THIRD DIVISION

[G.R. No. 144214. July 14, 2003.]

LUZVIMINDA J. VILLAREAL, DIOGENES VILLAREAL and CARMELITO

DECISION

PANGANIBAN, J.:

A share in a partnership can be returned only after the completion of the latter’s dissolution,
liquidation and winding up of the business.chanrob1es virtua1 1aw 1ibrary

The Case

The Petition for Review on Certiorari before us challenges the March 23, 2000 Decision 1
and the July 26, 2000 Resolution 2 of the Court of Appeals 3 (CA) in CA-GR CV No. 41026.
The assailed Decision disposed as follows:jgc:chanrobles.com.ph

"WHEREFORE, foregoing premises considered, the Decision dated July 21, 1992 rendered by
the Regional Trial Court, Branch 148, Makati City is hereby SET ASIDE and NULLIFIED and
in lieu thereof a new decision is rendered ordering the [petitioners] jointly and severally to
pay and reimburse to [respondents] the amount of P253,114.00. No pronouncement as to
costs." 4

Reconsideration was denied in the impugned Resolution.

The Facts

On July 25, 1984, Luzviminda J. Villareal, Carmelito Jose and Jesus Jose formed a
partnership with a capital of P750,000 for the operation of a restaurant and catering
business under the name "Aquarius Food House and Catering Services." 5 Villareal was
appointed general manager and Carmelito Jose, operations manager.

Respondent Donaldo Efren C. Ramirez joined as a partner in the business on September 5,

After Jesus Jose withdrew from the partnership in January 1987, his capital contribution of
P250,000 was refunded to him in cash by agreement of the partners. 7
In the same month, without prior knowledge of respondents, petitioners closed down the
restaurant, allegedly because of increased rental. The restaurant furniture and equipment
were deposited in the respondents’ house for storage. 8

On March 1, 1987, respondent spouses wrote petitioners, saying that they were no longer
interested in continuing their partnership or in reopening the restaurant, and that they were
accepting the latter’s offer to return their capital contribution. 9

On October 13, 1987, Carmelita Ramirez wrote another letter informing petitioners of the
deterioration of the restaurant furniture and equipment stored in their house. She also
reiterated the request for the return of their one-third share in the equity of the partnership.
The repeated oral and written requests were, however, left unheeded. 10

Before the Regional Trial Court (RTC) of Makati, Branch 59, respondents subsequently filed
a Complaint 11 dated November 10, 1987, for the collection of a sum of money from
petitioners.

In their Answer, petitioners contended that respondents had expressed a desire to withdraw
from the partnership and had called for its dissolution under Articles 1830 and 1831 of the
Civil Code; that respondents had been paid, upon the turnover to them of furniture and
equipment worth over P400,000; and that the latter had no right to demand a return of
their equity because their share, together with the rest of the capital of the partnership, had
been spent as a result of irreversible business losses. 12

In their Reply, respondents alleged that they did not know of any loan encumbrance on the
restaurant. According to them, if such allegation were true, then the loans incurred by
petitioners should be regarded as purely personal and, as such, not chargeable to the
partnership. The former further averred that they had not received any regular report or
accounting from the latter, who had solely managed the business. Respondents also alleged
that they expected the equipment and the furniture stored in their house to be removed by
petitioners as soon as the latter found a better location for the restaurant. 13

Respondents filed an Urgent Motion for Leave to Sell or Otherwise Dispose of Restaurant
Furniture and Equipment 14 on July 8, 1988. The furniture and the equipment stored in
their house were inventoried and appraised at P29,000. 15 The display freezer was sold for
P5,000 and the proceeds were paid to them. 16

After trial, the RTC 17 ruled that the parties had voluntarily entered into a partnership,
which could be dissolved at any time. Petitioners clearly intended to dissolve it when they
stopped operating the restaurant. Hence, the trial court, in its July 21, 1992 Decision, held
there liable as follows: 18

"WHEREFORE, judgment is hereby rendered in favor of [respondents] and against the

(a) Actual damages in the amount of P250,000.00

(b) Attorney’s fee in the amount of P30,000.00

(c) Costs of suit."cralaw virtua1aw library

The CA Ruling
The CA held that, although respondents had no right to demand the return of their capital
contribution, the partnership was nonetheless dissolved when petitioners lost interest in
continuing the restaurant business with them. Because petitioners never gave a proper
accounting of the partnership accounts for liquidation purposes, and because no sufficient
evidence was presented to show financial losses, the CA. computed their liability as
follows:jgc:chanrobles.com.ph

"Consequently, since what has been proven is only the outstanding obligation of the
partnership in the amount of P240,658.00, although contracted by the partnership before
[respondents’] have joined the partnership but in accordance with Article 1826 of the New
Civil Code, they are liable which must have to be deducted from the remaining capitalization
of the said partnership which is in the amount of P1,000,000.00 resulting in the amount of
P759,342.00, and in order to get the share of [respondents], this amount of P759,342.00
must be divided into three (3) shares or in the amount of P253,114.00 for each share and
which is the only amount which [petitioner] will return to [respondents’] representing the
contribution to the partnership minus the outstanding debt thereof." 19

Hence, this Petition. 20

Issues

In their Memorandum, 21 petitioners submit the following issues for our

"9.1. Whether the Honorable Court of Appeals’ decision ordering the distribution of the
capital contribution, instead of the net capital after the dissolution and liquidation of a
partnership, thereby treating the capital contribution like a loan, is in accordance with law
and jurisprudence;

"9.2. Whether the Honorable Court of Appeals’ decision ordering the petitioners to jointly
and severally pay and reimburse the amount of [P]253,114.00 is supported by the evidence
on record; and

"9.3. Whether the Honorable Court of Appeals was correct in making [n]o pronouncement
as to costs." 22

On closer scrutiny, the issues are as follows: (1) whether petitioners are liable to
respondents for the latter’s share in the partnership; (2) whether the CA’s computation of
P253,114 as respondents’ share is correct; and (3) whether the CA was likewise correct in
not assessing costs.

This Court’s Ruling

The Petition has merit.

First Issue:chanrob1es virtual 1aw library

Share in Partnership

Both the trial and the appellate courts found that a partnership had indeed existed, and that
it was dissolved on March 1, 1987. They found that the dissolution took place when
respondents informed petitioners of the intention to discontinue it because of the former’s
dissatisfaction with, and loss of trust in, the latter’s management of the partnership affairs.
These findings were amply supported by the evidence on record. Respondents consequently
demanded from petitioners the return of their one-third equity in the partnership.

We hold that respondents have no right to demand from petitioners the return of their
equity share. Except as managers of the partnership, petitioners did not personally hold its
equity or assets. "The partnership has a juridical personality separate and distinct from that
of each of the partners." 23 Since the capital was contributed to the partnership, not to
petitioners, it is the partnership that must refund the equity of the retiring partners. 24

Second Issue:chanrob1es virtual 1aw library

What Must Be Returned?

Since it is the partnership, as a separate and distinct entity, that must refund the shares of
the partners, the amount to be refunded is necessarily limited to its total resources. In other
words, it can only pay out what it has in its coffers, which consists of all its assets.
However, before the partners can be paid their shares, the creditors of the partnership must
first be compensated. 25 After all the creditors have been paid, whatever is left of the
partnership assets becomes available for the payment of the partners’ shares.

Evidently, in the present case, the exact amount of refund equivalent to respondents’ one-
third share in the partnership cannot be determined until all the partnership assets will have
been liquidated — in other words, sold and converted to cash — and all partnership
creditors, if any, paid. The CA’s computation of the amount to be refunded to respondents
as their share was thus erroneous.

First, it seems that the appellate court was under the misapprehension that the total capital
contribution was equivalent to the gross assets to be distributed to the partners at the time
of the dissolution of the partnership. We cannot sustain the underlying idea that the capital
contribution at the beginning of the partnership remains intact, unimpaired and available for
distribution or return to the partners. Such idea is speculative, conjectural and totally
without factual or legal support.

Generally, in the pursuit of a partnership business, its capital is either increased by profits
earned or decreased by losses sustained. It does not remain static and unaffected by the
changing fortunes of the business. In the present case, the financial statements presented
before the trial court showed that the business had made meager profits. 26 However,
notable therefrom is the omission of any provision for the depreciation 27 of the furniture
and the equipment. The amortization of the goodwill 28 (initially valued at P500,000) is not
reflected either. Properly taking these non-cash items into account will show that the
partnership was actually sustaining substantial losses, which consequently decreased the
capital of the partnership. Both the trial and the appellate courts in fact recognized the
decrease of the partnership assets to almost nil, but the latter failed to recognize the
consequent corresponding decrease of the capital.

Second, the CA’s finding that the partnership had an outstanding obligation in the amount
of P240,658 was not supported by evidence. We sustain the contrary finding of the RTC,
which had rejected the contention that the obligation belonged to the partnership for the
following reason:jgc:chanrobles.com.ph
". . . [E]vidence on record failed to show the exact loan owed by the partnership to its
creditors. The balance sheet (Exh.’4’) does not reveal the total loan. The Agreement
(Exh.’A’) par. 6 shows an outstanding obligation of P240,055.00 which the partnership owes
to different creditors, while the Certification issued by Mercator Finance (Exh.’8’) shows that
it was Sps. Diogenes P. Villareal and Luzviminda J. Villareal, the former being the nominal
party defendant in the instant case, who obtained a loan of P355,000.00 on Oct. 1983,
when the original partnership was not yet formed."cralaw virtua1aw library

Third, the CA failed to reduce the capitalization by P250,000, which was the amount paid by
the partnership to Jesus Jose when he withdrew from the partnership.

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

It is a long established doctrine that the law does not relieve parties from the effects of
unwise, foolish or disastrous contracts they have entered into with all the required
formalities and with full awareness of what they were doing. Courts have no power to
relieve them from obligations they have voluntarily assumed, simply because their contracts
turn out to be disastrous deals or unwise investments. 29

Petitioners further argue that respondents acted negligently by permitting the partnership
assets in their custody to deteriorate to the point of being almost worthless. Supposedly,
the latter should have liquidated these sole tangible assets of the partnership and
considered the proceeds as payment of their net capital. Hence, petitioners argue that the
turnover of the remaining partnership assets to respondents was precisely the manner of
liquidating the partnership and fully settling the latter’s share in the partnership.

We disagree. The delivery of the store furniture and equipment to private respondents was
for the purpose of storage. They were unaware that the restaurant would no longer be
reopened by petitioners. Hence, the former cannot be faulted for not disposing of the stored
items to recover their capital investment.

Third Issue:chanrob1es virtual 1aw library

Costs

Section 1, Rule 142, provides:jgc:chanrobles.com.ph

"SECTION 1. Costs ordinarily follow results of suit. — Unless otherwise provided in these
rules, costs shall be allowed to the prevailing party as a matter of course, but the court shall
have power, for special reasons, to adjudge that either party shall pay the costs of an
action, or that the same be divided, as may be equitable. No costs shall be allowed against
the Republic of the Philippines unless otherwise provided by law."cralaw virtua1aw library

Although, as a rule, costs are adjudged against the losing party, courts have discretion, "for
special reasons," to decree otherwise. When a lower court is reversed, the higher court
normally does not award costs, because the losing party relied on the lower court’s
judgment which is presumed to have been issued in good faith, even if found later on to be
erroneous. Unless shown to be patently capricious, the award shall not be disturbed by a
reviewing tribunal.

WHEREFORE, the Petition is GRANTED, and the assailed Decision and Resolution SET ASIDE.
This disposition is without prejudice to proper proceedings for the accounting, the liquidation
and the distribution of the remaining partnership assets, if any. No pronouncement as to
costs.chanrob1es virtua1 1aw 1ibrary

SO ORDERED.