Deluao vs. Casteel

A partnership formed to divide a fishpond permit between the parties after its award to one of them is dissolved ipso facto upon the permit's approval, because the event makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership, pursuant to Article 1830(3) of the Civil Code, in light of statutory prohibitions against unauthorized transfer or subletting of fishpond permits. An order in open court intransferably setting a case for hearing constitutes valid notice to all parties and counsel of record, and failure to appear constitutes a waiver of the right to be heard, warranting ex parte reception of the opposing party's evidence.

Nicanor Casteel filed successive fishpond applications beginning in 1940 for a tract of swampy land in Malalag, Davao, which were repeatedly disapproved by the Bureau of Forestry and Bureau of Fisheries. Felipe Deluao, Casteel's uncle, extended loans totaling approximately P27,000 to finance the construction and improvement of the fishpond pending resolution of Casteel's administrative appeals. On November 25, 1949, while both Casteel's and Felipe Deluao's competing applications over the same area were pending, Inocencia Deluao (Felipe's wife) and Casteel executed a document denominated a "contract of service," under which Inocencia financed the fishpond's development and served as administrator, while Casteel rendered services as manager and sole buyer of the fish produce. The dispute arose after the Secretary of Agriculture and Natural Resources approved Casteel's application on September 15, 1950, and Casteel subsequently ejected Inocencia's representative from the fishpond in January 1951, prompting the Deluaos to sue for specific performance and damages.

In 1940, Nicanor Casteel filed a fishpond application for a large tract of swampy land in Sitio Malalag (now Municipality of Malalag), Municipality of Padada, Davao. No action was taken by the authorities. During the Japanese occupation, he filed a second application for the same area, which likewise went unacted upon. On December 12, 1945, he filed a third application, which after survey was found to cover 178.76 hectares. A Bureau of Forestry investigation revealed that the area was still needed for firewood production, and the application was disapproved on May 13, 1946. Casteel filed a motion for reconsideration and, upon being advised by the district forester that a new application was required, filed fishpond application 1717 on May 27, 1947.

Meanwhile, several other persons filed applications for portions of the same area. Leoncio Aradillos filed application 1202 on May 20, 1946, and was granted permit F-289-C covering 9.3 hectares. Victorio D. Carpio filed application 762 on August 8, 1946. Alejandro Cacam's application 1276, filed December 26, 1946, was given due course on December 9, 1947, with the issuance of permit F-539-C covering 30 hectares. On November 17, 1948, Felipe Deluao filed his own fishpond application for the area covered by Casteel's application. Perceiving a threat from these rival applicants who had entered upon portions of the area, Casteel sought financial aid from his uncle Felipe Deluao, who extended loans totaling approximately P27,000 for the construction of dikes and cultivation of fish, resulting in a productive fishpond. Casteel filed protests against the competing applications, leading to two administrative cases — DANR Case 353 (Casteel vs. Carpio) and DANR Case 353-B (Casteel vs. Aradillos and Cacam). Despite findings that Casteel had introduced improvements on the land, the Director of Fisheries rejected his application on October 25, 1949, ordered removal of his improvements, and directed that the land be leased through public auction. Casteel appealed to the Secretary of Agriculture and Natural Resources.

On November 25, 1949, while Casteel's appeal was pending and Felipe Deluao's application had not yet been rejected, Inocencia Deluao and Casteel executed a document denominated a "contract of service." Under its terms, Inocencia financed P27,000 for the construction and improvement of the fishpond; Casteel was to serve as manager and sole buyer of the fish produce; and Inocencia was to serve as administrator. The document stated that it was the result of a verbal agreement entered into in November 1947. On the same date, Inocencia executed a special power of attorney in favor of Jesus Donesa, authorizing him to administer the fishpond and collect the value of the fish produce. On November 29, 1949, the Director of Fisheries rejected Felipe Deluao's application. Deluao reiterated his claim in the two administrative cases but withdrew his petition for reinvestigation by letter dated March 15, 1950, stating he was no longer interested in the area but wanted his interest protected and his capital reimbursed.

On September 15, 1950, the Secretary of Agriculture and Natural Resources issued decisions in both administrative cases, reinstating Casteel's application 1717 and giving it due course, rejecting Carpio's application, and cancelling the permits of Aradillos and Cacam, with Casteel required to pay for the improvements introduced by those permittees. Sometime in January 1951, Casteel forbade Inocencia Deluao from further administering the fishpond and ejected her representative, Jesus Donesa, from the premises. Alleging violation of the contract of service, Felipe and Inocencia Deluao filed an action on April 3, 1951 in the Court of First Instance of Davao for specific performance and damages against Casteel and Juan Depra, praying that Casteel be ordered to respect the contract, that Inocencia be allowed to continue administering the fishpond and collecting its proceeds, and that the defendants pay P20,000 in damages.

The lower court issued a preliminary mandatory injunction on April 28, 1951, ordering Casteel to allow Inocencia to continue administering the fishpond. After numerous postponements, Judge Fernandez of Branch I issued an order in open court on March 21, 1956, intransferably setting the case for hearing on May 2 and 3, 1956, and stating that the court would not entertain any further transfer of hearing. On April 25, 1956, defendants' counsel received a notice of hearing signed by a special deputy clerk of court, purportedly setting the hearing before Branch II presided by Judge Gomez. Defendants' counsel filed a motion for postponement on April 26, 1956, which Judge Gomez referred back to Branch I. On May 2, 1956, neither the defendants nor their counsel appeared before Judge Fernandez, who reiterated his March 21 order and directed the plaintiffs to introduce their evidence ex parte. On the basis of that evidence, the lower court rendered judgment on May 4, 1956, declaring the injunction permanent, ordering Casteel to deliver possession and administration of one-half of the fishpond to Inocencia, and awarding damages. Casteel's petition for relief from judgment was denied on May 21, 1956. The Court of Appeals certified the case to the Supreme Court as involving only questions of law.

• Due Process — Ex Parte Reception of Evidence: Casteel argued that the lower court committed gross abuse of discretion when it ordered reception of the appellees' evidence in the absence of the appellant at the trial on May 2, 1956, thereby depriving him of his day in court and of his property without due process of law.
• Petition for Relief from Judgment: Casteel maintained that the lower court committed grave abuse of discretion in denying his verified petition for relief from judgment filed on May 11, 1956 pursuant to Rule 38 of the Rules of Court, alleging lack of knowledge of the order setting the case for trial.
• Validity of Injunction and Complaint: Casteel contended that the lower court erred in ordering the issuance ex parte of a writ of preliminary injunction against him and in not dismissing the appellees' complaint.

• Co-ownership and Partnership: The appellees argued that the contract of service (Exhibit A) created a contract of co-ownership and partnership between Inocencia Deluao and Casteel over the fishpond in question.
• Recognition by the Secretary: The appellees contended that in approving Casteel's application, the Secretary of Agriculture and Natural Resources likewise recognized and/or confirmed their property right to one-half of the fishpond by virtue of the contract of service.

• Due Process — Ex Parte Reception of Evidence: Whether the lower court committed gross abuse of discretion when it ordered reception of the appellees' evidence in the absence of the appellant at the trial on May 2, 1956, thus depriving the appellant of his day in court and of his property without due process of law.
• Petition for Relief from Judgment: Whether the lower court committed grave abuse of discretion when it denied the verified petition for relief from judgment filed by the appellant on May 11, 1956 in accordance with Rule 38, Rules of Court.
• Validity of Injunction and Complaint: Whether the lower court erred in ordering the issuance ex parte of a writ of preliminary injunction against defendant-appellant, and in not dismissing appellees' complaint.

• Due Process — Ex Parte Reception of Evidence: No. The order given in open court on March 21, 1956, intransferably setting the case for hearing on May 2 and 3, 1956, constituted valid notice to the parties and all counsel of record; the defendants' failure to appear constituted a waiver of the right to be heard, warranting ex parte reception of the plaintiffs' evidence.
• Petition for Relief from Judgment: No. The lower court did not abuse its discretion in denying the petition for relief, as counsel's duty was to appear before the presiding judge on the scheduled hearing date and call attention to any pending motion, not to await action on the motion or rely on a notice issued by a special deputy clerk of court.
• Validity of Injunction and Complaint: Yes. The lower court erred in declaring the injunction permanent and in not dismissing the complaint, because the partnership was dissolved ipso facto upon approval of Casteel's fishpond application, making the continuation of the partnership unlawful under Article 1830(3) of the Civil Code and prohibitory provisions of the Fisheries Act, the Public Land Act, and Administrative Order No. 14.

• Due Process — Ex Parte Reception of Evidence: An order given in open court is presumed received by the parties on the very date and time of promulgation and amounts to a legal notification for all legal purposes. The March 21, 1956 order, issued by Judge Fernandez in open court, was a valid and binding notice; the subsequent notice of hearing dated April 21, 1956, signed by a special deputy clerk of court and purporting to set the hearing before another branch, was a superfluity and legally ineffective. The control of postponements and adjournments resides with the court, not the clerk of court, pursuant to Section 4, Rule 31 (now Section 3, Rule 22) of the Rules of Court. The clerk of court had no authority to transfer the case from one sala to another without an order from the court where the case originated. Notice to one counsel of record (Atty. Ruiz) was sufficient notice to all twelve counsel of record, as settled in Philippine jurisprudence. Between March 21 and May 2, 1956, the defendants had one month and ten days to prepare. The defendants and their counsel had no right to presume that their motion for postponement would be granted. The case was distinguished from Siochi vs. Tirona, where the postponement was the first one filed and the case was not intransferably set. The constitutional requirements of due process were fulfilled: a competent court lawfully acquired jurisdiction over the person of the defendant and the subject matter; the defendant was given an opportunity to be heard; and judgment was rendered upon lawful hearing.

• Petition for Relief from Judgment: The lower court properly denied the petition for relief. The duty of counsel was not to inquire from the clerk of court whether the trial had been transferred, but to appear before the presiding judge — particularly because the motion for postponement was not set for hearing and was not acted upon. Judge Fernandez's order of March 21, 1956 was clear and emphatic: the court would not accede to any transfer, and counsel's duty was to be present in the sala and call attention to any pending motion. The defendants' counsel admittedly went to the office of the clerk of court on May 2, 1956, which was located directly below Branch I; with due diligence, counsel could have gone upstairs to check whether the case was scheduled for hearing in that sala.

• Validity of Injunction and Complaint: The so-called "contract of service" was in reality a memorandum of partnership, with Inocencia Deluao as capitalist partner and Casteel as industrial partner. The evidence — including Casteel's own letter of November 15, 1949, stating "you are the ones interested in half of the work we have done so far" and "it so happened that we became partners because I am poor" — demonstrated the parties' intent to establish a partnership and ultimately divide the fishpond between them. The partnership had two components: (1) a contract of partnership to exploit the fishpond pending its award to either party, which was valid since no law prohibited such exploitation; and (2) a contract of partnership to divide the fishpond between them after such award, which was illegal. Upon the Secretary of Agriculture and Natural Resources' approval of Casteel's application on September 15, 1950, several prohibitory laws came into operation: Act 4003 (the Fisheries Act) prohibits a permittee from transferring or subletting the fishpond without the Secretary's prior consent; Section 40 of Commonwealth Act 141 (the Public Land Act) prohibits a lessee from assigning, encumbering, or subletting his rights without the Secretary's consent; and Section 37 of Administrative Order No. 14 prohibits transfer or sublease unless first approved by the Director of Lands. Since the partnership envisaged the unauthorized transfer of one-half of the fishpond to parties other than the applicant, the approval of Casteel's application was an event which made it unlawful for the business of the partnership to be carried on, causing its ipso facto dissolution under Article 1830(3) of the Civil Code. Even assuming arguendo that the approval alone did not cause dissolution, subsequent events — the exchange of letters in December 1950 and January 1951 in which both parties expressed their refusal to share the fishpond with the other — constituted express withdrawal by each partner, causing dissolution under Article 1830(2) of the Civil Code. The Secretary of Agriculture and Natural Resources, exercising executive and administrative powers over the disposition of public lands, did not possess authority to violate the prohibitory laws or exempt anyone from their operation. The lower court therefore erred in declaring the injunction permanent; an injunction should not be granted to take property out of the possession and control of one party and place it in the hands of another whose title has not been clearly established by law. However, because a valid partnership existed for the exploitation of the fishpond before its award to Casteel, the case was remanded for an accounting to determine partnership profits, the respective shares of the capitalist and industrial partners, and whether the P27,000 advanced by Deluao had been liquidated. Since Inocencia Deluao continued in possession after the award to Casteel, she did so no longer as a capitalist partner but merely as a creditor, and was required to account for the proceeds of fish sales from September 16, 1950 until Casteel's restoration to possession, reimbursing any excess over her lawful credit plus 6% interest per annum.

• Notice by Open Court Order — An order given in open court is presumed received by the parties on the very date and time of promulgation and constitutes a legal notification for all legal purposes. Such an order, when it intransferably sets a case for hearing, is the legally binding notice, superseding any subsequent notice issued by a clerk of court purporting to set the hearing before another branch. The Court applied this doctrine to hold that Casteel and his twelve counsel of record were validly notified of the May 2, 1956 hearing, and their failure to appear constituted a waiver of the right to be heard.

• Notice to One Counsel is Notice to All — When a party is represented by multiple counsel of record, none of whom has withdrawn, notice to one counsel of record is sufficient notice to all. The Court applied this rule to hold that notice to Atty. Ruiz of the March 21, 1956 order was sufficient notice to all twelve of Casteel's counsel of record.

• Control of Postponements Rests with the Court — The postponement of hearings does not depend upon the agreement of the parties but upon the court's discretion. The assignment or reassignment of cases already pending in one sala to another, and the setting of the date of trial after the trial calendar has been prepared, fall within the exclusive control of the presiding judge, not the clerk of court. The Court applied this principle to reject Casteel's reliance on the notice of hearing issued by a special deputy clerk of court.

• Ipso Facto Dissolution of Partnership by Unlawful Event — Under Article 1830(3) of the Civil Code, a partnership is dissolved ipso facto by any event which makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership. The Court held that the approval of Casteel's fishpond application triggered prohibitory laws against unauthorized transfer or subletting, making the continuation of the partnership unlawful and causing its automatic dissolution.

• Non-Interference with Administrative Discretion — Purely administrative and discretionary functions may not be interfered with by the courts. Findings of fact by an administrative official, following a hearing, are binding upon the courts and will not be disturbed except where the official has exceeded his statutory authority, exercised unconstitutional powers, or acted arbitrarily or with grave abuse of discretion. The Court applied this doctrine to uphold the Secretary of Agriculture and Natural Resources' approval of Casteel's application and to refuse to superimpose judicial discretion on that of the administrative department.

• Injunction May Not Transfer Possession to One Without Established Title — An injunction should not be granted to take property out of the possession and control of one party and place it in the hands of another whose title has not been clearly established by law. The Court applied this principle to dissolve the permanent injunction that had placed Inocencia Deluao in possession of the fishpond after Casteel's application had been approved.

• "An order given in open court is presumed received by the parties on the very date and time of promulgation, and amounts to a legal notification for all legal purposes." — This passage establishes the controlling rule on the binding effect of open-court orders as notice, which was decisive in upholding the validity of the ex parte reception of evidence.

• "We shall therefore construe the contract as one of partnership, divided into two parts — namely, a contract of partnership to exploit the fishpond pending its award to either Felipe Deluao or Nicanor Casteel, and a contract of partnership to divide the fishpond between them after such award. The first is valid, the second illegal." — This passage articulates the Court's critical construction of the "contract of service" as a bifurcated partnership, the analytical foundation for ruling that the partnership dissolved upon the permit's approval.

• "The approval was an event which made it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership." — This sentence states the ratio decidendi for the ipso facto dissolution of the partnership under Article 1830(3) of the Civil Code, tying the administrative approval of the fishpond permit to the operation of prohibitory transfer laws.

• "It is a salutary rule that the judicial department should not dictate to the executive department what to do with regard to the administration and disposition of the public domain which the law has entrusted to its care and administration." — This passage reflects the separation-of-powers doctrine underlying the Court's refusal to disturb the Secretary's administrative disposition of the fishpond application.

• Siochi vs. Tirona, 99 Phil. 462 — Distinguished. In Siochi, the motion for postponement was the first one filed, the case was not intransferably set for hearing, and the case had not been pending for a long time. In the case at bar, there had been a series of postponements, the case was intransferably set, and nearly five years had elapsed from filing to the final setting for hearing.
• Pajo, et al. vs. Ago, et al., L-15414, June 30, 1960 — Followed and reiterated in Ganitano vs. Secretary of Agriculture and Natural Resources, et al., L-21167, March 31, 1966. These cases established that the powers granted to the Secretary of Agriculture and Natural Resources regarding the disposition of public lands — granting of licenses, permits, leases, and contracts, or approving, rejecting, reinstating, or cancelling applications — are all executive and administrative in nature.
• Coloso vs. Board of Accountancy, G.R. No. L-5750, April 20, 1953 — Cited for the principle that purely administrative and discretionary functions may not be interfered with by the courts.
• Gonzales vs. Director of Lands, 43 Phil. 227 — Cited for the doctrine that courts cannot superimpose their discretion on that of the land department and compel it to do an act involving the exercise of judgment and discretion.
• Landicho vs. Tan, 87 Phil. 601 — Cited for the presumption that an order given in open court is received by the parties on the date and time of promulgation.
• Ortega, et al. vs. Pacho, 98 Phil. 618 — Cited for the rule that notice to one counsel of record is sufficient notice to all counsel of record when none has withdrawn.

• Article 1830(2) and (3), Civil Code — Provides that a partnership is dissolved by the express will of any partner at any time (paragraph 2) and by any event which makes it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership (paragraph 3). The Court applied paragraph 3 to hold that the approval of Casteel's fishpond application triggered prohibitory transfer laws, making the continuation of the partnership unlawful and causing its ipso facto dissolution. Paragraph 2 was applied as an alternative ground, since both parties subsequently expressed their refusal to share the fishpond, constituting express withdrawal.

• Section 4, Rule 31 (now Section 3, Rule 22), Rules of Court — Provides that the incidents of postponements and adjournments are controlled by the court and not by the clerk of court. The Court applied this provision to hold that the clerk of court had no authority to transfer the case from one sala to another or to override Judge Fernandez's intransferable setting.

• Act 4003 (Fisheries Act) — Prohibits the holder of a fishpond permit from transferring or subletting the fishpond without the previous consent or approval of the Secretary of Agriculture and Natural Resources. The Court applied this provision to hold that the partnership's contemplated post-award division of the fishpond would constitute an unauthorized transfer, rendering the partnership unlawful upon approval of Casteel's application.

• Section 40, Commonwealth Act 141 (Public Land Act) — Provides that a lessee shall not assign, encumber, or sublet his rights without the consent of the Secretary of Agriculture and Commerce, and that violation of this condition shall avoid the contract. The Court applied this provision as one of the prohibitory laws triggered by the approval of Casteel's application.

• Section 37, Administrative Order No. 14 (Secretary of Agriculture and Natural Resources, August 1937) — Provides that a transfer or sublease of a fishpond area and improvements shall only be valid when first approved by the Director, otherwise it shall be null and void, and that an unapproved transfer is sufficient cause for cancellation of the permit or lease and forfeiture of the bond. The Court applied this provision as an additional prohibitory law rendering the partnership's continuation unlawful upon the permit's approval.

Concepcion, C.J., Reyes, J.B.L., Dizon, Makalintal, Zaldivar, Sanchez, Fernando, and Capistrano, JJ., concurred.