Arbes vs. Polistico

A member of an unlawful partnership may recover his capital contribution from the partnership's administrators without basing his action on the void partnership contract, because the contribution was made for a purpose that never legally came into existence, leaving the administrator holding what belongs to another without any consideration; however, profits earned by the unlawful partnership cannot inure to the partners and must instead be given to charitable institutions of the partnership's domicile.

The plaintiffs and defendants were respectively members and officers of "Turnuhan Polistico & Co.," a voluntary association engaged in a business adjudged unlawful. The dispute had previously reached the Supreme Court in Borlasa vs. Polistico (47 Phil., 345), where it was settled that in an action against the officers of a voluntary association to wind up its affairs and enforce an accounting, it is not necessary that all members of the association be made parties. On remand, both parties amended their pleadings, and by agreement the trial court appointed a commissioner from the Insular Auditor's Office to examine all books, documents, and accounts of the association and receive evidence. The governing statute was Article 1666 of the Spanish Civil Code, which prescribed the disposition of profits upon dissolution of an unlawful partnership.

The plaintiffs were members or shareholders of a voluntary association called "Turnuhan Polistico & Co.," while the defendants served as its president-treasurer, directors, and secretary. The action was brought to compel the liquidation of the association's funds and property and to enforce an accounting from the officer-defendants for the money and property in their possession.

The case had previously reached the Supreme Court when the same plaintiffs appealed from an order sustaining the defendants' demurrer and requiring them to amend their complaint to include all members of the association as parties. In Borlasa vs. Polistico (47 Phil., 345), the Court held that all members need not be joined, and the case was remanded. Upon return to the trial court, both parties amended their respective pleadings, and by agreement the court appointed Amadeo R. Quintos of the Insular Auditor's Office as commissioner to examine all books, documents, and accounts of the association and to receive whatever evidence the parties desired to present.

The commissioner rendered a report showing total income of ₱109,620.70—comprising members' shares of ₱97,263.70, credits paid of ₱6,196.55, interest received of ₱4,569.45, and miscellaneous income of ₱1,891.00—against total expenses of ₱85,012.90, leaving cash on hand of ₱24,607.80. The defendants objected to the commissioner's report, but the trial court examined the grounds for the objection, found them sufficiently explained in the report and the evidence, and accepted the findings. The trial court rendered judgment declaring the association unlawful and sentencing the defendants jointly and severally to return the ₱24,607.80 together with documents showing uncollected credits to the plaintiffs and the rest of the members represented by them, with costs against the defendants.

The defendants appealed, assigning several errors reducible to two principal points: first, that not all persons having an interest in the association were included as plaintiffs or defendants; and second, that the trial court should have admitted their objections to the commissioner's report. They further contended that because the partnership was unlawful, a charitable institution to whom the partnership funds might be ordered turned over should be included as a party defendant, invoking Article 1666 of the Civil Code.

• Necessary Parties: The appellants argued that not all persons having an interest in the association were included as plaintiffs or defendants, and that the action was therefore defective for failure to implead all interested parties.
• Commissioner's Report: The appellants maintained that their objections to the commissioner's report should have been admitted by the trial court, asserting errors in the report's findings.
• Charitable Institution as Necessary Party: The appellants contended that because the partnership was unlawful, a charitable institution to whom the partnership funds might be ordered turned over should be included as a party defendant, relying on Article 1666 of the Civil Code, which provides that upon dissolution of an unlawful partnership, profits shall be given to charitable institutions of the domicile of the partnership.

• Necessary Parties: Whether all members of the voluntary association must be included as plaintiffs or defendants in an action for liquidation and accounting.
• Commissioner's Report: Whether the trial court erred in overruling the defendants' objections to the commissioner's report and adopting its findings.
• Charitable Institution as Necessary Party: Whether a charitable institution must be made a party defendant in an action for the recovery of contributions from the administrators of an unlawful partnership, pursuant to Article 1666 of the Civil Code.
• Recovery of Contributions: Whether a member of an unlawful partnership may recover his capital contribution from the partnership's administrators.

• Necessary Parties: No. The decision in Borlasa vs. Polistico (47 Phil., 345) is controlling: in an action against the officers of a voluntary association to wind up its affairs and enforce an accounting, it is not necessary that all members be made parties.
• Commissioner's Report: No. The trial court examined all evidence touching the grounds for the objection and found them explained away in the commissioner's report; findings of fact made by a commissioner, when approved by the court, stand as the court's own findings and should not be disturbed absent convincing argument.
• Charitable Institution as Necessary Party: No. Article 1666 does not require charitable institutions to be made parties in an action to determine the rights of the parties to recover their contributions; the action arises from the fact of having contributed money to the partnership capital, not from the existence of the partnership contract.
• Recovery of Contributions: Yes. A member may recover his contribution because the purpose for which the contribution was made never legally came into existence, leaving the administrator holding another's property without any consideration; however, profits cannot be claimed by the partners and must be given to charitable institutions.

• Necessary Parties: The first point was resolved by direct application of the prior ruling in Borlasa vs. Polistico (47 Phil., 345), which had already settled that in an action against the officers of a voluntary association to wind up its affairs and enforce an accounting for money and property in their possession, it is not necessary that all members of the association be made parties. The Court found no reason to depart from that ruling.

• Commissioner's Report: The Court applied the principle, drawn from Tan Dianseng Tan Siu Pic vs. Echauz Tan Siuco (5 Phil., 516) and Kriedt vs. McCullogh & Co. (37 Phil., 474), that findings of fact made by a commissioner or referee, when approved by the court, stand upon the same basis as findings made by the judge himself. Under section 140 of the Code of Civil Procedure, the court is duty-bound to render judgment in accordance with the referee's report unless cause is shown to set it aside, placing upon the litigants the duty of discovering and exhibiting any error therein. The appellants stated their grounds for objection, the trial court examined the evidence and the commissioner's report, and accepted the findings; the appellants failed to present convincing arguments to justify reversal.

• Charitable Institution as Necessary Party: The Court rejected the appellants' reliance on Article 1666 of the Civil Code. The action arising from that article, in the case of an unlawful partnership, is one for recovery of amounts paid by the member from those in charge of the partnership's administration. The action need not be based on the existence of the partnership contract but on the fact of having contributed money to the partnership capital. Accordingly, charitable institutions of the partnership's domicile are not necessary parties in the present action, which concerns the determination of the rights of the parties to recover their contributions. Article 1666 permits no action for obtaining earnings made by the unlawful partnership, because the partner would have to base such an action on the partnership contract, which is null and void by reason of its unlawful object. Since the contract is juridically non-existent, it cannot give rise to a cause of action. The second paragraph of Article 1666 accordingly provides that profits cannot inure to the partners but must be given to charitable institutions.

• Recovery of Contributions: The Court relied extensively on Manresa's commentaries on Article 1666, which drew upon Ricci's analysis. A partner who limits himself to demanding only the amount he contributed need not resort to the partnership contract as the basis of his action. The contribution was made for a purpose that, because the contract is void, never legally came into existence. The administrator thus retains what belongs to another without any consideration, and the contributor is entitled to recover it. Profits, by contrast, do not constitute or represent the partner's contribution but are the result of the industry, business, or speculation that is the object of the partnership; demanding a proportional share of profits would require basing the action on the void contract, which is impossible. Furthermore, it would be immoral and unjust for the law to permit profit from a prohibited industry. The Court noted that Article 1666 deals only with the disposition of profits, not contributions; the exclusion of contributions from the disposal prescribed for profits shows that the general law must be followed, and partners should be reimbursed the amount of their respective contributions.

• Findings of a Commissioner or Referee — Findings of fact made by a commissioner or referee appointed under the Code of Civil Procedure, when approved by the court, stand upon the same basis as findings made by the judge. Under section 140, the court must render judgment in accordance with the report unless cause is shown to set it aside or recommit it. The burden is on the litigants to discover and exhibit any error in the report. Applied here: the trial court examined the defendants' objections, found them explained in the report, and adopted the findings; the Supreme Court found no convincing argument to disturb that conclusion.

• Recovery of Contributions from an Unlawful Partnership — A member of an unlawful partnership may recover his capital contribution from the partnership's administrators without basing his action on the void partnership contract. The contribution was made for a purpose that never legally came into existence because the contract is null and void; the administrator therefore holds another's property without any consideration. Profits, however, cannot be recovered by the partners because they are the result of the prohibited business and would require an action based on the void contract; they must instead be given to charitable institutions of the partnership's domicile, or in default thereof, to those of the province, pursuant to Article 1666 of the Civil Code.

• Parties to an Action Against Officers of a Voluntary Association — In an action against the officers of a voluntary association to wind up its affairs and enforce an accounting for money and property in their possession, it is not necessary that all members of the association be made parties. Established in Borlasa vs. Polistico and followed in this case.

• "the partner who limits himself to demanding only the amount contributed by him need not resort to the partnership contract on which to base his action. And he adds in explanation that the partner makes his contribution, which passes to the managing partner for the purpose of carrying on the business or industry which is the object of the partnership; or in other words, to breathe the breath of life into a partnership contract with an objection forbidden by law. And as said contrast does not exist in the eyes of the law, the purpose from which the contribution was made has not come into existence, and the administrator of the partnership holding said contribution retains what belongs to others, without any consideration; for which reason he is not bound to return it and he who has paid in his share is entitled to recover it." — This passage, drawn from Manresa's commentaries on Article 1666 as quoted by the Court, articulates the ratio decidendi for why contributions (but not profits) may be recovered from an unlawful partnership: the void contract means the purpose of the contribution never came into legal existence, leaving the administrator holding another's property without consideration.

• "the findings of facts made by a referee appointed under the provisions of section 135 of the Code of Civil Procedure stand upon the same basis, when approved by the Court, as findings made by the judge himself." — Quoted from Tan Dianseng Tan Siu Pic vs. Echauz Tan Siuco, this passage states the controlling principle for the standard of appellate review of a commissioner's or referee's findings, which the Court applied to uphold the trial court's adoption of the commissioner's report.

• "no charitable institution is a necessary party in the present case of determination of the rights of the parties. The action which may arise from said article, in the case of unlawful partnership, is that for the recovery of the amounts paid by the member from those in charge of the administration of said partnership, and it is not necessary for the said parties to base their action to the existence of the partnership, but on the fact that of having contributed some money to the partnership capital." — This passage defines the scope of Article 1666 and explains why charitable institutions need not be impleaded: the members' action for recovery of contributions is independent of the void partnership contract.

• Borlasa vs. Polistico, 47 Phil., 345 — Controlling precedent on the first issue. The Court's prior ruling in the same case held that in an action against the officers of a voluntary association to wind up its affairs and enforce an accounting, not all members need be made parties. Followed directly.

• Tan Dianseng Tan Siu Pic vs. Echauz Tan Siuco, 5 Phil., 516 — Cited for the principle that findings of fact made by a referee, when approved by the court, stand as the court's own findings. Applied to uphold the trial court's adoption of the commissioner's report.

• Kriedt vs. McCullogh & Co., 37 Phil., 474 — Cited for the rule under section 140 of the Code of Civil Procedure that the court must render judgment in accordance with the referee's report unless cause is shown to set it aside, placing on the litigants the duty to discover and exhibit any error. Applied to reject the appellants' challenge to the commissioner's report.

• U.S. vs. Baguio, 39 Phil., 962 — Cited for the proposition that "Turnuhan Polistico & Co." is an unlawful partnership. The Court treated this as settled.

• Article 1666, Spanish Civil Code — Provides that a partnership must have a lawful object and must be established for the common benefit of the partners; and that upon dissolution of an unlawful partnership, profits shall be given to charitable institutions of the domicile of the partnership, or in default thereof, to those of the province. The Court interpreted this article as governing only the disposition of profits, not contributions, and held that charitable institutions are not necessary parties in an action for recovery of contributions. The article was read in light of Manresa's commentaries, which distinguished between contributions (recoverable) and profits (not recoverable by partners, to be given to charity).

• Sections 135 and 140, Code of Civil Procedure — Section 135 governed the appointment of referees; section 140 imposed on the court the duty to render judgment in accordance with the referee's report unless cause was shown to set it aside or recommit it. These provisions were applied to uphold the trial court's adoption of the commissioner's findings and to place on the appellants the burden of demonstrating error in the report.

Avanceña, C.J., Johnson, Street, Johns, Romualdez, and Villa-Real, JJ., concurred.