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Republic of the PhilippinesSUPREME COURT

Manila

EN BANC

G.R. No. L-23145 November 29, 1968

TESTATE ESTATE OF IDONAH SLADE PERKINS, deceased. RENATOD. TAYAG,ancillary administrator-appellee,vs.BENGUET CONSOLIDATED, INC.,oppositor-appellant.

Cirilo F. Asperillo, Jr., for ancillary administrator-appellee.Ross, Salcedo, Del Rosario, Bito and Misa for oppositor-appellant.

FERNANDO, J.:

Confronted by an obstinate and adamant refusal of the domiciliaryadministrator, the County Trust Company of New York, United States of

America, of the estate of the deceased Idonah Slade Perkins, who died inNew York City on March 27, 1960, to surrender to the ancillaryadministrator in the Philippines the stock certificates owned by her in aPhilippine corporation, Benguet Consolidated, Inc., to satisfy the legitimateclaims of local creditors, the lower court, then presided by the Honorable

Arsenio Santos, now retired, issued on May 18, 1964, an order of thistenor: "After considering the motion of the ancillary administrator, datedFebruary 11, 1964, as well as the opposition filed by the BenguetConsolidated, Inc., the Court hereby (1) considers as lost for all purposesin connection with the administration and liquidation of the Philippineestate of Idonah Slade Perkins the stock certificates covering the 33,002shares of stock standing in her name in the books of the BenguetConsolidated, Inc., (2) orders said certificates cancelled, and (3) directssaid corporation to issue new certificates in lieu thereof, the same to bedelivered by said corporation to either the incumbent ancillaryadministrator or to the Probate Division of this Court."

1

From such an order, an appeal was taken to this Court not by thedomiciliary administrator, the County Trust Company of New York, but bythe Philippine corporation, the Benguet Consolidated, Inc. The appealcannot possibly prosper. The challenged order represents a response andexpresses a policy, to paraphrase Frankfurter, arising out of a specificproblem, addressed to the attainment of specific ends by the use of

specific remedies, with full and ample support from legal doctrines ofweight and significance.

The facts will explain why. As set forth in the brief of appellant BenguetConsolidated, Inc., Idonah Slade Perkins, who died on March 27, 1960 inNew York City, left among others, two stock certificates covering 33,002shares of appellant, the certificates being in the possession of the CountyTrust Company of New York, which as noted, is the domiciliaryadministrator of the estate of the deceased.

2Then came this portion of the

appellant's brief: "On August 12, 1960, Prospero Sanidad institutedancillary administration proceedings in the Court of First Instance ofManila; Lazaro A. Marquez was appointed ancillary administrator, and onJanuary 22, 1963, he was substituted by the appellee Renato D. Tayag. A

dispute arose between the domiciary administrator in New York and theancillary administrator in the Philippines as to which of them was entitled tothe possession of the stock certificates in question. On January 27, 1964,the Court of First Instance of Manila ordered the domiciliary administrator,County Trust Company, to "produce and deposit" them with the ancillaryadministrator or with the Clerk of Court. The domiciliary administrator didnot comply with the order, and on February 11, 1964, the ancillaryadministrator petitioned the court to "issue an order declaring thecertificate or certificates of stocks covering the 33,002 shares issued in thename of Idonah Slade Perkins by Benguet Consolidated, Inc., be declared[or] considered as lost."3

It is to be noted further that appellant Benguet Consolidated, Inc. admitsthat "it is immaterial" as far as it is concerned as to "who is entitled to thepossession of the stock certificates in question; appellant opposed thepetition of the ancillary administrator because the said stock certificatesare in existence, they are today in the possession of the domiciliaryadministrator, the County Trust Company, in New York, U.S.A...."

4


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It is its view, therefore, that under the circumstances, the stock certificatescannot be declared or considered as lost. Moreover, it would allege thatthere was a failure to observe certain requirements of its by-laws beforenew stock certificates could be issued. Hence, its appeal.

As was made clear at the outset of this opinion, the appeal lacks merit.

The challenged order constitutes an emphatic affirmation of judicialauthority sought to be emasculated by the wilful conduct of the domiciliaryadministrator in refusing to accord obedience to a court decree. How, then,can this order be stigmatized as illegal?

As is true of many problems confronting the judiciary, such a responsewas called for by the realities of the situation. What cannot be ignored isthat conduct bordering on wilful defiance, if it had not actually reached it,cannot without undue loss of judicial prestige, be condoned or tolerated.For the law is not so lacking in flexibility and resourcefulness as topreclude such a solution, the more so as deeper reflection would makeclear its being buttressed by indisputable principles and supported by thestrongest policy considerations.

It can truly be said then that the result arrived at upheld and vindicated thehonor of the judiciary no less than that of the country. Through thischallenged order, there is thus dispelled the atmosphere of contingentfrustration brought about by the persistence of the domiciliary administratorto hold on to the stock certificates after it had, as admitted, voluntarilysubmitted itself to the jurisdiction of the lower court by entering itsappearance through counsel on June 27, 1963, and filing a petition forrelief from a previous order of March 15, 1963.

Thus did the lower court, in the order now on appeal, impart vitality andeffectiveness to what was decreed. For without it, what it had been

decided would be set at naught and nullified. Unless such a blatantdisregard by the domiciliary administrator, with residence abroad, of whatwas previously ordained by a court order could be thus remedied, it wouldhave entailed, insofar as this matter was concerned, not a partial but awell-nigh complete paralysis of judicial authority.

1. Appellant Benguet Consolidated, Inc. did not dispute the power of theappellee ancillary administrator to gain control and possession of allassets of the decedent within the jurisdiction of the Philippines. Nor couldit. Such a power is inherent in his duty to settle her estate and satisfy theclaims of local creditors.

5As Justice Tuason speaking for this Court made

clear, it is a "general rule universally recognized" that administration,

whether principal or ancillary, certainly "extends to the assets of adecedent found within the state or country where it was granted," thecorollary being "that an administrator appointed in one state or country hasno power over property in another state or country."

6

It is to be noted that the scope of the power of the ancillary administratorwas, in an earlier case, set forth by Justice Malcolm. Thus: "It is oftennecessary to have more than one administration of an estate. When aperson dies intestate owning property in the country of his domicile as wellas in a foreign country, administration is had in both countries. That whichis granted in the jurisdiction of decedent's last domicile is termed theprincipal administration, while any other administration is termed theancillary administration. The reason for the latter is because a grant of

administration does not ex proprio vigore have any effect beyond the limitsof the country in which it is granted. Hence, an administrator appointed ina foreign state has no authority in the [Philippines]. The ancillaryadministration is proper, whenever a person dies, leaving in a countryother than that of his last domicile, property to be administered in thenature of assets of the deceased liable for his individual debts or to bedistributed among his heirs."

7

It would follow then that the authority of the probate court to require thatancillary administrator's right to "the stock certificates covering the 33,002shares ... standing in her name in the books of [appellant] BenguetConsolidated, Inc...." be respected is equally beyond question. For

appellant is a Philippine corporation owing full allegiance and subject tothe unrestricted jurisdiction of local courts. Its shares of stock cannottherefore be considered in any wise as immune from lawful court orders.

Our holding in Wells Fargo Bank and Union v. Collector of InternalRevenue

8finds application. "In the instant case, the actual situs of the

shares of stock is in the Philippines, the corporation being domiciled


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[here]." To the force of the above undeniable proposition, not evenappellant is insensible. It does not dispute it. Nor could it successfully doso even if it were so minded.

2. In the face of such incontrovertible doctrines that argue in a ratherconclusive fashion for the legality of the challenged order, how does

appellant, Benguet Consolidated, Inc. propose to carry the extremelyheavy burden of persuasion of precisely demonstrating the contrary? Itwould assign as the basic error allegedly committed by the lower court its"considering as lost the stock certificates covering 33,002 shares ofBenguet belonging to the deceased Idonah Slade Perkins, ..."

9More

specifically, appellant would stress that the "lower court could not"consider as lost" the stock certificates in question when, as a matter offact, his Honor the trial Judge knew, and does know, and it is admitted bythe appellee, that the said stock certificates are in existence and are todayin the possession of the domiciliary administrator in New York."

10

There may be an element of fiction in the above view of the lower court.That certainly does not suffice to call for the reversal of the appealedorder. Since there is a refusal, persistently adhered to by the domiciliaryadministrator in New York, to deliver the shares of stocks of appellantcorporation owned by the decedent to the ancillary administrator in thePhilippines, there was nothing unreasonable or arbitrary in consideringthem as lost and requiring the appellant to issue new certificates in lieuthereof. Thereby, the task incumbent under the law on the ancillaryadministrator could be discharged and his responsibility fulfilled.

Any other view would result in the compliance to a valid judicial orderbeing made to depend on the uncontrolled discretion of the party or entity,in this case domiciled abroad, which thus far has shown the utmostpersistence in refusing to yield obedience. Certainly, appellant would not

be heard to contend in all seriousness that a judicial decree could betreated as a mere scrap of paper, the court issuing it being powerless toremedy its flagrant disregard.

It may be admitted of course that such alleged loss as found by the lowercourt did not correspond exactly with the facts. To be more blunt, thequality of truth may be lacking in such a conclusion arrived at. It is to be

remembered however, again to borrow from Frankfurter, "that fictionswhich the law may rely upon in the pursuit of legitimate ends have playedan important part in its development."

11

Speaking of the common law in its earlier period, Cardozo could statefictions "were devices to advance the ends of justice, [even if] clumsy and

at times offensive."12Some of them have persisted even to the present,that eminent jurist, noting "the quasi contract, the adopted child, theconstructive trust, all of flourishing vitality, to attest the empire of "as if"today."13He likewise noted "a class of fictions of another order, the fictionwhich is a working tool of thought, but which at times hides itself from viewtill reflection and analysis have brought it to the light."

14

What cannot be disputed, therefore, is the at times indispensable role thatfictions as such played in the law. There should be then on the part of theappellant a further refinement in the catholicity of its condemnation of such

judicial technique. If ever an occasion did call for the employment of alegal fiction to put an end to the anomalous situation of a valid judicialorder being disregarded with apparent impunity, this is it. What is thusmost obvious is that this particular alleged error does not carry persuasion.

3. Appellant Benguet Consolidated, Inc. would seek to bolster the abovecontention by its invoking one of the provisions of its by-laws which wouldset forth the procedure to be followed in case of a lost, stolen or destroyedstock certificate; it would stress that in the event of a contest or thependency of an action regarding ownership of such certificate orcertificates of stock allegedly lost, stolen or destroyed, the issuance of anew certificate or certificates would await the "final decision by [a] courtregarding the ownership [thereof]."

15

Such reliance is misplaced. In the first place, there is no such occasion to

apply such by-law. It is admitted that the foreign domiciliary administratordid not appeal from the order now in question. Moreover, there is likewisethe express admission of appellant that as far as it is concerned, "it isimmaterial ... who is entitled to the possession of the stock certificates ..."Even if such were not the case, it would be a legal absurdity to impart tosuch a provision conclusiveness and finality. Assuming that a contrariety


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exists between the above by-law and the command of a court decree, thelatter is to be followed.

It is understandable, as Cardozo pointed out, that the Constitutionoverrides a statute, to which, however, the judiciary must yield deference,when appropriately invoked and deemed applicable. It would be most

highly unorthodox, however, if a corporate by-law would be accorded sucha high estate in the jural order that a court must not only take note of it butyield to its alleged controlling force.

The fear of appellant of a contingent liability with which it could be saddledunless the appealed order be set aside for its inconsistency with one of itsby-laws does not impress us. Its obedience to a lawful court order certainlyconstitutes a valid defense, assuming that such apprehension of apossible court action against it could possibly materialize. Thus far, nothingin the circumstances as they have developed gives substance to such afear. Gossamer possibilities of a future prejudice to appellant do not sufficeto nullify the lawful exercise of judicial authority.

4. What is more the view adopted by appellant Benguet Consolidated, Inc.is fraught with implications at war with the basic postulates of corporatetheory.

We start with the undeniable premise that, "a corporation is an artificialbeing created by operation of law...."

16It owes its life to the state, its birth

being purely dependent on its will. As Berle so aptly stated: "Classically, acorporation was conceived as an artificial person, owing its existencethrough creation by a sovereign power."

17As a matter of fact, the statutory

language employed owes much to Chief Justice Marshall, who in theDartmouth College decision defined a corporation precisely as "an artificialbeing, invisible, intangible, and existing only in contemplation of law."

18

The well-known authority Fletcher could summarize the matter thus: "Acorporation is not in fact and in reality a person, but the law treats it asthough it were a person by process of fiction, or by regarding it as anartificial person distinct and separate from its individual stockholders.... Itowes its existence to law. It is an artificial person created by law for certainspecific purposes, the extent of whose existence, powers and liberties is

fixed by its charter."19

Dean Pound's terse summary, a juristic person,resulting from an association of human beings granted legal personality bythe state, puts the matter neatly.

20

There is thus a rejection of Gierke's genossenchafttheory, the basictheme of which to quote from Friedmann, "is the reality of the group as a

social and legal entity, independent of state recognition andconcession."

21A corporation as known to Philippine jurisprudence is a

creature without any existence until it has received the imprimatur of thestate according to law. It is logically inconceivable therefore that it will haverights and privileges of a higher priority than that of its creator. More thanthat, it cannot legitimately refuse to yield obedience to acts of its stateorgans, certainly not excluding the judiciary, whenever called upon to doso.

As a matter of fact, a corporation once it comes into being, followingAmerican law still of persuasive authority in our jurisdiction, comes moreoften within the ken of the judiciary than the other two coordinatebranches. It institutes the appropriate court action to enforce its right.Correlatively, it is not immune from judicial control in those instances,where a duty under the law as ascertained in an appropriate legalproceeding is cast upon it.

To assert that it can choose which court order to follow and which todisregard is to confer upon it not autonomy which may be conceded butlicense which cannot be tolerated. It is to argue that it may, when sominded, overrule the state, the source of its very existence; it is to contendthat what any of its governmental organs may lawfully require could beignored at will. So extravagant a claim cannot possibly merit approval.

5. One last point. In Viloria v. Administrator of Veterans Affairs,22

it was

shown that in a guardianship proceedings then pending in a lower court,the United States Veterans Administration filed a motion for the refund of acertain sum of money paid to the minor under guardianship, alleging thatthe lower court had previously granted its petition to consider thedeceased father as not entitled to guerilla benefits according to adetermination arrived at by its main office in the United States. The motionwas denied. In seeking a reconsideration of such order, the Administrator


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relied on an American federal statute making his decisions "final andconclusive on all questions of law or fact" precluding any other Americanofficial to examine the matter anew, "except a judge or judges of theUnited States court."

23Reconsideration was denied, and the Administrator

appealed.

In an opinion by Justice J.B.L. Reyes, we sustained the lower court. Thus:"We are of the opinion that the appeal should be rejected. The provisionsof the U.S. Code, invoked by the appellant, make the decisions of the U.S.Veterans' Administrator final and conclusive when made on claimsproperty submitted to him for resolution; but they are not applicable to thepresent case, where the Administrator is not acting as a judge but as alitigant. There is a great difference between actions against the

Administrator (which must be filed strictly in accordance with the conditionsthat are imposed by the Veterans' Act, including the exclusive review byUnited States courts), and those actions where the Veterans' Administratorseeks a remedy from our courts and submits to their jurisdiction by filingactions therein. Our attention has not been called to any law or treaty thatwould make the findings of the Veterans' Administrator, in actions where

he is a party, conclusive on our courts. That, in effect, would deprive ourtribunals of judicial discretion and render them mere subordinateinstrumentalities of the Veterans' Administrator."

It is bad enough as the Viloria decision made patent for our judiciary toaccept as final and conclusive, determinations made by foreigngovernmental agencies. It is infinitely worse if through the absence of anycoercive power by our courts over juridical persons within our jurisdiction,the force and effectivity of their orders could be made to depend on thewhim or caprice of alien entities. It is difficult to imagine of a situation moreoffensive to the dignity of the bench or the honor of the country.

Yet that would be the effect, even if unintended, of the proposition to whichappellant Benguet Consolidated seems to be firmly committed as shownby its failure to accept the validity of the order complained of; it seeks itsreversal. Certainly we must at all pains see to it that it does not succeed.The deplorable consequences attendant on appellant prevailing attest tothe necessity of negative response from us. That is what appellant will get.

That is all then that this case presents. It is obvious why the appeal cannotsucceed. It is always easy to conjure extreme and even oppressivepossibilities. That is not decisive. It does not settle the issue. What carriesweight and conviction is the result arrived at, the just solution obtained,grounded in the soundest of legal doctrines and distinguished by itscorrespondence with what a sense of realism requires. For through the

appealed order, the imperative requirement of justice according to law issatisfied and national dignity and honor maintained.

WHEREFORE, the appealed order of the Honorable Arsenio Santos, theJudge of the Court of First Instance, dated May 18, 1964, is affirmed. Withcosts against oppositor-appelant Benguet Consolidated, Inc.

Makalintal, Zaldivar and Capistrano, JJ.,concur.Concepcion, C.J., Reyes, J.B.L., Dizon, Sanchez and Castro, JJ.,concurin the result.

Republic of the Philippines

SUPREME COURTManila

THIRD DIVISION

G.R. No. 84197 July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION,petitioner,vs.THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVYEQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA and

JACOB S. LIM, respondents.

G.R. No. 84157 July 28, 1989

JACOB S. LIM, petitioner,vs.COURT OF APPEALS, PIONEER INSURANCE AND SURETYCORPORATION, BORDER MACHINERY and HEAVY EQUIPMENT CO.,


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INC,, FRANCISCO and MODESTO CERVANTES and CONSTANCIO

MAGLANA,respondents.

Eriberto D. Ignacio for Pioneer Insurance & Surety Corporation.

Sycip, Salazar, Hernandez & Gatmaitan for Jacob S. Lim.

Renato J. Robles for BORMAHECO, Inc. and Cervanteses.

Leonardo B. Lucena for Constancio Maglana.

GUTIERREZ,JR., J.:

The subject matter of these consolidated petitions is the decision of theCourt of Appeals in CA-G.R. CV No. 66195 which modified the decision ofthe then Court of First Instance of Manila in Civil Case No. 66135. Theplaintiffs complaint (petitioner in G.R. No. 84197) against all defendants(respondents in G.R. No. 84197) was dismissed but in all other respectsthe trial court's decision was affirmed.

The dispositive portion of the trial court's decision reads as follows:

WHEREFORE, judgment is rendered against defendantJacob S. Lim requiring Lim to pay plaintiff the amount ofP311,056.02, with interest at the rate of 12% per annumcompounded monthly; plus 15% of the amount awarded toplaintiff as attorney's fees from July 2,1966, until fullpayment is made; plus P70,000.00 moral and exemplary

damages.

It is found in the records that the cross party plaintiffsincurred additional miscellaneous expenses aside fromPl51,000.00,,making a total of P184,878.74. DefendantJacob S. Lim is further required to pay cross party plaintiff,Bormaheco, the Cervanteses one-half and Maglana the

other half, the amount of Pl84,878.74 with interest fromthe filing of the cross-complaints until the amount is fullypaid; plus moral and exemplary damages in the amount ofP184,878.84 with interest from the filing of the cross-complaints until the amount is fully paid; plus moral andexemplary damages in the amount of P50,000.00 for each

of the two Cervanteses.

Furthermore, he is required to pay P20,000.00 toBormaheco and the Cervanteses, and another P20,000.00to Constancio B. Maglana as attorney's fees.

xxx xxx xxx

WHEREFORE, in view of all above, the complaint ofplaintiff Pioneer against defendants Bormaheco, theCervanteses and Constancio B. Maglana, is dismissed.Instead, plaintiff is required to indemnify the defendants

Bormaheco and the Cervanteses the amount ofP20,000.00 as attorney's fees and the amount ofP4,379.21, per year from 1966 with legal rate of interestup to the time it is paid.

Furthermore, the plaintiff is required to pay Constancio B.Maglana the amount of P20,000.00 as attorney's fees andcosts.

No moral or exemplary damages is awarded againstplaintiff for this action was filed in good faith. The fact thatthe properties of the Bormaheco and the Cervanteseswere attached and that they were required to file a

counterbond in order to dissolve the attachment, is not anact of bad faith. When a man tries to protect his rights, heshould not be saddled with moral or exemplary damages.Furthermore, the rights exercised were provided for in theRules of Court, and it was the court that ordered it, in theexercise of its discretion.


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No damage is decided against Malayan InsuranceCompany, Inc., the third-party defendant, for it onlysecured the attachment prayed for by the plaintiff Pioneer.If an insurance company would be liable for damages inperforming an act which is clearly within its power andwhich is the reason for its being, then nobody would

engage in the insurance business. No further claim orcounter-claim for or against anybody is declared by thisCourt. (Rollo - G.R. No. 24197, pp. 15-16)

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in theairline business as owner-operator of Southern Air Lines (SAL) a singleproprietorship.

On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) andLim entered into and executed a sales contract (Exhibit A) for the sale andpurchase of two (2) DC-3A Type aircrafts and one (1) set of necessaryspare parts for the total agreed price of US $109,000.00 to be paid ininstallments. One DC-3 Aircraft with Registry No. PIC-718, arrived inManila on June 7,1965 while the other aircraft, arrived in Manila on July18,1965.

On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer,petitioner in G.R. No. 84197) as surety executed and issued its SuretyBond No. 6639 (Exhibit C) in favor of JDA, in behalf of its principal, Lim, forthe balance price of the aircrafts and spare parts.

It appears that Border Machinery and Heavy Equipment Company, Inc.(Bormaheco), Francisco and Modesto Cervantes (Cervanteses) andConstancio Maglana (respondents in both petitions) contributed somefunds used in the purchase of the above aircrafts and spare parts. The

funds were supposed to be their contributions to a new corporationproposed by Lim to expand his airline business. They executed two (2)separate indemnity agreements (Exhibits D-1 and D-2) in favor of Pioneer,one signed by Maglana and the other jointly signed by Lim for SAL,Bormaheco and the Cervanteses. The indemnity agreements stipulatedthat the indemnitors principally agree and bind themselves jointly andseverally to indemnify and hold and save harmless Pioneer from and

against any/all damages, losses, costs, damages, taxes, penalties,charges and expenses of whatever kind and nature which Pioneer mayincur in consequence of having become surety upon the bond/note and topay, reimburse and make good to Pioneer, its successors and assigns, allsums and amounts of money which it or its representatives should or maypay or cause to be paid or become liable to pay on them of whatever kind

and nature.

On June 10, 1965, Lim doing business under the name and style of SALexecuted in favor of Pioneer as deed of chattel mortgage as security forthe latter's suretyship in favor of the former. It was stipulated therein thatLim transfer and convey to the surety the two aircrafts. The deed (ExhibitD) was duly registered with the Office of the Register of Deeds of the Cityof Manila and with the Civil Aeronautics Administration pursuant to theChattel Mortgage Law and the Civil Aeronautics Law (Republic Act No.776), respectively.

Lim defaulted on his subsequent installment payments prompting JDA torequest payments from the surety. Pioneer paid a total sum ofP298,626.12.

Pioneer then filed a petition for the extrajudicial foreclosure of the saidchattel mortgage before the Sheriff of Davao City. The Cervanteses andMaglana, however, filed a third party claim alleging that they are co-owners of the aircrafts,

On July 19, 1966, Pioneer filed an action for judicial foreclosure with anapplication for a writ of preliminary attachment against Lim andrespondents, the Cervanteses, Bormaheco and Maglana.

In their Answers, Maglana, Bormaheco and the Cervanteses filed cross-

claims against Lim alleging that they were not privies to the contractssigned by Lim and, by way of counterclaim, sought for damages for beingexposed to litigation and for recovery of the sums of money they advancedto Lim for the purchase of the aircrafts in question.


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After trial on the merits, a decision was rendered holding Lim liable to payPioneer but dismissed Pioneer's complaint against all other defendants.

As stated earlier, the appellate court modified the trial court's decision inthat the plaintiffs complaint against all the defendants was dismissed. In allother respects the trial court's decision was affirmed.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

RESPONDENT COURT OF APPEALS GRIEVOUSLYERRED WHEN IT DISMISSED THE APPEAL OFPETITIONER ON THE SOLE GROUND THATPETITIONER HAD ALREADY COLLECTED THEPROCEEDS OF THE REINSURANCE ON ITS BOND INFAVOR OF THE JDA AND THAT IT CANNOTREPRESENT A REINSURER TO RECOVER THE

AMOUNT FROM HEREIN PRIVATE RESPONDENTS ASDEFENDANTS IN THE TRIAL COURT. (Rollo - G. R. No.84197, p. 10)

The petitioner questions the following findings of the appellate court:

We find no merit in plaintiffs appeal. It is undisputed thatplaintiff Pioneer had reinsured its risk of liability under thesurety bond in favor of JDA and subsequently collectedthe proceeds of such reinsurance in the sum ofP295,000.00. Defendants' alleged obligation to Pioneeramounts to P295,000.00, hence, plaintiffs instant actionfor the recovery of the amount of P298,666.28 fromdefendants will no longer prosper. Plaintiff Pioneer is notthe real party in interest to institute the instant action as itdoes not stand to be benefited or injured by the judgment.

Plaintiff Pioneer's contention that it is representing thereinsurer to recover the amount from defendants, hence, it

instituted the action is utterly devoid of merit. Plaintiff didnot even present any evidence that it is the attorney-in-fact of the reinsurance company, authorized to institute anaction for and in behalf of the latter. To qualify a person tobe a real party in interest in whose name an action mustbe prosecuted, he must appear to be the present real

owner of the right sought to be enforced (Moran, Vol. I,Comments on the Rules of Court, 1979 ed., p. 155). It hasbeen held that the real party in interest is the party whowould be benefited or injured by the judgment or the partyentitled to the avails of the suit (Salonga v. Warner Barnes& Co., Ltd., 88 Phil. 125, 131). By real party in interest ismeant a present substantial interest as distinguished froma mere expectancy or a future, contingent, subordinate orconsequential interest (Garcia v. David, 67 Phil. 27;Oglleaby v. Springfield Marine Bank, 52 N.E. 2d 1600, 385III, 414; Flowers v. Germans, 1 NW 2d 424; Weber v. Cityof Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).

Based on the foregoing premises, plaintiff Pioneer cannotbe considered as the real party in interest as it has alreadybeen paid by the reinsurer the sum of P295,000.00 thebulk of defendants' alleged obligation to Pioneer.

In addition to the said proceeds of the reinsurancereceived by plaintiff Pioneer from its reinsurer, the formerwas able to foreclose extra-judicially one of the subjectairplanes and its spare engine, realizing the total amountof P37,050.00 from the sale of the mortgaged chattels.

Adding the sum of P37,050.00, to the proceeds of thereinsurance amounting to P295,000.00, it is patent thatplaintiff has been overpaid in the amount of P33,383.72considering that the total amount it had paid to JDA totalsto only P298,666.28. To allow plaintiff Pioneer to recoverfrom defendants the amount in excess of P298,666.28would be tantamount to unjust enrichment as it hasalready been paid by the reinsurance company of theamount plaintiff has paid to JDA as surety of defendant


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Lim vis-a-vis defendant Lim's liability to JDA. Well settledis the rule that no person should unjustly enrich himself atthe expense of another (Article 22, New Civil Code).(Rollo-84197, pp. 24-25).

The petitioner contends that-(1) it is at a loss where respondent court

based its finding that petitioner was paid by its reinsurer in the aforesaidamount, as this matter has never been raised by any of the parties hereinboth in their answers in the court below and in their respective briefs withrespondent court; (Rollo, p. 11) (2) even assuming hypothetically that itwas paid by its reinsurer, still none of the respondents had any interest inthe matter since the reinsurance is strictly between the petitioner and there-insurer pursuant to section 91 of the Insurance Code; (3) pursuant tothe indemnity agreements, the petitioner is entitled to recover fromrespondents Bormaheco and Maglana; and (4) the principle of unjustenrichment is not applicable considering that whatever amount he wouldrecover from the co-indemnitor will be paid to the reinsurer.

The records belie the petitioner's contention that the issue on thereinsurance money was never raised by the parties.

A cursory reading of the trial court's lengthy decision shows that two of theissues threshed out were:

xxx xxx xxx

1. Has Pioneer a cause of action against defendants withrespect to so much of its obligations to JDA as has beenpaid with reinsurance money?

2. If the answer to the preceding question is in thenegative, has Pioneer still any claim against defendants,considering the amount it has realized from the sale of themortgaged properties? (Record on Appeal, p. 359, AnnexB of G.R. No. 84157).

In resolving these issues, the trial court made the following findings:

It appearing that Pioneer reinsured its risk of liability underthe surety bond it had executed in favor of JDA, collectedthe proceeds of such reinsurance in the sum of P295,000,and paid with the said amount the bulk of its allegedliability to JDA under the said surety bond, it is plain thaton this score it no longer has any right to collect to the

extent of the said amount.

On the question of why it is Pioneer, instead of thereinsurance (sic), that is suing defendants for the amountpaid to it by the reinsurers, notwithstanding that the causeof action pertains to the latter, Pioneer says: Thereinsurers opted instead that the Pioneer Insurance &Surety Corporation shall pursue alone the case.. . . .Pioneer Insurance & Surety Corporation is representingthe reinsurers to recover the amount.' In other words,insofar as the amount paid to it by the reinsurers Pioneeris suing defendants as their attorney-in-fact.

But in the first place, there is not the slightest indication inthe complaint that Pioneer is suing as attorney-in- fact ofthe reinsurers for any amount. Lastly, and most importantof all, Pioneer has no right to institute and maintain in itsown name an action for the benefit of the reinsurers. It iswell-settled that an action brought by an attorney-in-fact inhis own name instead of that of the principal will notprosper, and this is so even where the name of theprincipal is disclosed in the complaint.

Section 2 of Rule 3 of the Old Rules ofCourt provides that 'Every action must be

prosecuted in the name of the real partyin interest.' This provision is mandatory.The real party in interest is the party whowould be benefitted or injured by the

judgment or is the party entitled to theavails of the suit.


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This Court has held in various cases thatan attorney-in-fact is not a real party ininterest, that there is no law permitting anaction to be brought by an attorney-in-fact. Arroyo v. Granada and Gentero, 18Phil. Rep. 484; Luchauco v. Limjuco and

Gonzalo, 19 Phil. Rep. 12; FilipinosIndustrial Corporation v. San Diego G.R.No. L- 22347,1968, 23 SCRA 706, 710-714.

The total amount paid by Pioneer to JDA is P299,666.29.Since Pioneer has collected P295,000.00 from thereinsurers, the uninsured portion of what it paid to JDA isthe difference between the two amounts, or P3,666.28.This is the amount for which Pioneer may sue defendants,assuming that the indemnity agreement is still valid andeffective. But since the amount realized from the sale ofthe mortgaged chattels are P35,000.00 for one of the

airplanes and P2,050.00 for a spare engine, or a total ofP37,050.00, Pioneer is still overpaid by P33,383.72.Therefore, Pioneer has no more claim against defendants.(Record on Appeal, pp. 360-363).

The payment to the petitioner made by the reinsurers was not disputed inthe appellate court. Considering this admitted payment, the only issue thatcropped up was the effect of payment made by the reinsurers to thepetitioner. Therefore, the petitioner's argument that the respondents hadno interest in the reinsurance contract as this is strictly between thepetitioner as insured and the reinsuring company pursuant to Section 91(should be Section 98) of the Insurance Code has no basis.

In general a reinsurer, on payment of a loss acquires thesame rights by subrogation as are acquired in similarcases where the original insurer pays a loss (UniversalIns. Co. v. Old Time Molasses Co. C.C.A. La., 46 F 2nd925).

The rules of practice in actions on original insurancepolicies are in general applicable to actions or contracts ofreinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins.Co., 55 S.E. 330,126 GA. 380, 7 Ann. Con. 1134).

Hence the applicable law is Article 2207 of the new Civil Code, to wit:

Art. 2207. If the plaintiffs property has been insured, andhe has received indemnity from the insurance companyfor the injury or loss arising out of the wrong or breach ofcontract complained of, the insurance company shall besubrogated to the rights of the insured against thewrongdoer or the person who has violated the contract. Ifthe amount paid by the insurance company does not fullycover the injury or loss, the aggrieved party shall beentitled to recover the deficiency from the person causingthe loss or injury.

Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines,Inc. v. Heald Lumber Co. (101 Phil. 1031 [1957]) which we subsequentlyapplied in Manila Mahogany Manufacturing Corporation v. Court of

Appeals(154 SCRA 650 [1987]):

Note that if a property is insured and the owner receivesthe indemnity from the insurer, it is provided in said articlethat the insurer is deemed subrogated to the rights of theinsured against the wrongdoer and if the amount paid bythe insurer does not fully cover the loss, then theaggrieved party is the one entitled to recover thedeficiency. Evidently, under this legal provision, the real

party in interest with regard to the portion of the indemnity

paid is the insurer and not the insured. (Emphasissupplied).

It is clear from the records that Pioneer sued in its own name and not asan attorney-in-fact of the reinsurer.


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Accordingly, the appellate court did not commit a reversible error indismissing the petitioner's complaint as against the respondents for thereason that the petitioner was not the real party in interest in the complaintand, therefore, has no cause of action against the respondents.

Nevertheless, the petitioner argues that the appeal as regards the counter

indemnitors should not have been dismissed on the premise that theevidence on record shows that it is entitled to recover from the counterindemnitors. It does not, however, cite any grounds except its allegationthat respondent "Maglanas defense and evidence are certainly incredible"(p. 12, Rollo) to back up its contention.

On the other hand, we find the trial court's findings on the matter repletewith evidence to substantiate its finding that the counter-indemnitors arenot liable to the petitioner. The trial court stated:

Apart from the foregoing proposition, the indemnityagreement ceased to be valid and effective after the

execution of the chattel mortgage.

Testimonies of defendants Francisco Cervantes andModesto Cervantes.

Pioneer Insurance, knowing the value of the aircrafts andthe spare parts involved, agreed to issue the bondprovided that the same would be mortgaged to it, but thiswas not possible because the planes were still in Japanand could not be mortgaged here in the Philippines. Assoon as the aircrafts were brought to the Philippines, theywould be mortgaged to Pioneer Insurance to cover thebond, and this indemnity agreement would be cancelled.

The following is averred under oath by Pioneer in theoriginal complaint:

The various conflicting claims over themortgaged properties have impaired and

rendered insufficient the security underthe chattel mortgage and there is thus noother sufficient security for the claimsought to be enforced by this action.

This is judicial admission and aside from the chattel

mortgage there is no other security for the claim sought tobe enforced by this action, which necessarily means thatthe indemnity agreement had ceased to have any forceand effect at the time this action was instituted. Sec 2,Rule 129, Revised Rules of Court.

Prescinding from the foregoing, Pioneer, havingforeclosed the chattel mortgage on the planes and spareparts, no longer has any further action against thedefendants as indemnitors to recover any unpaid balanceof the price. The indemnity agreement was ipso jureextinguished upon the foreclosure of the chattel mortgage.These defendants, as indemnitors, would be entitled to besubrogated to the right of Pioneer should they makepayments to the latter. Articles 2067 and 2080 of the NewCivil Code of the Philippines.

Independently of the preceding proposition Pioneer'selection of the remedy of foreclosure precludes any furtheraction to recover any unpaid balance of the price.

SAL or Lim, having failed to pay the second to the eightand last installments to JDA and Pioneer as surety havingmade of the payments to JDA, the alternative remediesopen to Pioneer were as provided in Article 1484 of the

New Civil Code, known as the Recto Law.

Pioneer exercised the remedy of foreclosure of the chattelmortgage both by extrajudicial foreclosure and the instantsuit. Such being the case, as provided by theaforementioned provisions, Pioneer shall have no furtheraction against the purchaser to recover any unpaid


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balance and any agreement to the contrary is void.' Cruz,et al. v. Filipinas Investment & Finance Corp. No. L-24772, May 27,1968, 23 SCRA 791, 795-6.

The operation of the foregoing provision cannot beescaped from through the contention that Pioneer is not

the vendor but JDA. The reason is that Pioneer is actuallyexercising the rights of JDA as vendor, having subrogatedit in such rights. Nor may the application of the provisionbe validly opposed on the ground that these defendantsand defendant Maglana are not the vendee butindemnitors. Pascual, et al. v. Universal MotorsCorporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA124.

The restructuring of the obligations of SAL or Lim, thru thechange of their maturity dates discharged thesedefendants from any liability as alleged indemnitors. Thechange of the maturity dates of the obligations of Lim, orSAL extinguish the original obligations thru novations thusdischarging the indemnitors.

The principal hereof shall be paid in eightequal successive three months intervalinstallments, the first of which shall bedue and payable 25 August 1965, theremainder of which ... shall be due andpayable on the 26th day x x x of eachsucceeding three months and the last ofwhich shall be due and payable 26th May1967.

However, at the trial of this case, Pioneer produced amemorandum executed by SAL or Lim and JDA,modifying the maturity dates of the obligations, as follows:

The principal hereof shall be paid in eightequal successive three month interval

installments the first of which shall be dueand payable 4 September 1965, theremainder of which ... shall be due andpayable on the 4th day ... of eachsucceeding months and the last of whichshall be due and payable 4th June 1967.

Not only that, Pioneer also produced eight purportedpromissory notes bearing maturity dates different from thatfixed in the aforesaid memorandum; the due date of thefirst installment appears as October 15, 1965, and thoseof the rest of the installments, the 15th of each succeedingthree months, that of the last installment being July 15,1967.

These restructuring of the obligations with regard to theirmaturity dates, effected twice, were done without theknowledge, much less, would have it believed that thesedefendants Maglana (sic). Pioneer's official NumerianoCarbonel would have it believed that these defendantsand defendant Maglana knew of and consented to themodification of the obligations. But if that were so, therewould have been the corresponding documents in theform of a written notice to as well as written conformity ofthese defendants, and there are no such document. Theconsequence of this was the extinguishment of theobligations and of the surety bond secured by theindemnity agreement which was thereby alsoextinguished. Applicable by analogy are the rulings of theSupreme Court in the case of Kabankalan Sugar Co. v.Pacheco, 55 Phil. 553, 563, and the case of AsiaticPetroleum Co. v. Hizon David, 45 Phil. 532, 538.

Art. 2079. An extension granted to thedebtor by the creditor without the consentof the guarantor extinguishes theguaranty The mere failure on the part ofthe creditor to demand payment after the


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debt has become due does not of itselfconstitute any extension time referred toherein, (New Civil Code).'

Manresa, 4th ed., Vol. 12, pp. 316-317, Vol. VI, pp. 562-563, M.F. Stevenson & Co., Ltd., v. Climacom et al. (C.A.)

36 O.G. 1571.

Pioneer's liability as surety to JDA had already prescribedwhen Pioneer paid the same. Consequently, Pioneer hasno more cause of action to recover from these defendants,as supposed indemnitors, what it has paid to JDA. Byvirtue of an express stipulation in the surety bond, thefailure of JDA to present its claim to Pioneer within tendays from default of Lim or SAL on every installment,released Pioneer from liability from the claim.

Therefore, Pioneer is not entitled to exact reimbursement

from these defendants thru the indemnity.

Art. 1318. Payment by a solidary debtorshall not entitle him to reimbursementfrom his co-debtors if such payment ismade after the obligation has prescribedor became illegal.

These defendants are entitled to recover damages andattorney's fees from Pioneer and its surety by reason ofthe filing of the instant case against them and theattachment and garnishment of their properties. Theinstant action is clearly unfounded insofar as plaintiff drags

these defendants and defendant Maglana.' (Record onAppeal, pp. 363-369, Rollo of G.R. No. 84157).

We find no cogent reason to reverse or modify these findings.

Hence, it is our conclusion that the petition in G.R. No. 84197 is notmeritorious.

We now discuss the merits of G.R. No. 84157.

Petitioner Jacob S. Lim poses the following issues:

l. What legal rules govern the relationship among co-investors whose agreement was to do business throughthe corporate vehicle but who failed to incorporate theentity in which they had chosen to invest? How are thelosses to be treated in situations where their contributionsto the intended 'corporation' were invested not through thecorporate form? This Petition presents these fundamentalquestions which we believe were resolved erroneously bythe Court of Appeals ('CA'). (Rollo, p. 6).

These questions are premised on the petitioner's theory that as a result of

the failure of respondents Bormaheco, Spouses Cervantes, ConstancioMaglana and petitioner Lim to incorporate, ade factopartnership amongthem was created, and that as a consequence of such relationship all mustshare in the losses and/or gains of the venture in proportion to theircontribution. The petitioner, therefore, questions the appellate court'sfindings ordering him to reimburse certain amounts given by therespondents to the petitioner as their contributions to the intendedcorporation, to wit:

However, defendant Lim should be held liable to pay hisco-defendants' cross-claims in the total amount ofP184,878.74 as correctly found by the trial court, withinterest from the filing of the cross-complaints until the

amount is fully paid. Defendant Lim should pay one-half ofthe said amount to Bormaheco and the Cervanteses andthe other one-half to defendant Maglana. It is establishedin the records that defendant Lim had duly received theamount of Pl51,000.00 from defendants Bormaheco andMaglana representing the latter's participation in theownership of the subject airplanes and spare parts


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(Exhibit 58). In addition, the cross-party plaintiffs incurredadditional expenses, hence, the total sum of P184,878.74.

We first state the principles.

While it has been held that as between themselves therights of the stockholders in a defectively incorporatedassociation should be governed by the supposed charterand the laws of the state relating thereto and not by therules governing partners (Cannon v. Brush Electric Co., 54

A. 121, 96 Md. 446, 94 Am. S.R. 584), it is ordinarily heldthat persons who attempt, but fail, to form a corporationand who carry on business under the corporate nameoccupy the position of partners inter se (Lynch v.Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A1065). Thus, where persons associate themselvestogether under articles to purchase property to carry on abusiness, and their organization is so defective as to come

short of creating a corporation within the statute, theybecome in legal effect partners inter se, and their rights asmembers of the company to the property acquired by thecompany will be recognized (Smith v. Schoodoc PondPacking Co., 84 A. 268,109 Me. 555; Whipple v. Parker,29 Mich. 369). So, where certain persons associatedthemselves as a corporation for the development of landfor irrigation purposes, and each conveyed land to thecorporation, and two of them contracted to pay a third thedifference in the proportionate value of the land conveyedby him, and no stock was ever issued in the corporation, itwas treated as a trustee for the associates in an actionbetween them for an accounting, and its capital stock wastreated as partnership assets, sold, and the proceedsdistributed among them in proportion to the value of theproperty contributed by each (Shorb v. Beaudry, 56 Cal.446). However, such a relation does not necessarily exist,for ordinarily persons cannot be made to assume therelation of partners, as between themselves, when their

purpose is that no partnership shall exist(London Assur.Corp. v. Drennen, Minn., 6 S.Ct. 442, 116 U.S. 461, 472,29 L.Ed. 688), and it should be implied only whennecessary to do justice between the parties; thus, onewho takes no part except to subscribe for stock in a

proposed corporation which is never legally formed does

not become a partner with other subscribers who engagein business under the name of the pretended corporation,so as to be liable as such in an action for settlement of thealleged partnership and contribution(Ward v. Brigham,127 Mass. 24). A partnership relation between certainstockholders and other stockholders, who were alsodirectors, will not be implied in the absence of anagreement, so as to make the former liable to contributefor payment of debts illegally contracted by the latter(Heald v. Owen, 44 N.W. 210, 79 Iowa 23). (Corpus JurisSecundum, Vol. 68, p. 464). (Italics supplied).

In the instant case, it is to be noted that the petitioner was declared non-

suited for his failure to appear during the pretrial despite notification. In hisanswer, the petitioner denied having received any amount fromrespondents Bormaheco, the Cervanteses and Maglana. The trial courtand the appellate court, however, found through Exhibit 58, that thepetitioner received the amount of P151,000.00 representing theparticipation of Bormaheco and Atty. Constancio B. Maglana in theownership of the subject airplanes and spare parts. The record shows thatdefendant Maglana gave P75,000.00 to petitioner Jacob Lim thru theCervanteses.

It is therefore clear that the petitioner never had the intention to form acorporation with the respondents despite his representations to them. Thisgives credence to the cross-claims of the respondents to the effect thatthey were induced and lured by the petitioner to make contributions to aproposed corporation which was never formed because the petitionerreneged on their agreement. Maglana alleged in his cross-claim:

... that sometime in early 1965, Jacob Lim proposed toFrancisco Cervantes and Maglana to expand his airline


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business. Lim was to procure two DC-3's from Japan andsecure the necessary certificates of public convenienceand necessity as well as the required permits for theoperation thereof. Maglana sometime in May 1965, gaveCervantes his share of P75,000.00 for delivery to Limwhich Cervantes did and Lim acknowledged receipt

thereof. Cervantes, likewise, delivered his share of theundertaking. Lim in an undertaking sometime on or aboutAugust 9,1965, promised to incorporate his airline inaccordance with their agreement and proceeded toacquire the planes on his own account. Since then up tothe filing of this answer, Lim has refused, failed and stillrefuses to set up the corporation or return the money ofMaglana. (Record on Appeal, pp. 337-338).

while respondents Bormaheco and the Cervanteses alleged in theiranswer, counterclaim, cross-claim and third party complaint:

Sometime in April 1965, defendant Lim lured and induced

the answering defendants to purchase two airplanes andspare parts from Japan which the latter considered astheir lawful contribution and participation in the proposedcorporation to be known as SAL. Arrangements andnegotiations were undertaken by defendant Lim. Downpayments were advanced by defendants Bormaheco andthe Cervanteses and Constancio Maglana (Exh. E- 1).Contrary to the agreement among the defendants,defendant Lim in connivance with the plaintiff, signed andexecuted the alleged chattel mortgage and surety bondagreement in his personal capacity as the allegedproprietor of the SAL. The answering defendants learnedfor the first time of this trickery and misrepresentation ofthe other, Jacob Lim, when the herein plaintiff chattelmortgage (sic) allegedly executed by defendant Lim,thereby forcing them to file an adverse claim in the form ofthird party claim. Notwithstanding repeated oral demandsmade by defendants Bormaheco and Cervanteses, todefendant Lim, to surrender the possession of the two

planes and their accessories and or return the amountadvanced by the former amounting to an aggregate sumof P 178,997.14 as evidenced by a statement of accounts,the latter ignored, omitted and refused to comply withthem. (Record on Appeal, pp. 341-342).

Applying therefore the principles of law earlier cited to the facts of thecase, necessarily, no de facto partnership was created among the partieswhich would entitle the petitioner to a reimbursement of the supposedlosses of the proposed corporation. The record shows that the petitionerwas acting on his own and not in behalf of his other would-beincorporators in transacting the sale of the airplanes and spare parts.

WHEREFORE, the instant petitions are DISMISSED. The questioneddecision of the Court of Appeals is AFFIRMED.

SO ORDERED.

Republic of the PhilippinesSUPREME COURTManila

THIRD DIVISION

G.R. No. 136448 November 3, 1999

LIM TONG LIM, petitioner,vs.

PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

PANGANIBAN, J.:


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A partnership may be deemed to exist among parties who agree to borrowmoney to pursue a business and to divide the profits or losses that mayarise therefrom, even if it is shown that they have not contributed anycapital of their own to a "common fund." Their contribution may be in theform of credit or industry, not necessarily cash or fixed assets. Beingpartner, they are all liable for debts incurred by or on behalf of the

partnership. The liability for a contract entered into on behalf of anunincorporated association or ostensible corporation may lie in a personwho may not have directly transacted on its behalf, but reaped benefitsfrom that contract.

The Case

In the Petition for Review on Certioraribefore us, Lim Tong Lim assails theNovember 26, 1998 Decision of the Court of Appeals in CA-GR CV41477,

1which disposed as follows:

WHEREFORE, [there being] no reversible error in theappealed decision, the same is hereby affirmed.

2

The decretal portion of the Quezon City Regional Trial Court (RTC) ruling,which was affirmed by the CA, reads as follows:

WHEREFORE, the Court rules:

1. That plaintiff is entitled to the writ of preliminaryattachment issued by this Court on September 20, 1990;

2. That defendants are jointly liable to plaintiff for thefollowing amounts, subject to the modifications ashereinafter made by reason of the special and uniquefacts and circumstances and the proceedings thattranspired during the trial of this case;

a. P532,045.00 representing [the] unpaidpurchase price of the fishing nets coveredby the Agreement plus P68,000.00

representing the unpaid price of the floatsnot covered by said Agreement;

b. 12% interestper annum counted fromdate of plaintiff's invoices and computedon their respective amounts as follows:

i. Accrued interest ofP73,221.00 on InvoiceNo. 14407 forP385,377.80 datedFebruary 9, 1990;

ii. Accrued interest forP27,904.02 on InvoiceNo. 14413 forP146,868.00 datedFebruary 13, 1990;

iii. Accrued interest ofP12,920.00 on InvoiceNo. 14426 for P68,000.00dated February 19, 1990;

c. P50,000.00 as and for attorney's fees,plus P8,500.00 representing P500.00 perappearance in court;

d. P65,000.00 representing P5,000.00monthly rental for storage charges on thenets counted from September 20, 1990

(date of attachment) to September 12,1991 (date of auction sale);

e. Cost of suit.


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With respect to the joint liability of defendants forthe principal obligation or for the unpaid price ofnets and floats in the amount of P532,045.00 andP68,000.00, respectively, or for the total amountP600,045.00, this Court noted that these itemswere attached to guarantee any judgment that

may be rendered in favor of the plaintiff but, uponagreement of the parties, and, to avoid furtherdeterioration of the nets during the pendency ofthis case, it was ordered sold at public auction fornot less than P900,000.00 for which the plaintiffwas the sole and winning bidder. The proceeds ofthe sale paid for by plaintiff was deposited incourt. In effect, the amount of P900,000.00replaced the attached property as a guaranty forany judgment that plaintiff may be able to securein this case with the ownership and possession ofthe nets and floats awarded and delivered by thesheriff to plaintiff as the highest bidder in the

public auction sale. It has also been noted thatownership of the nets [was] retained by theplaintiff until full payment [was] made as stipulatedin the invoices; hence, in effect, the plaintiffattached its own properties. It [was] for this reasonalso that this Court earlier ordered the attachmentbond filed by plaintiff to guaranty damages todefendants to be cancelled and for theP900,000.00 cash bidded and paid for by plaintiffto serve as its bond in favor of defendants.

From the foregoing, it would appear therefore thatwhatever judgment the plaintiff may be entitled to

in this case will have to be satisfied from theamount of P900,000.00 as this amount replacedthe attached nets and floats. Considering,however, that the total judgment obligation ascomputed above would amount to onlyP840,216.92, it would be inequitable, unfair andunjust to award the excess to the defendants who

are not entitled to damages and who did not putup a single centavo to raise the amount ofP900,000.00 aside from the fact that they are notthe owners of the nets and floats. For this reason,the defendants are hereby relieved from any andall liabilities arising from the monetary judgment

obligation enumerated above and for plaintiff toretain possession and ownership of the nets andfloats and for the reimbursement of theP900,000.00 deposited by it with the Clerk ofCourt.

SO ORDERED.3

The Facts

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and PeterYao entered into a Contract dated February 7, 1990, for the purchase offishing nets of various sizes from the Philippine Fishing Gear Industries,Inc. (herein respondent). They claimed that they were engaged in abusiness venture with Petitioner Lim Tong Lim, who however was not asignatory to the agreement. The total price of the nets amounted toP532,045. Four hundred pieces of floats worth P68,000 were also sold tothe Corporation.

4

The buyers, however, failed to pay for the fishing nets and the floats;hence, private respondents filed a collection suit against Chua, Yao andPetitioner Lim Tong Lim with a prayer for a writ of preliminary attachment.The suit was brought against the three in their capacities as generalpartners, on the allegation that "Ocean Quest Fishing Corporation" was anonexistent corporation as shown by a Certification from the Securities

and Exchange Commission.5

On September 20, 1990, the lower courtissued a Writ of Preliminary Attachment, which the sheriff enforced byattaching the fishing nets on board F/B Lourdes which was then docked atthe Fisheries Port, Navotas, Metro Manila.

Instead of answering the Complaint, Chua filed a Manifestation admittinghis liability and requesting a reasonable time within which to pay. He also


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turned over to respondent some of the nets which were in his possession.Peter Yao filed an Answer, after which he was deemed to have waived hisright to cross-examine witnesses and to present evidence on his behalf,because of his failure to appear in subsequent hearings. Lim Tong Lim, onthe other hand, filed an Answer with Counterclaim and Crossclaim andmoved for the lifting of the Writ of Attachment.

6The trial court maintained

the Writ, and upon motion of private respondent, ordered the sale of thefishing nets at a public auction. Philippine Fishing Gear Industries won thebidding and deposited with the said court the sales proceeds ofP900,000.

7

On November 18, 1992, the trial court rendered its Decision, ruling thatPhilippine Fishing Gear Industries was entitled to the Writ of Attachmentand that Chua, Yao and Lim, as general partners, were jointly liable to payrespondent.

8

The trial court ruled that a partnership among Lim, Chua and Yao existedbased (1) on the testimonies of the witnesses presented and (2) on aCompromise Agreement executed by the three

9in Civil Case No. 1492-

MN which Chua and Yao had brought against Lim in the RTC of Malabon,Branch 72, for (a) a declaration of nullity of commercial documents; (b) areformation of contracts; (c) a declaration of ownership of fishing boats; (d)an injunction and (e) damages.

10The Compromise Agreement provided:

a) That the parties plaintiffs & Lim TongLim agree to have the four (4) vesselssold in the amount of P5,750,000.00including the fishing net. ThisP5,750,000.00 shall be applied as fullpayment for P3,250,000.00 in favor of JLHoldings Corporation and/or Lim Tong

Lim;

b) If the four (4) vessel[s] and the fishingnet will be sold at a higher price thanP5,750,000.00 whatever will be theexcess will be divided into 3: 1/3 Lim

Tong Lim; 1/3 Antonio Chua; 1/3 PeterYao;

c) If the proceeds of the sale the vesselswill be less than P5,750,000.00 whateverthe deficiency shall be shouldered and

paid to JL Holding Corporation by 1/3 LimTong Lim; 1/3 Antonio Chua; 1/3 PeterYao.

11

The trial court noted that the Compromise Agreement was silent as to thenature of their obligations, but that joint liability could be presumed fromthe equal distribution of the profit and loss.

21

Lim appealed to the Court of Appeals (CA) which, as already stated,affirmed the RTC.

Ruling of the Court of Appeals

In affirming the trial court, the CA held that petitioner was a partner ofChua and Yao in a fishing business and may thus be held liable as a suchfor the fishing nets and floats purchased by and for the use of thepartnership. The appellate court ruled:

The evidence establishes that all the defendants includingherein appellant Lim Tong Lim undertook a partnership fora specific undertaking, that is for commercial fishing . . . .Oviously, the ultimate undertaking of the defendants wasto divide the profits among themselves which is what apartnership essentially is . . . . By a contract ofpartnership, two or more persons bind themselves to

contribute money, property or industry to a common fundwith the intention of dividing the profits among themselves(Article 1767, New Civil Code).

13

Hence, petitioner brought this recourse before this Court.14


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The Issues

In his Petition and Memorandum, Lim asks this Court to reverse theassailed Decision on the following grounds:

I THE COURT OF APPEALS ERRED IN HOLDING,

BASED ON A COMPROMISE AGREEMENT THATCHUA, YAO AND PETITIONER LIM ENTERED INTO IN

A SEPARATE CASE, THAT A PARTNERSHIPAGREEMENT EXISTED AMONG THEM.

II SINCE IT WAS ONLY CHUA WHO REPRESENTEDTHAT HE WAS ACTING FOR OCEAN QUEST FISHINGCORPORATION WHEN HE BOUGHT THE NETS FROMPHILIPPINE FISHING, THE COURT OF APPEALS WASUNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONERLIM AS WELL.

III THE TRIAL COURT IMPROPERLY ORDERED THESEIZURE AND ATTACHMENT OF PETITIONER LIM'SGOODS.

In determining whether petitioner may be held liable for the fishing netsand floats from respondent, the Court must resolve this key issue: whetherby their acts, Lim, Chua and Yao could be deemed to have entered into apartnership.

This Court's Ruling

The Petition is devoid of merit.

First and Second Issues:

Existence of a Partnership

and Petitioner's Liability

In arguing that he should not be held liable for the equipment purchasedfrom respondent, petitioner controverts the CA finding that a partnershipexisted between him, Peter Yao and Antonio Chua. He asserts that the CAbased its finding on the Compromise Agreement alone. Furthermore, hedisclaims any direct participation in the purchase of the nets, alleging thatthe negotiations were conducted by Chua and Yao only, and that he has

not even met the representatives of the respondent company. Petitionerfurther argues that he was a lessor, not a partner, of Chua and Yao, for the"Contract of Lease " dated February 1, 1990, showed that he had merelyleased to the two the main asset of the purported partnership the fishingboat F/B Lourdes. The lease was for six months, with a monthly rental ofP37,500 plus 25 percent of the gross catch of the boat.

We are not persuaded by the arguments of petitioner. The facts as foundby the two lower courts clearly showed that there existed a partnershipamong Chua, Yao and him, pursuant to Article 1767 of the Civil Codewhich provides:

Art. 1767 By the contract of partnership, two or more

persons bind themselves to contribute money, property, orindustry to a common fund, with the intention of dividingthe profits among themselves.

Specifically, both lower courts ruled that a partnership among the threeexisted based on the following factual findings:

15

(1) That Petitioner Lim Tong Lim requested Peter Yao whowas engaged in commercial fishing to join him, while

Antonio Chua was already Yao's partner;

(2) That after convening for a few times, Lim, Chua, and

Yao verbally agreed to acquire two fishing boats, the FBLourdesand theFB Nelsonfor the sum of P3.35 million;

(3) That they borrowed P3.25 million from Jesus Lim,brother of Petitioner Lim Tong Lim, to finance the venture.


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(4) That they bought the boats from CMF FishingCorporation, which executed a Deed of Sale over thesetwo (2) boats in favor of Petitioner Lim Tong Lim only toserve as security for the loan extended by Jesus Lim;

(5) That Lim, Chua and Yao agreed that the refurbishing,

re-equipping, repairing, dry docking and other expensesfor the boats would be shouldered by Chua and Yao;

(6) That because of the "unavailability of funds," JesusLim again extended a loan to the partnership in theamount of P1 million secured by a check, because ofwhich, Yao and Chua entrusted the ownership papers oftwo other boats, Chua's FB Lady Anne Meland Yao'sFBTracy to Lim Tong Lim.

(7) That in pursuance of the business agreement, PeterYao and Antonio Chua bought nets from RespondentPhilippine Fishing Gear, in behalf of "Ocean Quest FishingCorporation," their purported business name.

(8) That subsequently, Civil Case No. 1492-MN was filedin the Malabon RTC, Branch 72 by Antonio Chua andPeter Yao against Lim Tong Lim for (a) declaration ofnullity of commercial documents; (b) reformation ofcontracts; (c) declaration of ownership of fishing boats; (4)injunction; and (e) damages.

(9) That the case was amicably settled through aCompromise Agreement executed between the parties-litigants the terms of which are already enumerated

above.

From the factual findings of both lower courts, it is clear that Chua, Yaoand Lim had decided to engage in a fishing business, which they startedby buying boats worth P3.35 million, financed by a loan secured fromJesus Lim who was petitioner's brother. In their Compromise Agreement,

they subsequently revealed their intention to pay the loan with theproceeds of the sale of the boats, and to divide equally among them theexcess or loss. These boats, the purchase and the repair of which werefinanced with borrowed money, fell under the term "common fund" under

Article 1767. The contribution to such fund need not be cash or fixedassets; it could be an intangible like credit or industry. That the parties

agreed that any loss or profit from the sale and operation of the boatswould be divided equally among them also shows that they had indeedformed a partnership.

Moreover, it is clear that the partnership extended not only to the purchaseof the boat, but also to that of the nets and the floats. The fishing nets andthe floats, both essential to fishing, were obviously acquired in furtheranceof their business. It would have been inconceivable for Lim to involvehimself so much in buying the boat but not in the acquisition of theaforesaid equipment, without which the business could not haveproceeded.

Given the preceding facts, it is clear that there was, among petitioner,

Chua and Yao, a partnership engaged in the fishing business. Theypurchased the boats, which constituted the main assets of the partnership,and they agreed that the proceeds from the sales and operations thereofwould be divided among them.

We stress that under Rule 45, a petition for review like the present caseshould involve only questions of law. Thus, the foregoing factual findingsof the RTC and the CA are binding on this Court, absent any cogent proofthat the present action is embraced by one of the exceptions to therule.

16In assailing the factual findings of the two lower courts, petitioner

effectively goes beyond the bounds of a petition for review under Rule 45.

Compromise Agreement

Not the Sole Basis of Partnership

Petitioner argues that the appellate court's sole basis for assuming theexistence of a partnership was the Compromise Agreement. He also


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claims that the settlement was entered into only to end the dispute amongthem, but not to adjudicate their preexisting rights and obligations. Hisarguments are baseless. The Agreement was but an embodiment of therelationship extant among the parties prior to its execution.

A proper adjudication of claimants' rights mandates that courts must

review and thoroughly appraise all relevant facts. Both lower courts havedone so and have found, correctly, a preexisting partnership among theparties. In implying that the lower courts have decided on the basis of onepiece of document alone, petitioner fails to appreciate that the CA and theRTC delved into the history of the document and explored all the possibleconsequential combinations in harmony with law, logic and fairness. Verily,the two lower courts' factual findings mentioned above nullified petitioner'sargument that the existence of a partnership was based only on theCompromise Agreement.

Petitioner Was a Partner,

Not a Lessor

We are not convinced by petitioner's argument that he was merely thelessor of the boats to Chua and Yao, not a partner in the fishing venture.His argument allegedly finds support in the Contract of Lease and theregistration papers showing that he was the owner of the boats,including F/B Lourdeswhere the nets were found.

His allegation defies logic. In effect, he would like this Court to believe thathe consented to the sale of his own boats to pay a debt of Chua and Yao,with the excess of the proceeds to be divided among the three of them. Nolessor would do what petitioner did. Indeed, his consent to the sale provedthat there was a preexisting partnership among all three.

Verily, as found by the lower courts, petitioner entered into a businessagreement with Chua and Yao, in which debts were undertaken in order tofinance the acquisition and the upgrading of the vessels which would beused in their fishing business. The sale of the boats, as well as the divisionamong the three of the balance remaining after the payment of their loans,

proves beyond cavil that F/B Lourdes, though registered in his name, wasnot his own property but an asset of the partnership. It is not uncommon toregister the properties acquired from a loan in the name of the person thelender trusts, who in this case is the petitioner himself. After all, he is thebrother of the creditor, Jesus Lim.

We stress that it is unreasonable indeed, it is absurd for petitioner tosell his property to pay a debt he did not incur, if the relationship amongthe three of them was merely that of lessor-lessee, instead of partners.

Corporation by Estoppel

Petitioner argues that under the doctrine of corporation by estoppel,liability can be imputed only to Chua and Yao, and not to him. Again, wedisagree.

Sec. 21 of the Corporation Code of the Philippines provides:

Sec. 21. Corporation by estoppel. All persons whoassume to act as a corporation knowing it to be withoutauthority to do so shall be liable as general partners for alldebts, liabilities and damages incurred or arising as aresult thereof: Provided however,That when any suchostensible corporation is sued on any transaction enteredby it as a corporation or on any tort committed by it assuch, it shall not be allowed to use as a defense its lack ofcorporate personality.

One who assumes an obligation to an ostensiblecorporation as such, cannot resist performance thereof onthe ground that there was in fact no corporation.

Thus, even if the ostensible corporate entity is proven to be legallynonexistent, a party may be estopped from denying its corporateexistence. "The reason behind this doctrine is obvious anunincorporated association has no personality and would be incompetentto act and appropriate for itself the power and attributes of a corporation as


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provided by law; it cannot create agents or confer authority on another toact in its behalf; thus, those who act or purport to act as its representativesor agents do so without authority and at their own risk. And as it is anelementary principle of law that a person who acts as an agent withoutauthority or without a principal is himself regarded as the principal,possessed of all the right and subject to all the liabilities of a principal, a

person acting or purporting to act on behalf of a corporation which has novalid existence assumes such privileges and obligations and becomespersonally liable for contracts entered into or for other acts performed assuch agent.

17

The doctrine of corporation by estoppel may apply to the allegedcorporation and to a third party. In the first instance, an unincorporatedassociation, which represented itself to be a corporation, will be estoppedfrom denying its corporate capacity in a suit against it by a third personwho relied in good faith on such representation. It cannot allege lack ofpersonality to be sued to evade its responsibility for a contract it enteredinto and by virtue of which it received advantages and benefits.

On the other hand, a third party who, knowing an association to beunincorporated, nonetheless treated it as a corporation and receivedbenefits from it, may be barred from denying its corporate existence in asuit brought against the alleged corporation. In such case, all those whobenefited from the transaction made by the ostensible corporation, despiteknowledge of its legal defects, may be held liable for contracts theyimpliedly assented to or took advantage of.

There is no dispute that the respondent, Philippine Fishing GearIndustries, is entitled to be paid for the nets it sold. The only question hereis whether petitioner should be held jointly

18liable with Chua and Yao.

Petitioner contests such liability, insisting that only those who dealt in the

name of the ostensible corporation should be held liable. Since his namedoes not appear on any of the contracts and since he never directlytransacted with the respondent corporation, ergo, he cannot be held liable.

Unquestionably, petitioner benefited from the use of the nets foundinside F/B Lourdes, the boat which has earlier been proven to be an asset

of the partnership. He in fact questions the attachment of the nets,because the Writ has effectively stopped his use of the fishing vessel.

It is difficult to disagree with the RTC and the CA that Lim, Chua and Yaodecided to form a corporation. Although it was never legally formed forunknown reasons, this fact alone does not preclude the liabilities of the

three as contracting parties in representation of it. Clearly, under the lawon estoppel, those acting on behalf of a corporation and those benefitedby it, knowing it to be without valid existence, are held liable as generalpartners.

Technically, it is true that petitioner did not directly act on behalf of thecorporation. However, having reaped the benefits of the contract enteredinto by persons with whom he previously had an existing relationship, he isdeemed to be part of said association and is covered by the scope of thedoctrine of corporation by estoppel. We reiterate the ruling of the CourtinAlonso v. Villamor:

19

A litigation is not a game of technicalities in which one,more deeply schooled and skilled in the subtle art ofmovement and position, entraps and destroys the other. Itis, rather, a contest in which each contending party fullyand fairly lays before the court the facts in issue and then,brushing aside as wholly trivial and indecisive allimperfections of form and technicalities of procedure, asksthat justice be done upon the merits. Lawsuits, unlikeduels, are not to be won by a rapier's thrust. Technicality,when it deserts its proper office as an aid to justice andbecomes its great hindrance and chief enemy, deservesscant consideration from courts. There should be novested rights in technicalities.

Third Issue:

Validity of Attachment


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Finally, petitioner claims that the Writ of Attachment was improperly issuedagainst the nets. We agree with the Court of Appeals that this issue is nowmoot and academic. As previously discussed, F/B Lourdeswas an assetof the partnership and that it was placed in the name of petitioner, only toassure payment of the debt he and his partners owed. The nets and thefloats were specifically manufactured and tailor-made according to their

own design, and were bought and used in the fishing venture they agreedupon. Hence, the issuance of the Writ to assure the payment of the pricestipulated in the invoices is proper. Besides, by specific agreement,ownership of the nets remained with Respondent Philippine Fishing Gear,until full payment thereof.

WHEREFORE, the Petition is DENIED and the assailed DecisionAFFIRMED. Costs against petitioner.

SO ORDERED.

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