Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION
G.R. No. 70403 July 7, 1989
SANTIAGO SYJUCO, INC., petitioner,
vs.
HON. JOSE P. CASTRO, AS PRESIDING JUDGE OF THE REGIONAL TRIAL COURT OF THE
NATIONAL CAPITAL JUDICIAL REGION, BRANCH LXXXV, QUEZON CITY, THE CITY SHERIFF
OF THE CITY OF MANILA, THE CITY REGISTER OF DEEDS OF THE CITY OF MANILA,
EUGENIO LIM, ARAMIS LIM, MARIO LIM, PAULINO LIM, LORENZO LIM, NILA LIM and/ or THE
PARTNERSHIP OF THE HEIRS OF HUGO LIM and ATTORNEY PATERNO P. CANLAS,
respondents.
Doroteo B. Daguna and Felix D. Carao for petitioner.
Paterno Canlas for private respondents.

NARVASA, J.:
This case may well serve as a textbook example of how judicial processes, designed to promote the
swift and efficient disposition of disputes at law, can be so grossly abused and manipulated as to
produce precisely the opposite result; how they can be utilized by parties with small scruples to
forestall for an unconscionably long time so essentially simple a matter as making the security given
for a just debt answer for its payment.
The records of the present proceedings and of two other cases already decided by this Court expose
how indeed the routine procedure of an extrajudicial foreclosure came by dint of brazen forum
shopping and other devious maneuvering to grow into a veritable thicket of litigation from which the
mortgagee has been trying to extricate itself for the last twenty years.
Back in November 1964, Eugenio Lim, for and in his own behalf and as attorney-in-fact of his
mother, the widow Maria Moreno (now deceased) and of his brother Lorenzo, together with his other
brothers, Aramis, Mario and Paulino, and his sister, Nila, all hereinafter collectively called the Lims,
borrowed from petitioner Santiago Syjuco, Inc. (hereinafter, Syjuco only) the sum of P800,000.00.
The loan was given on the security of a first mortgage on property registered in the names of said
borrowers as owners in common under Transfer Certificates of Title Numbered 75413 and 75415 of
the Registry of Deeds of Manila. Thereafter additional loans on the same security were obtained by
the Lims from Syjuco, so that as of May 8, 1967, the aggregate of the loans stood at P2,460,000.00,
exclusive of interest, and the security had been augmented by bringing into the mortgage other

property, also registered as owned pro indiviso by the Lims under two titles: TCT Nos. 75416 and
75418 of the Manila Registry.
There is no dispute about these facts, nor about the additional circumstance that as stipulated in the
mortgage deed the obligation matured on November 8, 1967; that the Lims failed to pay it despite
demands therefor; that Syjuco consequently caused extra-judicial proceedings for the foreclosure of
the mortgage to be commenced by the Sheriff of Manila; and that the latter scheduled the auction
sale of the mortgaged property on December 27, 1968. 1 The attempt to foreclose triggered off a legal
battle that has dragged on for more than twenty years now, fought through five (5) cases in the trial
courts, 2 two (2) in the Court of Appeals, 3 and three (3) more in this Court, 4 with the end only now in sight.
1. CIVIL CASE NO. 75180, CFI MANILA, BR.5; CA-G.R. NO. 00242R; G.R. NO. L-34683
To stop the foreclosure, the Lims through Atty. Marcial G. Mendiola, who was later joined by Atty.
Raul Correa filed Civil Case No. 75180 on December 24,1968 in the Court of First Instance of
Manila (Branch 5). In their complaint they alleged that their mortgage was void, being usurious for
stipulating interest of 23% on top of 11 % that they had been required to pay as "kickback." An order
restraining the auction sale was issued two days later, on December 26,1968, premised inter alia on
the Lims' express waiver of "their rights to the notice and re-publication of the notice of sale which
may be conducted at some future date." 5
On November 25,1970, the Court of First Instance (then presided over by Judge Conrado M.
Vasquez 6 rendered judgment finding that usury tained the mortgage without, however, rendering it void,
declaring the amount due to be only Pl,136,235.00 and allowing the foreclosure to proceed for satisfaction
of the obligation reckoned at only said amount . 7
Syjuco moved for new trial to enable it to present additional evidence to overthrow the finding of
usury, and the Court ordered the case reopened for that purpose. The Lims tried to negate that order
of reopening in the Court of Appeals, the proceedings being docketed as CA-G.R. No. 00242-R.
They failed. The Court of Appeals upheld the Trial Court. The Lims then sought to nullify this action
of the Appellate Court; towards that end, they filed with this Court a petition for certiorari and
prohibition, docketed as G.R. No. L-34683. But here, too, they failed; their petition was dismissed. 8
Thereafter, and on the basis of the additional evidence adduced by Syjuco on remand of the case
from this Court, the Trial Court promulgated an amended decision on August 16, 1972, reversing its
previous holding that usury had flawed the Lims' loan obligation. It declared that the principal of said
obligation indeed amounted to P2,460,000.00, exclusive of interest at the rate of 12% per annum
from November 8, 1967, and, that obligation being already due, the defendants (Syjuco and the
Sheriff of Manila) could proceed with the extrajudicial foreclosure of the mortgage given to secure its
satisfaction. 9
2. APPEAL FROM CIVIL CASE NO. 75180; CA-G.R. NO. 51752;
G.R. NO. L-45752

On September 9, 1972, Atty. Paterno R. Canlas entered his appearance in Civil Case No. 75180 as
counsel for the Lims in collaboration with Atty. Raul Correa, and on the same date appealed to the
Court of Appeals from the amended decision of August 16, 1972. 10 In that appeal, which was docketed
as CA G.R. No. 51752, Messrs. Canlas and Correa prayed that the loans be declared usurious; that the
principal of the loans be found to be in the total amount of Pl,269,505.00 only, and the interest thereon
fixed at only 6% per annum from the filing of the complaint; and that the mortgage be also pronounced
void ab initio. 11
The appeal met with no success. In a decision promulgated on October 25,1976, the Court of
Appeals affirmed in toto the Trial Court's amended decision. 12
The Lims came to this Court seeking reversal of the appellate Court's decision. However, their
petition for review-filed in their behalf by Canlas, and Atty. Pio R. Marcos, and docketed as G.R. No.
L-45752-was denied for lack of merit in a minute resolution dated August 5, 1977. The Lims' motion
for reconsideration was denied and entry of judgment was made on September 24,1977. 13 Here the
matter should have ended; it marked only the beginning of Syjuco's travails.
3. CIVIL CASE NO.112762, CFI MANILA BRANCH 9
Syjuco then resumed its efforts to proceed with the foreclosure. It caused the auction sale of the
mortgaged property to be scheduled on December 20, 1977, only to be frustrated again by another
action filed by the Lims on December 19, 1977, docketed as Civil Case No. 112762 of the Court of
First Instance of Manila. 14 The action sought to stop the sale on the ground that the notice of foreclosure
had not been republished; this, notwithstanding that as earlier stressed, the restraining order of December
26, 1968 issued in Civil Case No 75180 explicitly declared itself to be predicated on the Lims' waiver of
"their rights to the notice and republication of the notice of sale which may be conducted at some future
date." 15 An order restraining the sale issued in the case, although the petition for preliminary injunction
was subsequently denied. A supplemental complaint was also filed by the Lims seeking recovery of some
Pl million in damages allegedly suffered by reason of said lack of republication. 16
4. CIVIL CASE NO. 75180
That very same claim that there had been no republication of the notice of sale, which was the
foundation of the Lims' action in Civil Case No. 112762 as aforesaid was made by the Lims the
basis of an urgent motion filed on December 15, 1977 in Civil Case No. 75180, in which, as earlier
narrated, the judgement authorizing the foreclosure had been affirmed by both the Court of Appeals
and this Court, and had become final and executory. And that motion sought exactly the same
remedy prayed for in Civil Case No. 112762 (filed by the Lims four [4] days later, on December 19,
1977), i.e., the prevention of the auction sale. The Court -- Branch 5, then presided over by Judge
Jose H. Tecson granted the restraining order on December 19, 1977, 17 the very same day that the
Lims commenced Civil Case No. 112762 in the same Court and in which subsequent action they asked
for and obtained a similar restraining order.
The Lims' counsel thus brought about the anomalous situation of two (2) restraining orders directed
against the same auction sale, based on the same ground, issued by different courts having
cognizance of two (2) separate proceedings instituted for identical objectives. This situation lasted
for all of three (3) years, despite the republication of the notice of sale caused by Syjuco in January,

1978 in an effort to end all dispute about the matter, and despite Judge Tecson's having been made
aware of Civil Case No. 112762. It should have been apparent to Judge Tecson that there was
nothing more to be done in Civil Case No. 75180 except to enforce the judgment, already final and
executory, authorizing the extrajudicial foreclosure of the mortgage, a judgment sanctioned, to
repeat, by both the Court of Appeals and the Supreme Court; that there was in truth no need for
another publication of the notice since the Lims had precisely waived such republication, this waiver
having been the condition under which they had earlier obtained an order restraining the first
scheduled sale; that, in any event, the republication effected by Syjuco had removed the only
asserted impediment to the holding of the same; and that, finally, the Lims were acting in bad faith:
they were maintaining proceedings in two (2) different courts for essentially the same relief. 18
Incredibly, not only did Judge Tecson refuse to allow the holding of the auction sale, as was the only just
and lawful course indicated by the circumstances, 19 he authorized the Lims to sell the mortgaged
property in a private sale, 20 with the evident intention that the proceeds of the sale, which he directed to
be deposited in court, would be divided between Syjuco and the Lims; this, in line with the patently
specious theory advocated by the Lims' counsel that the bond flied by them for the postponement of the
sale, set at P6 million by the Court (later increased by P 3 million) had superseded and caused novation
of the mortgage. 21 The case lay fallow for a year, certain other, incidents arising and remaining
unresolved on account of numerous postponements.
5. G.R. No. L-56014
Finally, on January 28, 1981, Syjuco betook itself to this Court, presumably no longer disposed to
await Judge Tecson's pleasure or the Lims' convenience. It filed a petition for certiorari and
prohibition, docketed as G.R. No. L-56014, alleging that in Civil Case No. 75180, Judge Tecson had
gravely abused discretion in:
(1) unreasonably delaying the foreclosure of the mortgage;
(2) entertaining the Lims' motion to discharge said mortgage grounded on the theory
that it had been superseded and novated by the Lims' act of filing the bond required
by Judge Tecson in connection with the postponement of the foreclosure sale, and
unreasonably delaying resolution of the issue; and
(3) authorizing the Lims to negotiate and consummate the private sale of the
mortgaged property and motu proprio extending the period granted the Lims for the
purpose, in disregard of the final and executory judgment rendered in the case.
By judgment rendered on September 21, 1982, after due proceedings, this Court 22
issued the writ prayed for and nullified the orders and actuations of Judge Tecson in Civil
Case No. 75180. The judgment declared that:
(1) the republication by Syjuco of the notice of foreclosure sale rendered the
complaint in Civil Case No. 112762 moot and academic; hence, said case could not
operate to bar the sale;
(2) the Lims' bonds (of P 6 million and P 3 million), having by the terms thereof been
given to guarantee payment of damages to Syjuco and the Sheriff of Manila resulting

from the suspension of the auction sale, could not in any sense and from any aspect
have the effect of superseding the mortgage or novating it;
(3) in fact, the bonds had become worthless when, as shown by the record, the
bondsman's authority to transact non-life insurance business in the Philippines was
not renewed, for cause, as of July 1, 1981.
The decision consequently decreed that the Sheriff of Manila should proceed with the mortgage
sale, there being no further impediment thereto. 23
Notice of the decision was served on the Lims, through Atty. Canlas, on October 2, 1982. A motion
for reconsideration was filed, 24 but the same was denied with finality for lack of merit and entry of final
judgment was made on March 22,1983. 25
6. THE SECRET ACTION CIVIL CASE NO. Q-36845 OF THE
REGIONAL TRIAL COURT, QUEZON CITY, JUDGE JOSE P.
CASTRO, PRESIDING
Twelve (12) days after the Lims were served, as above mentioned, with notice of this Court's
judgment in G.R. No. 56014, or on October 14,1982, they caused the filing with the Regional Trial
Court of Quezon City of still another action, the third, also designed, like the first two, to preclude
enforcement of the mortgage held by Syjuco.
This time the complaint was presented, not in their individual names, but in the name of a
partnership of which they themselves were the only partners: "Heirs of Hugo Lim." The complaint
advocated the theory that the mortgage which they, together with their mother, had individually
constituted (and thereafter amended during the period from 1964 to 1967) over lands standing in
their names in the Property Registry as owners pro indiviso, in fact no longer belonged to them at
that time, having been earlier deeded over by them to the partnership, "Heirs of Hugo Lim", more
precisely, on March 30, 1959, hence, said mortgage was void because executed by them without
authority from the partnership.
The complaint was signed by a lawyer other than Atty. Canlas, but the records disclose that Atty.
Canlas took over as counsel as of November 4,1982. The case, docketed as Civil Case No. Q39295, was assigned to Branch 35 of the Quezon City Regional Trial Court, then presided over by
Judge Jose P. Castro.
Judge Castro issued a restraining order on October 15, 1982. Then, Sheriff Perfecto G. Dalangin
submitted a return of summons to the effect that on December 6, 1982 he
.. served personally and left a copy of summons together with a copy of Complaint
and its annexes x x upon defendant's office formerly at 313 Quirino Ave., Paranaque,
Metro-Manila and now at 407 Dona Felisa Syjuco Building, Remedios St., corner Taft
Avenue, Manila, through the Manager, a person of sufficient age and discretion duly
authorized to receive service of such nature, but who refused to accept service and
signed receipt thereof. 26

A vaguer return will be hard to find. It is impossible to discern from it where precisely the summons
was served, whether at Quirino Avenue, Paranaque, or Taft Avenue, Manila; and it is inexplicable
that the name of the person that the sheriff had been able to identify as the manager is not stated,
the latter being described merely as "a person of sufficient age and discretion." In any event, as it
was to claim later, Syjuco asserts that it was never so served with summons, or with any other
notice, pleading, or motion relative to the case, for that matter.
On February 10, 1983, Atty. Canlas filed an ex-parte motion to declare Syjuco in default. The order
of default issued the next day, also directing the plaintiff partnership to present evidence ex parte
within three (3) days. On February 22, 1983, judgment by default was rendered, declaring void the
mortgage in question because executed by the Lims without authority from the partnership which
was and had been since March 30,1959 the exclusive owner of the mortgaged property, and making
permanent an injunction against the foreclosure sale that had issued on January 14,1983. 27 Service
of notice of the default judgment was, according to the return of the same Sheriff Perfecto Dalangin,
effected on the following day, February 23, 1983. His return is a virtual copy of his earlier one regarding
service of summons: it also states the place of service as the defendant's office, either at its former
location, 313 Quirino Avenue, Paranaque, or at the later address, 407 Dona Felisa, Syjuco Building, Taft
Avenue, Manila; and it also fails to identify the person on whom service was made, describing him only as
"the clerk or person in charge" of the office. 28
Unaccountably, and contrary to what might be expected from the rapidity with which it was decidedtwelve (12) days from February 10, 1983, when the motion to declare defendant Syjuco in default
was filed-the case was afterwards allowed by Atty. Canlas to remain dormant for seventeen (17)
months. He made no effort to have the judgment executed, or to avail of it in other actions instituted
by him against Syjuco. The judgment was not to be invoked until sometime in or after July, 1984,
again to stop the extrajudicial mortgage sale scheduled at or about that time at the instance of
Syjuco, as shall presently be recounted.
7. Other Actions in the Interim:
a. CIVIL CASE No. 83-19018, RTC MANILA
While the Lims, through their partnership ("Heirs of Hugo Lim"), were prosecuting their action in the
sala of Judge Castro, as above narrated, Syjuco once again tried to proceed with the foreclosure
after entry of judgment had been made in G.R. No. 56014 on March 22, 1983. It scheduled the
auction sale on July 30, 1983. But once again it was frustrated. Another obstacle was put up by the
Lims and their counsel, Atty. Canlas. This was Civil Case No. 83-19018 of the Manila Regional Trial
Court. The case was filed to stop the sale on the theory that what was sought to be realized from the
sale was much in excess of the judgment in Civil Case No. 75180, and that there was absence of
the requisite notice. It is significant that the judgment by default rendered by Judge Castro in Civil
Case No. Q-36485 was not asserted as additional ground to support the cause of action. Be this as
it may, a restraining order was issued on July 20,1983 in said Civil Case No. 83-9018. 29
b. CIVIL CASE NO. Q-32924, RTC QUEZON CITY
What the outcome of this case, No. 83-19018, is not clear. What is certain is (1) that the auction sale
was re-scheduled for September 20, 1983, (2) that it was aborted because the Lims managed to

obtain still another restraining order in another case commenced by their lawyer, Atty. Canlas: Civil
Case No. Q-32924 of the Court of First Instance of Quezon City, grounded on the proposition that
the publication of the notice of sale was defective; and (3) that the action was dismissed by the
Regional Trial Court on February 3, 1984. 30
No other salient details about these two (2) cases are available in the voluminous records before the
Court, except that it was Atty. Canlas who had filed them. He admits having done so unequivocally:
"Thus, the undersigned counsel filed injunction cases in Civil Case No. 83-19018 and Civil Case No.
39294, Regional Trial Courts of Manila and Quezon City. ... " 31
7. RE-ACTIVATION OF CIVIL CASE NO. Q-36485, RTC, Q QUEZON
CITY, BRANCH XXXV
Upon the dismissal of Civil Case No. 39294, Syjuco once more resumed its efforts to effect the
mortgage sale which had already been stymied for more than fifteen (15) years. At its instance, the
sheriff once again set a date for the auction sale. But on the date of the sale, a letter of Atty. Canlas
was handed to the sheriff drawing attention to the permanent injunction of the sale embodied in the
judgment by default rendered by Judge Castro in Civil Case No. Q- 36485. 32 Syjuco lost no time in
inquiring about Civil Case No. Q-36485, and was very quickly made aware of the judgment by default
therein promulgated and the antecedent events leading thereto. It was also made known that on July 9,
1984, Judge Castro had ordered execution of the judgment; that Judge Castro had on July 16, 1984
granted Atty. Canlas' motion to declare cancelled the titles to the Lims' mortgaged properties and as nun
and void the annotation of the mortgage and its amendments on said titles, and to direct the Register of
Deeds of Manila to issue new titles, in lieu of the old, in the name of the partnership, "Heirs of Hugo Lim."
33

On July 17,1984, Syjuco filed in said Civil Case No. Q-36485 a motion for reconsideration of the
decision and for dismissal of the action, alleging that it had never been served with summons; that
granting arguendo that service had somehow been made, it had never received notice of the
decision and therefore the same had not and could not have become final; and that the action
should be dismissed on the ground of bar by prior judgment premised on the final decisions of the
Supreme Court in G.R. No. L-45752 and G.R. No. 56014.
Two other motions by Syjuco quickly followed. The first, dated July 20, 1984, prayed for abatement
of Judge Castro's order decreeing the issuance of new certificates of title over the mortgaged lands
in the name of the plaintiff partnership. 34 The second, filed on July 24, 1984, was a supplement to the
motion to dismiss earlier filed, asserting another ground for the dismissal of the action, i.e., failure to state
a cause of action, it appearing that the mortgaged property remained registered in the names of the
individual members of the Lim family notwithstanding that the property had supposedly been conveyed to
the plaintiff partnership long before the execution of the mortgage and its amendments,-and that even
assuming ownership of the property by the partnership, the mortgage executed by all the partners was
valid and binding under Articles 1811 and 1819 of the Civil Code. 35
The motions having been opposed in due course by the plaintiff partnership, they remained pending
until January 31, 1985 when Syjuco moved for their immediate resolution. Syjuco now claims that
Judge Castro never acted on the motions. The latter however states that that he did issue an order

on February 22, 1985 declaring that he had lost jurisdiction to act thereon because, petitio principii,
his decision had already become final and executory.
8. G.R.NO.L-70403; THE PROCEEDING AT BAR
For the third time Syjuco is now before this Court on the same matter. It filed on April 3, 1985 the
instant petition for certiorari, prohibition and mandamus. It prays in its petition that the default
judgment rendered against it by Judge Castro in said Civil Case No. Q-36485 be annulled on the
ground of lack of service of summons, res judicata and laches, and failure of the complaint to state a
cause of action; that the sheriff be commanded to proceed with the foreclosure of the mortgage on
the property covered by Transfer Certificates of Title Numbered 75413, 75415, 75416 and 75418 of
the Manila Registry; and that the respondents the Lims, Judge Castro, the Sheriff and the Register of
Deeds of Manila, the partnership known as "Heirs of Hugo Lim," and Atty. Paterno R. Canlas,
counsel for-the Lims and their partnership-be perpetually enjoined from taking any further steps to
prevent the foreclosure.
The comment filed for the respondents by Atty. Canlas in substance alleged that (a) Syjuco was
validly served with summons in Civil Case No. Q-36485, hence, that the decision rendered by
default therein was also valid and, having been also duly served on said petitioner, became final by
operation of law after the lapse of the reglementary appeal period; (b) finality of said decision
removed the case from the jurisdiction of the trial court, which was powerless to entertain and act on
the motion for reconsideration and motion to dismiss; (c) the petition was in effect an action to annul
a judgment, a proceeding within the original jurisdiction of the Court of Appeals; (d) the plea of res
judicata came too late because raised after the decision had already become final; moreover, no
Identity of parties existed between the cases invoked, on the one hand, and Civil Case No. Q-36485,
on the other, the parties in the former being the Lims in their personal capacities and in the latter, the
Lim Partnership, a separate and distinct juridical entity; and the pleaded causes of action being
different, usury in the earlier cases and authority of the parties to encumber partnership property in
the case under review; (e) the plea of laches also came too late, not having been invoked in the
lower court; and (f) the property involved constituted assets of the Lim partnership, being registered
as such with the Securities and Exchange Commission. 36
On his own behalf Atty. Canlas submitted that he had no knowledge of the institution of Civil Case
No. Q-36485 (though he admitted being collaborating counsel in said case); that he did not
represent the Lims in all their cases against Syjuco, having been counsel for the former only since
1977, not for the last seventeen years as claimed by Syjuco; and that he had no duty to inform
opposing counsel of the pendency of Civil Case No. Q-36485. 37
Respondent Judge Castro also filed a comment 38 disclaiming knowledge of previous controversies
regarding the mortgaged property. He asserted that Syjuco had been properly declared in default for
having failed to answer the complaint despite service of summons upon it, and that his decision in said
case which was also properly served on Syjuco became final when it was not timely appealed, after which
he lost jurisdiction to entertain the motion for reconsideration and motion to dismiss. He also denied
having failed to act on said motions, adverting to an alleged order of February 22, 1985 where he
declared his lack of jurisdiction to act thereon.

The respondent Register of Deeds for his part presented a comment wherein he stated that by virtue
of an order of execution in Civil Case No. Q-36485, he had cancelled TCTs Nos. 75413, 75415,
75416 and 75418 of his Registry and prepared new certificates of title in lieu thereof, but that
cancellation had been held in abeyance for lack of certain registration requirements and by reason
also of the motion of Syjuco's Atty. Formoso to hold in abeyance enforcement of the trial court's
order of July 16, 1984 as well as of the temporary restraining order subsequently issued by the
Court. 39
It is time to write finis to this unedifying narrative which is notable chiefly for the deception,
deviousness and trickery which have marked the private respondents' thus far successful attempts
to avoid the payment of a just obligation. The record of the present proceeding and the other records
already referred to, which the Court has examined at length, make it clear that the dispute should
have been laid to rest more than eleven years ago, with entry of judgment of this Court (on
September 24, 1977) in G.R. No. L-45752 sealing the fate of the Lims' appeal against the amended
decision in Civil Case No. 75180 where they had originally questioned the validity of the mortgage
and its foreclosure. That result, the records also show, had itself been nine (9) years in coming, Civil
Case No. 75180 having been instituted in December 1968 and, after trial and judgment, gone
through the Court of Appeals (in CA-G.R. No. 00242-R) and this Court (in G.R. No. 34683), both at
the instance of the Lims, on the question of reopening before the amended decision could be issued.
Unwilling, however, to concede defeat, the Lims moved (in Civil Case No. 75180) to stop the
foreclosure sale on the ground of lack of republication. On December 19,1977 they obtained a
restraining order in said case, but this notwithstanding, on the very same date they filed another
action (Civil Case No. 117262) in a different branch of the same Court of First Instance of Manila to
enjoin the foreclosure sale on the same ground of alleged lack of republication. At about this time,
Syjuco republished the notice of sale in order, as it was later to manifest, to end all further dispute.
That move met with no success. The Lims managed to persuade the judge in Civil Case No. 75180,
notwithstanding his conviction that the amended decision in said case had already become final, not
only to halt the foreclosure sale but also to authorize said respondents to dispose of the mortgaged
property at a private sale upon posting a bond of P6,000,000.00 (later increased by P3,000,000.00)
to guarantee payment of Syjuco's mortgage credit. This gave the Lims a convenient excuse for
further suspension of the foreclosure sale by introducing a new wrinkle into their contentions-that the
bond superseded the mortgage which should, they claimed, therefore be discharged instead of
foreclosed.
Thus from the final months of 1977 until the end of 1980, a period of three years, Syjuco found itself
fighting a legal battle on two fronts: in the already finally decided Civil Case No. 75180 and in Civil
Case No. 117262, upon the single issue of alleged lack of republication, an issue already mooted by
the Lims' earlier waiver of republication as a condition for the issuance of the original restraining
order of December 26,1968 in Civil Case No. 75180, not to mention the fact that said petitioner had
also tried to put an end to it by actually republishing the notice of sale.
With the advent of 1981, its pleas for early resolution having apparently fallen on deaf ears, Syjuco
went to this Court (in G.R. No. L-56014) from which, on September 21, 1982, it obtained the decision

already referred to holding, in fine, that there existed no further impediment to the foreclosure sale
and that the sheriff could proceed with the same.
Said decision, instead of deterring further attempts to derail the foreclosure, apparently gave the
signal for the clandestine filing this time by the Partnership of the Heirs of Hugo Lim -on October
14,1982 of Civil Case No. Q-36485, the subject of the present petition, which for the first time
asserted the claim that the mortgaged property had been contributed to the plaintiff partnership long
before the execution of the Syjuco's mortgage in order to defeat the foreclosure.
Syjuco now maintains that it had no actual knowledge of the existence and pendency of Civil Case
No. Q-36485 until confronted, in the manner already adverted to, with the fait accompli of a "final"
judgment with permanent injunction therein, and nothing in the record disabuses the Court about the
truth of this disclaimer. Indeed, considering what had transpired up to that denouement, it becomes
quite evident that actuations of the Lims and their lawyer had been geared to keeping Syjuco in the
dark about said case. Their filing of two other cases also seeking to enjoin the foreclosure sale (Civil
Case No. 83-19018, Regional Trial Court of Manila in July 1983, and Civil Case No. Q-32924,
Regional Trial Court of Quezon City in September of the same year) after said sale had already been
permanently enjoined by default judgment in Civil Case No. Q-36485, appears in retrospect to be
nothing but a brace of feints calculated to keep Syjuco in that state of ignorance and to lull any
apprehensions it mat may have harbored about encountering further surprises from any other
quarter.
Further credence is lent to this appraisal by the unusually rapid movement of Civil Case No. Q36485 itself in its earlier stages, which saw the motion to declare Syjuco in default filed, an order of
default issued, evidence ex parte for the plaintiffs received and judgment by default rendered, all
within the brief span of twelve days, February 10-22, 1983. Notice of said judgment was "served" on
February 23, 1983, the day after it was handed down, only to be followed by an unaccountable lull of
well over a year before it was ordered executed on July 9, 1984 unaccountable, considering that
previous flurry of activity, except in the context of a plan to rush the case to judgment and then divert
Syjuco's attention to the Lims' moves in other directions so as to prevent discovery of the existence
of the case until it was too late.
The Court cannot but condemn in the strongest terms this trifling with the judicial process which
degrades the administration of justice, mocks, subverts and misuses that process for purely dilatory
purposes, thus tending to bring it into disrepute, and seriously erodes public confidence in the will
and competence of the courts to dispense swift justice.
Upon the facts, the only defense to the foreclosure that could possibly have merited the full-blown
trial and appeal proceedings it actually went through was that of alleged usury pleaded in Civil Case
No. 75180 and finally decided against the respondent Lims in G.R. No. L-45752 in September 1977.
The other issues of failure to republish and discharge of mortgage by guarantee set up in
succeeding actions were sham issues, questions without substance raised only for purposes of
delay by the private respondents, in which they succeeded only too well. The claim urged in this
latest case: that the mortgaged property had been contributed to the respondent partnership and
was already property of said partnership when the individual Lims unauthorizedly mortgaged it to

Syjuco, is of no better stripe, and this, too, is clear from the undisputed facts and the legal
conclusions to be drawn therefrom.
The record shows that the respondent partnership is composed exclusively of the individual Lims in
whose name all the cases herein referred to, with the sole exception of Civil Case No. Q-36485,
were brought and prosecuted, their contribution to the partnership consisting chiefly, if not solely, of
the property subject of the Syjuco mortgage. It is also a fact that despite its having been contributed
to the partnership, allegedly on March 30, 1959, the property was never registered with the Register
of Deeds in the name of the partnership, but to this date remains registered in the names of the Lims
as owners in common. The original mortgage deed of November 14,1964 was executed by the Lims
as such owners, as were all subsequent amendments of the mortgage. There can be no dispute that
in those circumstances, the respondent partnership was chargeable with knowledge of the mortgage
from the moment of its execution. The legal fiction of a separate juridical personality and existence
will not shield it from the conclusion of having such knowledge which naturally and irresistibly flows
from the undenied facts. It would violate all precepts of reason, ordinary experience and common
sense to propose that a partnership, as commonly known to all the partners or of acts in which all of
the latter, without exception, have taken part, where such matters or acts affect property claimed as
its own by said partnership.
If, therefore, the respondent partnership was inescapably chargeable with knowledge of the
mortgage executed by all the partners thereof, its silence and failure to impugn said mortgage within
a reasonable time, let alone a space of more than seventeen years, brought into play the doctrine of
estoppel to preclude any attempt to avoid the mortgage as allegedly unauthorized.
The principles of equitable estoppel, sometimes called estoppel in pais, are made part of our law by
Art. 1432 of the Civil Code. Coming under this class is estoppel by silence, which obtains here and
as to which it has been held that:
... an estoppel may arise from silence as well as from words. 'Estoppel by silence'
arises where a person, who by force of circumstances is under a duty to another to
speak, refrains from doing so and thereby leads the other to believe in the existence
of a state of facts in reliance on which he acts to his prejudice. Silence may support
an estoppel whether the failure to speak is intentional or negligent.
Inaction or silence may under some circumstances amount to a misrepresentation
and concealment of the facts, so as to raise an equitable estoppel. When the silence
is of such a character and under such circumstances that it would become a fraud on
the other party to permit the party who has kept silent to deny what his silence has
induced the other to believe and act on, it will operate as an estoppel. This doctrine
rests on the principle that if one maintains silence, when in conscience he ought to
speak, equity will debar him from speaking when in conscience he ought to remain
silent. He who remains silent when he ought to speak cannot be heard to speak
when he should be silent. 40
And more to the point:

A property owner who knowingly permits another to sell or encumber the property,
without disclosing his title or objecting to the transaction, is estopped to set up his
title or interest as against a person who has been thereby misled to his injury.
xxx
An owner of real property who stands by and sees a third person selling or
mortgaging it under claim of title without asserting his own title or giving the
purchaser or mortgagee any notice thereof is estopped, as against such purchaser or
mortgagee, afterward to assert his title; and, although title does not pass under these
circumstances, a conveyance will be decreed by a court of equity. Especially is the
rule applicable where the party against whom the estoppel is claimed, in addition to
standing by, takes part in malting the sale or mortgage. 41
More specifically, the concept to which that species of estoppel which results from the
non-disclosure of an estate or interest in real property has ordinarily been referred is
fraud, actual or constructive. ... Although fraud is not an essential element of the original
conduct working the estoppel, it may with perfect property be said that it would be
fraudulent for the party to repudiate his conduct, and to assert a right or claim in
contravention thereof. 42

Equally or even more preclusive of the respondent partnership's claim to the mortgaged property is
the last paragraph of Article 1819 of the Civil Code, which contemplates a situation duplicating the
circumstances that attended the execution of the mortgage in favor of Syjuco and therefore applies
foursquare thereto:
Where the title to real property is in the names of all the partners a conveyance
executed by all the partners passes all their rights in such property.
The term "conveyance" used in said provision, which is taken from Section 10 of the American
Uniform Partnership Act, includes a mortgage.
Interpreting Sec. 10 of the Uniform Partnership Act, it has been held that the right to
mortgage is included in the right to convey. This is different from the rule in agency
that a special power to sell excludes the power to mortgage (Art. 1879). 43
As indisputable as the propositions and principles just stated is that the cause of action in Civil Case
No. Q-36485 is barred by prior judgment. The right subsumed in that cause is the negation of the
mortgage, postulated on the claim that the parcels of land mortgaged by the Lims to Syjuco did not
in truth belong to them but to the partnership. Assuming this to be so, the right could have been
asserted at the time that the Lims instituted their first action on December 24, 1968 in the Manila
Court of First Instance, Civil Case No. 75180, or when they filed their subsequent actions: Civil Case
No. 112762, on December 19, 1977; Civil Case No. 83-19018, in 1983, and Civil Case No. Q-39294,
also in 1983. The claim could have been set up by the Lims, as members composing the
partnership, "Heirs of Hugo Lim." It could very well have been put forth by the partnership itself, as
co-plaintiff in the corresponding complaints, considering that the actions involved property

supposedly belonging to it and were being prosecuted by the entire membership of the partnership,
and therefore, the partnership was in actuality, the real party in interest. In fact, consistently with the
Lims' theory, they should be regarded, in all the actions presented by them, as having sued for
vindication, not of their individual rights over the property mortgaged, but those of the partnership.
There is thus no reason to distinguish between the Lims, as individuals, and the partnership itself,
since the former constituted the entire membership of the latter. In other words, despite the
concealment of the existence of the partnership, for all intents and purposes and consistently with
the Lims' own theory, it was that partnership which was the real party in interest in all the actions; it
was actually represented in said actions by all the individual members thereof, and consequently,
those members' acts, declarations and omissions cannot be deemed to be simply the individual acts
of said members, but in fact and in law, those of the partnership.
What was done by the Lims or by the partnership of which they were the only members-was to
split their cause of action in violation of the well known rule that only one suit may be instituted for a
single cause of action. 44 The right sought to be enforced by them in all their actions was, at bottom, to
strike down the mortgage constituted in favor of Syjuco, a right which, in their view, resulted from several
circumstances, namely that the mortgage was constituted over property belonging to the partnership
without the latter's authority; that the principal obligation thereby secured was usurious; that the
publication of the notice of foreclosure sale was fatally defective, circumstances which had already taken
place at the time of the institution of the actions. They instituted four (4) actions for the same purpose on
one ground or the other, making each ground the subject of a separate action. Upon these premises,
application of the sanction indicated by law is caned for, i.e., the judgment on the merits in any one is
available as a bar in the others. 45
The first judgment-rendered in Civil Case No. 75180 and affirmed by both the Court of Appeals (CAG.R. No. 51752) and this Court (G.R. No. L-45752) should therefore have barred all the others, all
the requisites of res judicata being present. The judgment was a final and executory judgment; it had
been rendered by a competent court; and there was, between the first and subsequent cases, not
only identity of subject-matter and of cause of action, but also of parties. As already pointed out, the
plaintiffs in the first four (4) actions, the Lims, were representing exactly the same claims as those of
the partnership, the plaintiff in the fifth and last action, of which partnership they were the only
members, and there was hence no substantial difference as regards the parties plaintiff in all the
actions. Under the doctrine of res judicata, the judgment in the first was and should have been
regarded as conclusive in all other, actions not only "with respect to the matter directly adjudged,"
but also "as to any other matter that could have been raised in relation thereto. " 46 It being
indisputable that the matter of the partnership's being the owner of the mortgaged properties "could have
been raised in relation" to those expressly made issuable in the first action, it follows that that matter
could not be re-litigated in the last action, the fifth.
Though confronted with the facts thus precluding the respondent partnership's claim to the property
under both the principle of estoppel and the provisions of Article 1819, last paragraph, of the Civil
Code, as well as the familiar doctrine of res judicata, the respondent Judge refused to act on
Syjuco's motions on the ground that he no longer had jurisdiction to do so because they were filed
after judgment by default against Syjuco, which failed to answer the complaint despite valid service
of summons, had been rendered and become final. The sheriffs return, however, creates grave
doubts about the correctness of the Judge's basic premise that summons had been validly served on
Syjuco. For one thing, the return 47 is unspecific about where service was effected. No safe conclusion

about the place of service can be made from its reference to a former and a present office of Syjuco in
widely separate locations, with nothing to indicate whether service was effected at one address or the
other, or even at both. A more serious defect is the failure to name the person served who is, with equal
ambiguity, identified only as "the Manager" of the defendant corporation (petitioner herein). Since the
sheriffs return constitutes primary evidence of the manner and incidents of personal service of a
summons, the Rules are quite specific about what such a document should contain:

SEC. 20. Proof of service. The proof of service of a summons shall be made in
writing by the server and shall set forth the manner, place and date of service; shall
specify any papers which have been served with the process and the name of the
person who received the same; and shall be sworn to when made by a person other
than a sheriff or his deputy. 48
In the case of Delta Motor Sales Corporation vs. Mangosing

49

it was held that:"

(a) strict compliance with the mode of service is necessary to confer jurisdiction of the court over a
corporation. The officer upon whom service is made must be one who is named in the statute;
otherwise the service is insufficient. So, where the statute requires that in the case of a domestic
corporation summons should be served on 'the president or head of the corporation, secretary,
treasurer, cashier or managing agent thereof, service of summons on the secretary's wife did not
confer jurisdiction over the corporation in the foreclosure proceeding against it. Hence, the decree of
foreclosure and the deficiency judgment were void and should be vacated (Reader vs. District Court,
94 Pacific 2nd 858).
The purpose is to render it reasonably certain that the corporation will receive prompt
and proper notice in an action against it or to insure that the summons be served on
a representative so integrated with the corporation that such person will know what to
do with the legal papers served on him. In other words, 'to bring home to the
corporation notice of the filing of the action'. (35 A C.J.S. 288 citing Jenkins vs. Lykes
Bros. S.S. Co., 48 F. Supp. 848; MacCarthy vs. Langston, D.C. Fla., 23 F.R.D. 249).
The liberal construction rule cannot be invoked and utilized as a substitute for the
plain legal requirements as to the manner in which summons should be served on a
domestic corporation (U.S. vs. Mollenhauer Laboratories, Inc., 267 Fed. Rep. 2nd
260).'
The rule cannot be any less exacting as regards adherence to the requirements of proof of service, it
being usually by such proof that sufficiency of compliance with the prescribed mode of service is
measured. Here the only proof of service of summons is the questioned sheriff's return which, as
already pointed out, is not only vague and unspecific as to the place of service, but also neglects to
Identify by name the recipient of the summons as required by Rule 20, Section 14, of the Rules of
Court. Where the sheriffs return is defective the presumption of regularity in the performance of
official functions will not lie. 50 The defective sheriffs return thus being insufficient and incompetent to
prove that summons was served in the manner prescribed for service upon corporations, there is no
alternative to affirming the petitioner's claim that it had not been validly summoned in Civil Case No. Q36485. It goes without saying that lacking such valid service, the Trial Court did not acquire jurisdiction

over the petitioner Syjuco, rendering null and void all subsequent proceedings and issuances in the action
from the order of default up to and including the judgment by default and the order for its execution. 51

The respondents' contention that the petition is in effect an action to annul a judgment which is within
the exclusive original jurisdiction of the Court of Appeals 52 has already been answered in Matanguihan
vs. Tengco 53 where, by declaring that an action for annulment of judgment is not a plain, speedy and
adequate remedy, this Court in effect affirmed that certiorari is an appropriate remedy against judgments
or proceedings alleged to have been rendered or had without valid service of summons. 54
Respondent Judge Castro begged the question when, instead of resolving on the merits the issue of
the invalidity of his default judgment and of the proceedings leading thereto because of absence of
valid service of summons on the defendant, which had been expressly raised in the defendant's
motion for reconsideration, he simply refused to do so on the excuse that he had lost jurisdiction
over the case. This refusal was, in the premises, a grave abuse of judicial discretion which must be
rectified.
What has been said makes unnecessary any further proceedings in the Court below, which might
otherwise be indicated by the consideration that two of the postulates of petitioner's unresolved
motions which the Court considers equally as decisive as res judicata, to wit: estoppel by silence
and Article 1819, last paragraph, of the Civil Code, do not constitute grounds for a motion to dismiss
under rule 16, of the Rules of Court. Such a step would only cause further delay. And delay has been
the bane of petitioner's cause, defying through all these years all its efforts to collect on a just debt.
The undenied and undisputable facts make it perfectly clear that the claim to the mortgaged property
belatedly and in apparent bad faith pressed by the respondent partnership is foreclosed by both law
and equity. Further proceedings will not make this any clearer than it already is. The Court is clothed
with ample authority, in such a case, to call a halt to all further proceedings and pronounce judgment
on the basis of what is already manifestly of record.
So much for the merits; the consequences that should attend the inexcusable and indefensible
conduct of the respondents Lims, the respondent partnership and their counsel, Atty. Paterno R.
Canlas, should now be addressed. That the Lims and their partnership acted in bad faith and with
intent to defraud is manifest in the record of their actuations, presenting as they did, piecemeal and
in one case after another, defenses to the foreclosure or claims in derogation thereof that were
available to them from the very beginning actuations that were to stave off the liquidation of an
undenied debt for more than twenty years and culminated in the clandestine filing and prosecution of
the action subject of the present petition.
What has happened here, it bears repeating, is nothing less than an abuse of process, a trifling with
the courts and with the rights of access thereto, for which Atty. Canlas must share responsibility
equally with his clients. The latter could not have succeeded so well in obstructing the course of
justice without his aid and advice and his tireless espousal of their claims and pretensions made in
the various cases chronicled here. That the cause to which he lent his advocacy was less than just
or worthy could not have escaped him, if not at the start of his engagement, in the years that
followed when with his willing assistance, if not instigation, it was shuttled from one forum to another
after each setback. This Court merely stated what is obvious and cannot be gainsaid when, in

Surigao Mineral Reservation Board vs. Cloribel, 55 it held that a party's lawyer of record has control of
the proceedings and that '(w)hatever steps his client takes should be within his knowledge and
responsibility."
In Prudential Bank vs. Castro, 56 strikingly similar actuations in a case, which are described in the
following paragraph taken from this Court's decision therein:
Respondents' foregoing actuations reveal an 'unholy alliance' between them and a
clear indication of partiality for the party represented by the other to the detriment of
the objective dispensation of justice. Writs of Attachment and Execution were issued
and implemented with lightning speed; the case itself was railroaded to a swift
conclusion through a similar judgment; astronomical sums were awarded as
damages and attorney's fees; and topping it all, the right to appeal was foreclosed by
clever maneuvers," and which, the Court found, followed a pattern of conduct in
other cases of which judicial notice was taken, were deemed sufficient cause for
disbarment.
Atty. Canlas even tried to mislead this Court by claiming that he became the Lims' lawyer only in
1977, 57 when the record indubitably shows that he has represented them since September 9, 1972 when
he first appeared for them to prosecute their appeal in Civil Case No. 75180. 58 He has also quite
impenitently disclaimed a duty to inform opposing counsel in Civil Case No. Q-39294 of the existence of
Civil Case No. Q-36485, as plaintiffs' counsel in both actions, even while the former, which involved the
same mortgage, was already being litigated when the latter was filed, although in the circumstances such
disclosure was required by the ethics of his profession, if not indeed by his lawyer's oath.
A clear case also exists for awarding at least nominal damages to petitioner, though damages are
not expressly prayed for, under the general prayer of the petition for "such other reliefs as may be
just and equitable under the premises," and the action being not only of certiorari and prohibition, but
also of mandamus-in which the payment of "damages sustained by the petitioner by reason of the
wrongful acts of the defendant' is expressly authorized. 59
There is no question in the Court's mind that such interests as may have accumulated on the
mortgage loan will not offset the prejudice visited upon the petitioner by the excruciatingly long delay
in the satisfaction of said debt that the private respondents have engineered and fomented.
These very same considerations dictate the imposition of exemplary damages in accordance with
Art. 2229 of the Civil Code.
WHEREFORE, so that complete justice may be dispensed here and, as far as consistent with that
end, all the matters and incidents with which these proceedings are concerned may be brought to a
swift conclusion:
(1) the assailed judgment by default in Civil Case No.Q-36485, the writ of execution
and all other orders issued in implementation thereof, and all proceedings in the case
leading to said judgment after the filing of the complaint are DECLARED null and
void and are hereby SET ASIDE; and the complaint in said case is DISMISSED for
being barred by prior judgment and estoppel, and for lack of merit;

(2) the City Sheriff of Manila is ORDERED, upon receipt of this Decision, to schedule
forthwith and thereafter conduct with all due dispatch the sale at public auction of the
mortgaged property in question for the satisfaction of the mortgage debt of the
respondents Lims to petitioner, in the principal amount of P2,460,000.00 as found in
the amended decision in Civil Case No. 75180 of the Court of First Instance of
Manila, interests thereon at the rate of twelve (12%) percent per annum from
November 8, 1967 until the date of sale, plus such other and additional sums for
commissions, expenses, fees, etc. as may be lawfully chargeable in extrajudicial
foreclosure and sale proceedings;
(3) the private respondents, their successors and assigns, are PERPETUALLY
ENJOINED from taking any action whatsoever to obstruct, delay or prevent said
auction sale;
(4) the private respondents (the Lims, the Partnership of the Heirs of Hugo Lim and
Atty. Paterno R. Canlas) are sentenced, jointly and severally, to pay the petitioner
P25,000.00 as nominal damages and P100,000.00 as exemplary damages, as well
as treble costs; and
(5) let this matter be referred to the Integrated Bar of the Philippines for investigation,
report, and recommendation insofar as the conduct of Atty. Canlas as counsel in this
case and in the other cases hereinabove referred to is concerned.
SO ORDERED.
Cruz, Gancayco, Grio-Aquino and Medialdea, JJ., concur.

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 84197 July 28, 1989
PIONEER INSURANCE & SURETY CORPORATION, petitioner,
vs.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, 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 SURETY CORPORATION, BORDER
MACHINERY and HEAVY EQUIPMENT CO., 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 the Court of Appeals in CA-G.R.
CV No. 66195 which modified the decision of the then Court of First Instance of Manila in Civil Case
No. 66135. The plaintiffs complaint (petitioner in G.R. No. 84197) against all defendants
(respondents in G.R. No. 84197) was dismissed but in all other respects the trial court's decision
was affirmed.
The dispositive portion of the trial court's decision reads as follows:
WHEREFORE, judgment is rendered against defendant Jacob S. Lim requiring Lim
to pay plaintiff the amount of P311,056.02, with interest at the rate of 12% per annum
compounded monthly; plus 15% of the amount awarded to plaintiff as attorney's fees
from July 2,1966, until full payment is made; plus P70,000.00 moral and exemplary
damages.

It is found in the records that the cross party plaintiffs incurred additional
miscellaneous expenses aside from Pl51,000.00,,making a total of P184,878.74.
Defendant Jacob 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 from the filing of the cross-complaints until the amount is fully paid; plus
moral and exemplary damages in the amount of P184,878.84 with interest from the
filing of the cross-complaints until the amount is fully paid; plus moral and exemplary
damages in the amount of P50,000.00 for each of the two Cervanteses.
Furthermore, he is required to pay P20,000.00 to Bormaheco and the Cervanteses,
and another P20,000.00 to Constancio B. Maglana as attorney's fees.
xxx xxx xxx
WHEREFORE, in view of all above, the complaint of plaintiff Pioneer against
defendants Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed.
Instead, plaintiff is required to indemnify the defendants Bormaheco and the
Cervanteses the amount of P20,000.00 as attorney's fees and the amount of
P4,379.21, per year from 1966 with legal rate of interest up 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 and costs.
No moral or exemplary damages is awarded against plaintiff for this action was filed
in good faith. The fact that the properties of the Bormaheco and the Cervanteses
were attached and that they were required to file a counterbond in order to dissolve
the attachment, is not an act of bad faith. When a man tries to protect his rights, he
should not be saddled with moral or exemplary damages. Furthermore, the rights
exercised were provided for in the Rules of Court, and it was the court that ordered it,
in the exercise of its discretion.
No damage is decided against Malayan Insurance Company, Inc., the third-party
defendant, for it only secured the attachment prayed for by the plaintiff Pioneer. If an
insurance company would be liable for damages in performing an act which is clearly
within its power and which is the reason for its being, then nobody would engage in
the insurance business. No further claim or counter-claim for or against anybody is
declared by this Court. (Rollo - G.R. No. 24197, pp. 15-16)
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the airline business as owneroperator of Southern Air Lines (SAL) a single proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim entered into and
executed a sales contract (Exhibit A) for the sale and purchase of two (2) DC-3A Type aircrafts and
one (1) set of necessary spare parts for the total agreed price of US $109,000.00 to be paid in
installments. One DC-3 Aircraft with Registry No. PIC-718, arrived in Manila on June 7,1965 while
the other aircraft, arrived in Manila on July 18,1965.

On May 22, 1965, Pioneer Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197)
as surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor of JDA, in behalf of its
principal, Lim, for the balance price of the aircrafts and spare parts.
It appears that Border Machinery and Heavy Equipment Company, Inc. (Bormaheco), Francisco and
Modesto Cervantes (Cervanteses) and Constancio Maglana (respondents in both petitions)
contributed some funds used in the purchase of the above aircrafts and spare parts. The funds were
supposed to be their contributions to a new corporation proposed 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 stipulated that the indemnitors principally agree and bind
themselves jointly and severally 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 may incur in consequence of having become surety upon the bond/note
and to pay, reimburse and make good to Pioneer, its successors and assigns, all sums and amounts
of money which it or its representatives should or may pay 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 SAL executed in favor of
Pioneer as deed of chattel mortgage as security for the latter's suretyship in favor of the former. It
was stipulated therein that Lim transfer and convey to the surety the two aircrafts. The deed (Exhibit
D) was duly registered with the Office of the Register of Deeds of the City of Manila and with the Civil
Aeronautics Administration pursuant to the Chattel Mortgage Law and the Civil Aeronautics Law
(Republic Act No. 776), respectively.
Lim defaulted on his subsequent installment payments prompting JDA to request payments from the
surety. Pioneer paid a total sum of P298,626.12.
Pioneer then filed a petition for the extrajudicial foreclosure of the said chattel mortgage before the
Sheriff of Davao City. The Cervanteses and Maglana, 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 an application for a writ of
preliminary attachment against Lim and respondents, 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 contracts signed by Lim and, by way of counterclaim, sought for
damages for being exposed to litigation and for recovery of the sums of money they advanced to Lim
for the purchase of the aircrafts in question.
After trial on the merits, a decision was rendered holding Lim liable to pay Pioneer but dismissed
Pioneer's complaint against all other defendants.
As stated earlier, the appellate court modified the trial court's decision in that the plaintiffs complaint
against all the defendants was dismissed. In all other 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 GRIEVOUSLY ERRED WHEN IT
DISMISSED THE APPEAL OF PETITIONER ON THE SOLE GROUND THAT
PETITIONER HAD ALREADY COLLECTED THE PROCEEDS OF THE
REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT IT CANNOT
REPRESENT A REINSURER TO RECOVER THE AMOUNT FROM HEREIN
PRIVATE RESPONDENTS AS DEFENDANTS 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 that plaintiff Pioneer had
reinsured its risk of liability under the surety bond in favor of JDA and subsequently
collected the proceeds of such reinsurance in the sum of P295,000.00. Defendants'
alleged obligation to Pioneer amounts to P295,000.00, hence, plaintiffs instant action
for the recovery of the amount of P298,666.28 from defendants will no longer
prosper. Plaintiff Pioneer is not the real party in interest to institute the instant action
as it does not stand to be benefited or injured by the judgment.
Plaintiff Pioneer's contention that it is representing the reinsurer to recover the
amount from defendants, hence, it instituted the action is utterly devoid of merit.
Plaintiff did not even present any evidence that it is the attorney-in-fact of the
reinsurance company, authorized to institute an action for and in behalf of the latter.
To qualify a person to be a real party in interest in whose name an action must be
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 has
been held that the real party in interest is the party who would be benefited or injured
by the judgment or the party entitled to the avails of the suit (Salonga v. Warner
Barnes & Co., Ltd., 88 Phil. 125, 131). By real party in interest is meant a present
substantial interest as distinguished from a mere expectancy or a future, contingent,
subordinate or consequential interest (Garcia v. David, 67 Phil. 27; Oglleaby v.
Springfield Marine Bank, 52 N.E. 2d 1600, 385 III, 414; Flowers v. Germans, 1 NW
2d 424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).
Based on the foregoing premises, plaintiff Pioneer cannot be considered as the real
party in interest as it has already been paid by the reinsurer the sum of P295,000.00
the bulk of defendants' alleged obligation to Pioneer.
In addition to the said proceeds of the reinsurance received by plaintiff Pioneer from
its reinsurer, the former was able to foreclose extra-judicially one of the subject
airplanes and its spare engine, realizing the total amount of P37,050.00 from the sale
of the mortgaged chattels. Adding the sum of P37,050.00, to the proceeds of the
reinsurance amounting to P295,000.00, it is patent that plaintiff has been overpaid in

the amount of P33,383.72 considering that the total amount it had paid to JDA totals
to only P298,666.28. To allow plaintiff Pioneer to recover from defendants the
amount in excess of P298,666.28 would be tantamount to unjust enrichment as it has
already been paid by the reinsurance company of the amount plaintiff has paid to
JDA as surety of defendant Lim vis-a-vis defendant Lim's liability to JDA. Well settled
is the rule that no person should unjustly enrich himself at the 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 aforesaid amount, as this matter has never been raised by any of the
parties herein both in their answers in the court below and in their respective briefs with respondent
court; (Rollo, p. 11) (2) even assuming hypothetically that it was paid by its reinsurer, still none of the
respondents had any interest in the matter since the reinsurance is strictly between the petitioner
and the re-insurer pursuant to section 91 of the Insurance Code; (3) pursuant to the indemnity
agreements, the petitioner is entitled to recover from respondents Bormaheco and Maglana; and (4)
the principle of unjust enrichment is not applicable considering that whatever amount he would
recover from the co-indemnitor will be paid to the reinsurer.
The records belie the petitioner's contention that the issue on the reinsurance money was never
raised by the parties.
A cursory reading of the trial court's lengthy decision shows that two of the issues threshed out were:
xxx xxx xxx
1. Has Pioneer a cause of action against defendants with respect to so much of its
obligations to JDA as has been paid with reinsurance money?
2. If the answer to the preceding question is in the negative, has Pioneer still any
claim against defendants, considering the amount it has realized from the sale of the
mortgaged properties? (Record on Appeal, p. 359, Annex B 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 under the surety bond it had
executed in favor of JDA, collected the proceeds of such reinsurance in the sum of
P295,000, and paid with the said amount the bulk of its alleged liability to JDA under
the said surety bond, it is plain that on 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 the reinsurance (sic), that is suing
defendants for the amount paid to it by the reinsurers, notwithstanding that the cause
of action pertains to the latter, Pioneer says: The reinsurers opted instead that the
Pioneer Insurance & Surety Corporation shall pursue alone the case.. . . . Pioneer
Insurance & Surety Corporation is representing the reinsurers to recover the

amount.' In other words, insofar as the amount paid to it by the reinsurers Pioneer is
suing defendants as their attorney-in-fact.
But in the first place, there is not the slightest indication in the complaint that Pioneer
is suing as attorney-in- fact of the reinsurers for any amount. Lastly, and most
important of all, Pioneer has no right to institute and maintain in its own name an
action for the benefit of the reinsurers. It is well-settled that an action brought by an
attorney-in-fact in his own name instead of that of the principal will not prosper, and
this is so even where the name of the principal is disclosed in the complaint.
Section 2 of Rule 3 of the Old Rules of Court provides that 'Every
action must be prosecuted in the name of the real party in interest.'
This provision is mandatory. The real party in interest is the party who
would be benefitted or injured by the judgment or is the party entitled
to the avails of the suit.
This Court has held in various cases that an attorney-in-fact is not a
real party in interest, that there is no law permitting an action to be
brought by an attorney-in-fact. Arroyo v. Granada and Gentero, 18
Phil. Rep. 484; Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12;
Filipinos Industrial 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 the reinsurers, the uninsured portion of what it paid to
JDA is the 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 and effective. But since the amount realized from the sale of the mortgaged
chattels are P35,000.00 for one of the airplanes and P2,050.00 for a spare engine, or
a total of P37,050.00, 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 in the appellate court.
Considering this admitted payment, the only issue that cropped up was the effect of payment made
by the reinsurers to the petitioner. Therefore, the petitioner's argument that the respondents had no
interest in the reinsurance contract as this is strictly between the petitioner 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 the same rights by subrogation
as are acquired in similar cases where the original insurer pays a loss (Universal Ins.
Co. v. Old Time Molasses Co. C.C.A. La., 46 F 2nd 925).
The rules of practice in actions on original insurance policies are in general
applicable to actions or contracts of reinsurance. (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, and he has received indemnity
from the insurance company for the injury or loss arising out of the wrong or breach
of contract complained of, the insurance company shall be subrogated to the rights of
the insured against the wrongdoer or the person who has violated the contract. If the
amount paid by the insurance company does not fully cover the injury or loss, the
aggrieved party shall be entitled to recover the deficiency from the person causing
the 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 subsequently applied in Manila Mahogany Manufacturing
Corporation v. Court of Appeals (154 SCRA 650 [1987]):
Note that if a property is insured and the owner receives the indemnity from the
insurer, it is provided in said article that the insurer is deemed subrogated to the
rights of the insured against the wrongdoer and if the amount paid by the insurer
does not fully cover the loss, then the aggrieved party is the one entitled to recover
the deficiency. 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.
(Emphasis supplied).
It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact of the
reinsurer.
Accordingly, the appellate court did not commit a reversible error in dismissing the petitioner's
complaint as against the respondents for the reason that the petitioner was not the real party in
interest in the complaint and, 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 the evidence on record shows that it is entitled to recover
from the counter indemnitors. It does not, however, cite any grounds except its allegation that
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 replete with evidence to
substantiate its finding that the counter-indemnitors are not liable to the petitioner. The trial court
stated:
Apart from the foregoing proposition, the indemnity agreement ceased to be valid
and effective after the execution of the chattel mortgage.
Testimonies of defendants Francisco Cervantes and Modesto Cervantes.
Pioneer Insurance, knowing the value of the aircrafts and the spare parts involved,
agreed to issue the bond provided that the same would be mortgaged to it, but this

was not possible because the planes were still in Japan and could not be mortgaged
here in the Philippines. As soon as the aircrafts were brought to the Philippines, they
would be mortgaged to Pioneer Insurance to cover the bond, and this indemnity
agreement would be cancelled.
The following is averred under oath by Pioneer in the original complaint:
The various conflicting claims over the mortgaged properties have
impaired and rendered insufficient the security under the chattel
mortgage and there is thus no other sufficient security for the claim
sought 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 to be enforced by this action, which necessarily means
that the indemnity agreement had ceased to have any force and effect at the time
this action was instituted. Sec 2, Rule 129, Revised Rules of Court.
Prescinding from the foregoing, Pioneer, having foreclosed the chattel mortgage on
the planes and spare parts, no longer has any further action against the defendants
as indemnitors to recover any unpaid balance of the price. The indemnity agreement
was ipso jure extinguished upon the foreclosure of the chattel mortgage. These
defendants, as indemnitors, would be entitled to be subrogated to the right of Pioneer
should they make payments to the latter. Articles 2067 and 2080 of the New Civil
Code of the Philippines.
Independently of the preceding proposition Pioneer's election of the remedy of
foreclosure precludes any further action to recover any unpaid balance of the price.
SAL or Lim, having failed to pay the second to the eight and last installments to JDA
and Pioneer as surety having made of the payments to JDA, the alternative remedies
open 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 chattel mortgage both by
extrajudicial foreclosure and the instant suit. Such being the case, as provided by the
aforementioned provisions, Pioneer shall have no further action against the
purchaser to recover any unpaid 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 be escaped from through the
contention that Pioneer is not the vendor but JDA. The reason is that Pioneer is
actually exercising the rights of JDA as vendor, having subrogated it in such rights.
Nor may the application of the provision be validly opposed on the ground that these
defendants and defendant Maglana are not the vendee but indemnitors. Pascual, et
al. v. Universal Motors Corporation, G.R. No. L- 27862, Nov. 20,1974, 61 SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change of their maturity
dates discharged these defendants from any liability as alleged indemnitors. The
change of the maturity dates of the obligations of Lim, or SAL extinguish the original
obligations thru novations thus discharging the indemnitors.
The principal hereof shall be paid in eight equal successive three
months interval installments, the first of which shall be due and
payable 25 August 1965, the remainder of which ... shall be due and
payable on the 26th day x x x of each succeeding three months and
the last of which shall be due and payable 26th May 1967.
However, at the trial of this case, Pioneer produced a memorandum executed by
SAL or Lim and JDA, modifying the maturity dates of the obligations, as follows:
The principal hereof shall be paid in eight equal successive three
month interval installments the first of which shall be due and payable
4 September 1965, the remainder of which ... shall be due and
payable on the 4th day ... of each succeeding months and the last of
which shall be due and payable 4th June 1967.
Not only that, Pioneer also produced eight purported promissory notes bearing
maturity dates different from that fixed in the aforesaid memorandum; the due date of
the first installment appears as October 15, 1965, and those of the rest of the
installments, the 15th of each succeeding three months, that of the last installment
being July 15, 1967.
These restructuring of the obligations with regard to their maturity dates, effected
twice, were done without the knowledge, much less, would have it believed that
these defendants Maglana (sic). Pioneer's official Numeriano Carbonel would have it
believed that these defendants and defendant Maglana knew of and consented to
the modification of the obligations. But if that were so, there would have been the
corresponding documents in the form of a written notice to as well as written
conformity of these defendants, and there are no such document. The consequence
of this was the extinguishment of the obligations and of the surety bond secured by
the indemnity agreement which was thereby also extinguished. Applicable by
analogy are the rulings of the Supreme Court in the case of Kabankalan Sugar Co. v.
Pacheco, 55 Phil. 553, 563, and the case of Asiatic Petroleum Co. v. Hizon David, 45
Phil. 532, 538.
Art. 2079. An extension granted to the debtor by the creditor without
the consent of the guarantor extinguishes the guaranty The mere
failure on the part of the creditor to demand payment after the debt
has become due does not of itself constitute any extension time
referred to herein, (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 prescribed when Pioneer paid the
same. Consequently, Pioneer has no more cause of action to recover from these
defendants, as supposed indemnitors, what it has paid to JDA. By virtue of an
express stipulation in the surety bond, the failure of JDA to present its claim to
Pioneer within ten days 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 debtor shall not entitle him to
reimbursement from his co-debtors if such payment is made after the
obligation has prescribed or became illegal.
These defendants are entitled to recover damages and attorney's fees from Pioneer
and its surety by reason of the filing of the instant case against them and the
attachment and garnishment of their properties. The instant action is clearly
unfounded insofar as plaintiff drags these defendants and defendant Maglana.'
(Record on Appeal, 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 not meritorious.
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 through the corporate vehicle but who failed to incorporate the entity
in which they had chosen to invest? How are the losses to be treated in situations
where their contributions to the intended 'corporation' were invested not through the
corporate form? This Petition presents these fundamental questions which we
believe were resolved erroneously by the 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, Constancio Maglana and petitioner Lim to incorporate, a de facto
partnership among them was created, and that as a consequence of such relationship all must share
in the losses and/or gains of the venture in proportion to their contribution. The petitioner, therefore,
questions the appellate court's findings ordering him to reimburse certain amounts given by the
respondents to the petitioner as their contributions to the intended corporation, to wit:

However, defendant Lim should be held liable to pay his co-defendants' cross-claims
in the total amount of P184,878.74 as correctly found by the trial court, with interest
from the filing of the cross-complaints until the amount is fully paid. Defendant Lim
should pay one-half of the said amount to Bormaheco and the Cervanteses and the
other one-half to defendant Maglana. It is established in the records that defendant
Lim had duly received the amount of Pl51,000.00 from defendants Bormaheco and
Maglana representing the latter's participation in the ownership of the subject
airplanes and spare parts (Exhibit 58). In addition, the cross-party plaintiffs incurred
additional expenses, hence, the total sum of P 184,878.74.
We first state the principles.
While it has been held that as between themselves the rights of the stockholders in a
defectively incorporated association should be governed by the supposed charter
and the laws of the state relating thereto and not by the rules governing partners
(Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), it is
ordinarily held that persons who attempt, but fail, to form a corporation and who carry
on business under the corporate name occupy the position of partners inter se
(Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913A 1065). Thus, where
persons associate themselves together under articles to purchase property to carry
on a business, and their organization is so defective as to come short of creating a
corporation within the statute, they become in legal effect partners inter se, and their
rights as members of the company to the property acquired by the company will be
recognized (Smith v. Schoodoc Pond Packing Co., 84 A. 268,109 Me. 555; Whipple
v. Parker, 29 Mich. 369). So, where certain persons associated themselves as a
corporation for the development of land for irrigation purposes, and each conveyed
land to the corporation, and two of them contracted to pay a third the difference in the
proportionate value of the land conveyed by him, and no stock was ever issued in the
corporation, it was treated as a trustee for the associates in an action between them
for an accounting, and its capital stock was treated as partnership assets, sold, and
the proceeds distributed among them in proportion to the value of the property
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 the relation 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 when necessary to do justice between the
parties; thus, one who 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 engage in business under the name of the pretended corporation,
so as to be liable as such in an action for settlement of the alleged partnership and
contribution (Ward v. Brigham, 127 Mass. 24). A partnership relation between certain
stockholders and other stockholders, who were also directors, will not be implied in
the absence of an agreement, so as to make the former liable to contribute for
payment of debts illegally contracted by the latter (Heald v. Owen, 44 N.W. 210, 79
Iowa 23). (Corpus Juris Secundum, 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 his answer, the petitioner denied having received
any amount from respondents Bormaheco, the Cervanteses and Maglana. The trial court and the
appellate court, however, found through Exhibit 58, that the petitioner received the amount of
P151,000.00 representing the participation of Bormaheco and Atty. Constancio B. Maglana in the
ownership of the subject airplanes and spare parts. The record shows that defendant Maglana gave
P75,000.00 to petitioner Jacob Lim thru the Cervanteses.
It is therefore clear that the petitioner never had the intention to form a corporation with the
respondents despite his representations to them. This gives credence to the cross-claims of the
respondents to the effect that they were induced and lured by the petitioner to make contributions to
a proposed corporation which was never formed because the petitioner reneged on their agreement.
Maglana alleged in his cross-claim:
... that sometime in early 1965, Jacob Lim proposed to Francisco Cervantes and
Maglana to expand his airline business. Lim was to procure two DC-3's from Japan
and secure the necessary certificates of public convenience and necessity as well as
the required permits for the operation thereof. Maglana sometime in May 1965, gave
Cervantes his share of P75,000.00 for delivery to Lim which Cervantes did and Lim
acknowledged receipt thereof. Cervantes, likewise, delivered his share of the
undertaking. Lim in an undertaking sometime on or about August 9,1965, promised
to incorporate his airline in accordance with their agreement and proceeded to
acquire the planes on his own account. Since then up to the filing of this answer, Lim
has refused, failed and still refuses to set up the corporation or return the money of
Maglana. (Record on Appeal, pp. 337-338).
while respondents Bormaheco and the Cervanteses alleged in their answer, counterclaim, crossclaim and third party complaint:
Sometime in April 1965, defendant Lim lured and induced the answering defendants
to purchase two airplanes and spare parts from Japan which the latter considered as
their lawful contribution and participation in the proposed corporation to be known as
SAL. Arrangements and negotiations were undertaken by defendant Lim. Down
payments were advanced by defendants Bormaheco and the Cervanteses and
Constancio Maglana (Exh. E- 1). Contrary to the agreement among the defendants,
defendant Lim in connivance with the plaintiff, signed and executed the alleged
chattel mortgage and surety bond agreement in his personal capacity as the alleged
proprietor of the SAL. The answering defendants learned for the first time of this
trickery and misrepresentation of the other, Jacob Lim, when the herein plaintiff
chattel mortgage (sic) allegedly executed by defendant Lim, thereby forcing them to
file an adverse claim in the form of third party claim. Notwithstanding repeated oral
demands made by defendants Bormaheco and Cervanteses, to defendant Lim, to
surrender the possession of the two planes and their accessories and or return the
amount advanced by the former amounting to an aggregate sum of P 178,997.14 as
evidenced by a statement of accounts, the latter ignored, omitted and refused to
comply with them. (Record on Appeal, pp. 341-342).

Applying therefore the principles of law earlier cited to the facts of the case, necessarily, no de facto
partnership was created among the parties which would entitle the petitioner to a reimbursement of
the supposed losses of the proposed corporation. The record shows that the petitioner was acting on
his own and not in behalf of his other would-be incorporators in transacting the sale of the airplanes
and spare parts.
WHEREFORE, the instant petitions are DISMISSED. The questioned decision of the Court of
Appeals is AFFIRMED.
SO ORDERED.
Fernan, C.J., (Chairman), Bidin and Cortes, JJ., concur.
Feliciano, J., took no part.
Republic of the Philippines
SUPREME COURT
Manila
SECOND DIVISION

G.R. No. L-22493 July 31, 1975

ISLAND SALES, INC., plaintiff-appellee,
vs.
UNITED PIONEERS GENERAL CONSTRUCTION COMPANY, ET. AL defendants. BENJAMIN C.
DACO, defendant-appellant.
Grey, Buenaventura and Santiago for plaintiff-appellee.
Anacleto D. Badoy, Jr. for defendant-appellant.

CONCEPCION JR., J.:

This is an appeal interposed by the defendant Benjamin C. Daco from the decision of the Court of
First Instance of Manila, Branch XVI, in Civil Case No. 50682, the dispositive portion of which reads:
WHEREFORE, the Court sentences defendant United Pioneer General Construction
Company to pay plaintiff the sum of P7,119.07 with interest at the rate of 12% per
annum until it is fully paid, plus attorney's fees which the Court fixes in the sum of
Eight Hundred Pesos (P800.00) and costs.

The defendants Benjamin C. Daco, Daniel A. Guizona, Noel C. Sim and Augusto
Palisoc are sentenced to pay the plaintiff in this case with the understanding that the
judgment against these individual defendants shall be enforced only if the defendant
company has no more leviable properties with which to satisfy the judgment against
it. .
The individual defendants shall also pay the costs.
On April 22, 1961, the defendant company, a general partnership duly registered under the laws of
the Philippines, purchased from the plaintiff a motor vehicle on the installment basis and for this
purpose executed a promissory note for P9,440.00, payable in twelve (12) equal monthly
installments of P786.63, the first installment payable on or before May 22, 1961 and the subsequent
installments on the 22nd day of every month thereafter, until fully paid, with the condition that failure
to pay any of said installments as they fall due would render the whole unpaid balance immediately
due and demandable.
Having failed to receive the installment due on July 22, 1961, the plaintiff sued the defendant
company for the unpaid balance amounting to P7,119.07. Benjamin C. Daco, Daniel A. Guizona,
Noel C. Sim, Romulo B. Lumauig, and Augusto Palisoc were included as co-defendants in their
capacity as general partners of the defendant company.
Daniel A. Guizona failed to file an answer and was consequently declared in default. 1
Subsequently, on motion of the plaintiff, the complaint was dismissed insofar as the defendant
Romulo B. Lumauig is concerned. 2
When the case was called for hearing, the defendants and their counsels failed to appear
notwithstanding the notices sent to them. Consequently, the trial court authorized the plaintiff to
present its evidence ex-parte 3 , after which the trial court rendered the decision appealed from.
The defendants Benjamin C. Daco and Noel C. Sim moved to reconsider the decision claiming that
since there are five (5) general partners, the joint and subsidiary liability of each partner should not
exceed one-fifth ( 1/ 5 ) of the obligations of the defendant company. But the trial court denied the said
motion notwithstanding the conformity of the plaintiff to limit the liability of the defendants Daco and Sim to
only one-fifth ( 1/ 5 ) of the obligations of the defendant company. 4 Hence, this appeal.
The only issue for resolution is whether or not the dismissal of the complaint to favor one of the
general partners of a partnership increases the joint and subsidiary liability of each of the remaining
partners for the obligations of the partnership.
Article 1816 of the Civil Code provides:
Art. 1816. All partners including industrial ones, shall be liable pro rata with all their
property and after all the partnership assets have been exhausted, for the contracts
which may be entered into in the name and for the account of the partnership, under

its signature and by a person authorized to act for the partnership. However, any
partner may enter into a separate obligation to perform a partnership contract.
In the case of Co-Pitco vs. Yulo (8 Phil. 544) this Court held:
The partnership of Yulo and Palacios was engaged in the operation of a sugar estate
in Negros. It was, therefore, a civil partnership as distinguished from a mercantile
partnership. Being a civil partnership, by the express provisions of articles l698 and
1137 of the Civil Code, the partners are not liable each for the whole debt of the
partnership. The liability is pro rata and in this case Pedro Yulo is responsible to
plaintiff for only one-half of the debt. The fact that the other partner, Jaime Palacios,
had left the country cannot increase the liability of Pedro Yulo.
In the instant case, there were five (5) general partners when the promissory note in question was
executed for and in behalf of the partnership. Since the liability of the partners is pro rata, the liability
of the appellant Benjamin C. Daco shall be limited to only one-fifth ( 1/ 5 ) of the obligations of the
defendant company. The fact that the complaint against the defendant Romulo B. Lumauig was
dismissed, upon motion of the plaintiff, does not unmake the said Lumauig as a general partner in the
defendant company. In so moving to dismiss the complaint, the plaintiff merely condoned Lumauig's
individual liability to the plaintiff.
WHEREFORE, the appealed decision as thus clarified is hereby AFFIRMED, without
pronouncement as to costs.
SO ORDERED.
Makalintal, C.J., Fernando (Chairman), Barredo and Aquino, JJ., concur.