bohol refused to give credence to Exhibit "C" and dismissed the complaint on the
ground that the other partners were indispensable parties but had not been impleaded. Upon appeal, the Court
of Appeals reversed, with the result noted at the start of this opinion.

Gregorio Magdusa then petitioned for a review of the decision, and we gave it due course.

The main argument of appellant is that the appellees' action can not be entertained, because in the distribution
of all or part of a partnership's assets, all the partners have an interest and are indispensable parties without
whose intervention no decree of distribution can be validly entered. This argument was considered and answered
by the Court of Appeals in the following, words;

"We now come to the last issue involved. While finding that some amounts are due the plaintiffs, the lower court
"withheld ail award in their favor, reasoning that a judgment ordering the defendant to pay might affect the
rights of other partners who were not made parties in this case. The reason cited by the lower court does not
constitute a legal impediment to a judgment for the plaintiffs in this case. This is not an action for a dissolution of
a partnership and winding up of its affairs or liquidation of its assets in which the interest of other partners who
are not brought into the case may be affected. The action of the plaintiffs is one for the recovery of a sum of
money with Gregorio Magdusa as the principal defendant. The partnership, with Gregorio Magdusa as managing
partner, was brought into the case as an alternative defendant only. Plaintiffs' action was based on the allegation,
substantiated in evidence, that Gregorio Magdusa, having taken delivery of their shares, failed and refused and
still fails and refuses to pay them their claims. The liability, therefore, is personal to Gregorio Magdusa, and the
judgment should be against his sole interest, not against the partnership's although the judgment creditors may
satisfy the judgment against the interest of Gregorio Magdusa in the partnership subject to the conditions
imposed by Article 1814 of the Civil Code."

We do not find the preceding reasoning tenable. A partner's share can not be returned without first dissolving
and liquidating the partnership (Po Yeng Cheo vs. Lim Ka Yam, 44 Phil., 177), for the return is dependent on the
discharge of the creditors, whose claims enjoy preference over those of the partners; and it is self-evident that all
members of the partnership are interested in its assets and business, and are entitled to be heard in the matter of
the firm's liquidation and the distribution of its property. The liquidation Exhibit "C" is not signed by the other
members of the partnership besides appellees and appellant; it does not appear that they have approved,
authorized, or ratified the same; and, therefore, it is not binding upon them. At the very least, they are entitled to
be heard upon its correctness.

In addition, unless a proper accounting and liquidation of the partnership affairs is first had, the capital shares of
the appellees, as retiring partners, can not be repaid, for the firm's outside creditors have preference over the
assets of the enterprise (Civ. Code, Art. 1839), and the firm's property can not be diminished to their prejudice.
Finally, the appellant can not be held liable in his personal capacity for the payment of partners' shares, for he
does not hold them except as manager of, or trustee for, the partnership. It is the latter that must refund their
shares to the retiring partners. Since not all the members of the partnership have been impleaded, no judgment
for refund can be rendered, and the action should have been dismissed.

In view of the foregoing, the decision of the Court of Appeals is reversed, and the action ordered dismissed,
without prejudice to a proper proceeding for the dissolution and liquidation of the common enterprise. Costs
against appellees.
GREGORIO MAGDUSA, ET AL., petitioners, vs.GERUNDIO ALBARAN, ET AL DIGEST

Facts:

In the herein case, the appellant and appellees, together with other persons, had verbally formed apartnership de
facto, for the sale of general merchandise in Surigao, to which appellant contributedP2,000 as capital. Meanwhile,
the others contributed their labor, under the condition that out of the netprofits of the business 25% would be
added to the original capital, and the remaining 75% would bedivided among the members in proportion to the
length of service of each.However, sometime in 1953 and 1954, the appellees expressed their desire to withdraw
from thepartnership, and appellant thereupon made a computation to determine the value of the partners'shares
to that date. The results of the computation were embodied in a document, drawn in thehandwriting of
appellant. Appellees made demands upon appellant for payment, but appellant refused,they filed the initial
complaint in the court below. Appellant defended by denying any partnership withappellees, whom he claimed to
be mere employees of his.The Court of First Instance of Bohol refused to give credence to the document of the
computation, anddismissed the complaint on the ground that the others were indispensable parties but had not
beenimpleaded. Gregorio Magdusa then petitioned for a review of the decision, and was given it due
course.Upon appeal, the Court of Appeals reversed the decision stating that this is not an action for adissolution
of a partnership and winding up of its affairs or liquidation of its assets in which the interestof other partners who
are not brought into the case may be affected. The action of the plaintiffs is onefor the recovery of a sum of
money with Gregorio Magdusa as the principal defendant. The partnership,with Gregorio Magdusa as managing
partner, was brought into the case as an alternative defendantonly.

Issue:

Whether or not appellees' action can be entertained.

SC Ruling:

According to the Court, No, it cannot be entertained. As stated in the case of Po Yeng Cheo vs. Lim KaYam, a
partner's share cannot be returned without first dissolving and liquidating the partnership, for the return is
dependent on the discharge of the creditors, whose claims enjoy preference over those of the partners; and it is
self-evident that all members of the partnership are interested in his assets and business, and are entitled to be
heard in the matter of the firm's liquidation and the distribution of its property. The liquidation is not signed by
the other members of the partnership besides appellees and appellant; it does not appear that they have
approved, authorized, or ratified the same, and, therefore, it is not binding upon them. At the very least, they are
entitled to be heard upon its correctness. In addition, unless a proper accounting and liquidation of the
partnership affairs is first had, the capital shares of the appellees, as retiring partners, cannot be repaid, for the
firm's outside creditors have preference over the assets of the enterprise, as states in the Civil Code, Art. 1839),
and the firm’s property cannot be diminished to their prejudice. Finally, the appellant cannot be held liable in his
personal capacity for the payment of partners' shares for he does not hold them except as manager of, or trustee
for, the partnership. It is the latter that must refund their shares to the retiring partners. Since not all the
members of the partnership have been impleaded, no judgment for refund can be rendered. Thus, the decision of
the Court of Appeals was reversed and the action filed by the appellant was ordered dismissed such without
prejudice to a proper proceeding for the dissolution and liquidation of the common enterprise.
Bonnevie vs. Hernandez Digest

Facts:

 Plaintiffs with other associates formed a syndicate or secret partnership for the purpose of acquiring

the plants, franchises and other properties of the Manila Electric Co. — hereinafter called the

Meralco.

 No formal articles were drawn for it was the purpose of the members to incorporate once the deal

had been consummated.

 Negotiation for the purchase was commenced, but as it made no headway, defendant was taken in

as a member of the partnership so that he could push the deal through, and to that end he was

given the necessary power of attorney.

 Using partnership funds, defendant was able to buy the Meralco properties.
 Although defendant was the one named vendee in the deed of sale, there is no question that the

transaction was in penalty made for the partnership so that the latter assumed control of the

business the day following the sale

 About the latter half of the following month the members of the partnership proceeded with the

formation of the proposed corporation, apportioning among themselves its shares of stock in

proportion to their respective contributions to the capital of the partnership and their individual

efforts in bringing about the acquisition of the Meralco properties.

 But before the incorporation, judge Reyes and the plaintiffs withdrew from the partnership for the

reason that the business was not going well, and, as admitted by both parties, the partnership was

then dissolved. In accordance with the terms of the resolution, the withdrawing partners

 Following the dissolution of the partnership, the members who preferred to remain in the business

went ahead with the formation of the corporation, taking in new associates as stockholders.

 And defendant, on his part, in fulfillment of his trust, made a formal assignment of the Meralco

properties to the treasurer of the corporation, giving them a book value of P365,000, in return for

which the corporation issued, to the various subscribers to its capital stock, shares of stock of the

total face value of P225,000 and assumed the obligation of paying what was still due the Meralco on

the purchase price.

 Two years from their withdrawal from the partnership, when the corporate business was already in

a prosperous condition, plaintiffs brought the present suit against Jaime Hernandez, claiming a share

in the profit the latter is supposed to have made from the assignment of the Meralco properties to
the corporation, estimated by plaintiffs to be P225,000 and their share of it to be P115,312.50.

 Defendant's answer denies that he has made any profit out of the assignment in question and

alleges that in any event plaintiffs, after their withdrawal from the partnership, ceased to have any

further interest in the subsequent transactions of the remaining members.

Issues:

1. WON the partnership had realized profit out of the Meralco properties made by the defendant to

the corporation. – No.

2. If there was indeed a profit, WON the plaintiffs are entitled for their share out of such profit. – No.

Held:

1. No. the profit alleged to have been realized from the assignment of the Meralco properties to the

new corporation, the Bicol Electric Company, is more apparent than real. It is true that the value set

for those properties in the deed of assignment was P365,000 when the acquisition price was only

P122,000. But one should not jump to the conclusion that a profit, consisting of the difference

between the two sums was really made out of the transaction, for the assignment was not made for

cash but in payment for subscriptions to shares of stock in the assignee, and while those shares had

a total face value of P225,000, this is not necessarily their real worth.

2. No. Assuming that the assignment actually brought profit to the partnership, it is hard to see how

defendant could be made to answer for plaintiffs' alleged share thereof.

In the case at bar, the defendant did not receive the consideration for the assignment for, as already

stated, the assignment was made in payment for subscriptions of various persons to the capital

stock of the new corporation.

Plaintiffs, in order to give color of legality to their claim against defendant, maintain that the latter

should be held liable for damages caused to them, consisting of the loss of their share of the profits,

due to defendant's failure properly to perform his duty as a liquidator of the dissolved partnership,

this on the theory that as managing partner of the partnership, it was defendant's duty to liquidate

its affairs upon its dissolutions.

However, it does not appear that plaintiffs have ever asked for a liquidation, and as will presently be

explained no liquidation was called for because when plaintiffs withdrew from the partnership the

understanding was that after they had been reimbursed their investment, they were no longer to

have any further interest in the partnership or its assets and liabilities.

As a general rule, when a partner retires from the firm, he is entitled to the payment of what may be
due him after a liquidation. But certainly no liquidation is necessary where there is already a

settlement or an agreement as to what the retiring partner shall receive.

In the instant case, it appears that a settlement was agreed upon on the very day the partnership

was dissolved. For when plaintiffs and Judge Jaime Reyes withdrew from the partnership on that day

they did so as agreed to by all the partners, subject to the only condition that they were to be repaid

their contributions or investments within three days from said date. And this condition was fulfilled

when on the following day they were reimbursed the respective amounts due them pursuant to the

agreement.

The SC therefore, found that, the acceptance by the withdrawing partners, including the plaintiffs,

of their investment in the instant case was understood and intended by all the parties as a final

settlement of whatever rights or claim the withdrawing partners might have in the dissolved

partnership. Such being the case they are now precluded from claiming any share in the alleged

profits, should there be any, at the time of the dissolution.

Idos v. Court of Appeals

FACTS:

Petitioner, Irma L. Idos, is a businesswoman engaged in leather tanning was accused by the complainant, Eddie
Alarilla her erstwhile supplier and business partner for violation of B.P. 22. The complainant Eddie Alarilla
supplied chemicals and rawhide to the accused-appellant Irma L. Idos for use in the latter’s business of
manufacturing leather. He joined the accused-appellant’s business and formed with her the short-lived
partnership under the style “Tagumpay Manufacturing which was dissolved by agreement of the parties.

Upon liquidation of the business, the partnership had as of May 1986 receivables and stocks worth
P1,800,000.00. The complainant’s share of the assets was P900,000.00 and to pay such share for accused-
appellant issued four (4) postdated checks where one of the checks bounced. The complainant demanded
payment from the accused-appellant but the latter failed to pay. In a letter reply, the accused-appellant denied
liability. She claimed that the check had been given upon demand of complainant in May 1986 only as
“assurance” of his share in the assets of the partnership and that it was not supposed to be deposited until the
stocks had been sold. Complainant then filed an action before the court for violating BP 22 against petitioner.

Accused-appellant insisted that the complainant had known that the checks were to be funded from the proceeds
of the sale of the stocks and the collection of receivables. She claimed that the complainant himself asked for the
checks because he did not want to continue in the tannery business and had no use for a share of the stocks.

Trail court rendered a decision finding the petitioner guilty and her motion for reconsideration was denied. The
decision was affirmed by the appellate court, hence, this petition.

ISSUE:
Whether or not the agreement between the petitioner and complainant to dissolve the partnership automatically
terminated the partnership in question.

RULING:

It could not be denied that though the parties — petitioner and complainant — had agreed to dissolve the
partnership, such ageement did not automatically put an end to the partnership, since they still had to sell the
goods on hand and collect the receivables from debtors. In short, they were still in the process of “winding up”
the affairs of the partnership, when the check in question was issued.

Under the Civil Code, the three final stages of a partnership are (1) dissolution; (2) winding-up; and (3)
termination. These stages are distinguished, to wit:

1. Dissolution Defined

Dissolution is the change in the relation of the partners caused by any partner ceasing to be associated in the
carrying on of the business (Art. 1828). It is that point of time the time the partners cease to carry on the business
tonether. (Citation omitted).

2. Winding Up Defined

Winding up is the process of settling business affairs of dissolution.

3. Termination Defined

Termination is the point in time after all the partnership affairs have been wound up.

These final stages in the life of a partnership are recognized under the Civil Code that explicitly declares that upon
dissolution, the partnership is not terminated, to wit:

Art 1828. The dissolution of a partnership is the change in the relation of the partners caused by any partner
ceasing to be associated in the carrying on as distinguished from the winding up of the business.

Art. 1829. On dissolution the partnership is not terminated, but continues until the winding up of partnership
affairs is completed. (Emphasis supplied.)

The best evidence of the existence of the partnership, which was not yet terminated (though in the winding up
stage), were the unsold goods and uncollected receivables, which were presented to the trial court. Since the
partnership has not been terminated, the petitioner and private complainant remained as co-partners. The check
was thus issued by the petitioner to complainant, as would a partner to another, and not as payment from a
debtor to a creditor.