Goquiolay vs. Sycip

A surviving partner who authorized the deceased partner’s heir to manage partnership property is estopped to deny that the heir became a general partner; and, in a partnership expressly organized to buy and sell real estate, real property acquired as stock-in-trade may be sold by a general partner in the ordinary course of the partnership business even without the co-partner’s prior consent, as against third persons.

Antonio C. Goquiolay and Tan Sin An formed a registered commercial partnership in Davao City on May 29, 1940, for a ten-year term with capital of ₱30,000, of which Goquiolay contributed ₱18,000 and Tan Sin An ₱12,000. The articles made Tan Sin An the exclusive managing partner and provided that upon a partner’s death the partnership would continue, with the deceased partner represented by his heirs or assigns. The firm’s stated purpose was to engage in the real estate business by buying, selling, subdividing, leasing, and reselling real properties. The partnership acquired three parcels of land in Davao as its only real property, financing part of the purchase price through mortgage debt later consolidated and transferred to Banco Hipotecario, for which Tan Sin An and the partnership were solidarily liable.

On May 29, 1940, Antonio C. Goquiolay and Tan Sin An formed a commercial partnership in Davao City for a period of ten years with capital of ₱30,000; Goquiolay contributed ₱18,000, representing sixty percent, and Tan Sin An contributed ₱12,000, representing forty percent. The partnership was registered, and its stated business was to engage in real estate — buying, subdividing, leasing, and selling lands. The articles made Tan Sin An the exclusive managing partner and stipulated that upon the death of either partner the partnership would not be dissolved but would continue, with the deceased partner represented by his heirs or assigns. On May 31, 1940, Goquiolay also executed a general power of attorney in Tan Sin An’s favor as manager.

The partnership’s only assets were three parcels of land in Davao — Lots Nos. 526, 441, and 521 — acquired on May 29, 1940. The purchase price was partly financed by a ₱25,000 mortgage to La Urbana, payable in ten years. Tan Sin An separately acquired forty-six parcels and mortgaged them to the same creditor for ₱35,000. On September 25, 1940, the two mortgage obligations were consolidated and transferred to Banco Hipotecario de Filipinas; Tan Sin An and the partnership became solidarily liable for the total amount of ₱52,282.80, with eight percent annual interest payable within eight years, secured by all three partnership lots and Tan Sin An’s individual parcels.

Tan Sin An died on June 26, 1942, survived by his widow, Kong Chai Pin, and four minor children. In 1944, Kong Chai Pin was appointed administratrix of his intestate estate; on March 18, 1944, Sing, Yee & Cuan Co., Inc. paid the Banco Hipotecario the remaining unpaid balance of the partnership mortgage obligation, amounting to ₱46,116.75 in Japanese currency. After liberation, Yu Khe Thai, president of Yutivo Sons Hardware Co. and Sing, Yee & Cuan Co., Inc., asked Goquiolay to sell his interest, but Goquiolay refused. In 1945, Goquiolay told Yu Eng Lai that Kong Chai Pin could continue managing the properties because she had no other income and because he was not interested in agricultural lands; he did not take any steps to manage the properties himself. In 1948, when Kong Chai Pin’s counsel asked him to execute a power of attorney in her favor, Goquiolay again refused.

In November 1946, Yutivo Sons Hardware Co. and Sing, Yee & Cuan Co., Inc. filed claims in Tan Sin An’s intestate proceedings for ₱84,705.48 and ₱66,529.91, respectively, alleging that these represented obligations of both Tan Sin An and the partnership. Kong Chai Pin initially denied knowledge of the claims but later admitted them without qualification in an amended answer filed on February 28, 1947, and the probate court approved them. On March 29, 1949, she petitioned the probate court for authority to sell all the partnership properties and some of Tan Sin An’s conjugal properties to pay the claims. After the court granted the petition, Kong Chai Pin, as administratrix and purporting to act as managing partner, executed a deed of sale on April 4, 1949 in favor of Betty Y. Lee and Washington Z. Sycip for ₱37,000 cash and the buyers’ assumption of the claims — ₱62,415.91 to Yutivo and ₱54,310.13 to Sing Yee Cuan & Co., or a total consideration of ₱153,726.04. The sale took place without Goquiolay’s knowledge; the buyers later conveyed the same properties to their co-defendant Insular Development Company, Inc.

Upon learning of the sale, Goquiolay sought to set aside the probate court’s approval and then filed the present complaint to annul the sale. The trial court sustained the sale, finding that under the articles of partnership Kong Chai Pin had succeeded to Tan Sin An’s capacity as managing partner. On appeal, the main decision affirmed on different grounds: it found that Goquiolay had authorized her to manage the partnership properties from 1945, never revoked that authority before the 1949 sale, and allowed seven years to pass without acting to pay the overdue firm debts, cancel the management arrangement, or warn third parties that they should deal only with him.

• Status as General Partner: Petitioner argued that Kong Chai Pin never became more than a limited partner and was legally incapacitated to manage the partnership; he contended there was no evidence she actually managed or retained possession, and that the testimony of Young and Lim belied any administration.
• Scope of Authority to Alienate: Petitioner maintained that any authority given was only to manage, not to sell, citing Article 1713 of the Civil Code of 1889; he further argued that even as a partner she lacked power to sell the firm’s real estate.
• Fraud: Petitioner insisted that the sale should be set aside because it was executed with intent to defraud him of his share, pointing to the allegedly low price and the relationship among the buyers, creditors, and widow as indicia of fraud.
• McGrath Precedent: Petitioner relied on McGrath, et al. vs. Cowen, et al. to argue that a partner’s disposition of all firm property to terminate the partnership was outside ordinary partnership powers.

• Succession to Managing Partner: Respondents defended the sale on the theory that Kong Chai Pin succeeded to all the rights and prerogatives of Tan Sin An as managing partner upon his death.

• Status of Kong Chai Pin: Whether Kong Chai Pin became a general partner with authority to bind the partnership, notwithstanding the rule that a deceased partner’s heir ordinarily enters as a limited partner.
• Authority to Sell Real Property: Whether the sale of the partnership’s real estate was within the ordinary powers of a general partner, given that the partnership’s object was buying and selling real estate, and notwithstanding the absence of Goquiolay’s prior consent.
• Third-Party Reliance and Estoppel: Whether Goquiolay was estopped to deny the widow’s status and authority as general partner because of his authorization and inaction, and whether the purchasers could rely on her apparent authority.
• Fraud and Rescission: Whether the sale should be annulled for fraud because of gross inadequacy of price and the relationship among the buyers, creditors, and widow, or because rescission was barred as subsidiary.

• Status of Kong Chai Pin: Yes. Kong Chai Pin became a general partner through Goquiolay’s authorization for her to manage, and he was estopped to deny that status; the articles’ continuation clause contemplated heirs as general partners unless they refused.
• Authority to Sell Real Property: Yes. The sale was within the ordinary powers of a general partner because the partnership was expressly organized to buy and sell real estate, and the sold lands were acquired as stock-in-trade.
• Third-Party Reliance and Estoppel: Yes. Third parties had a right to presume that the managing partner had the co-partner’s consent, and Goquiolay’s seven-year inaction confirmed the widow’s apparent authority.
• Fraud and Rescission: No. There was no direct evidence of fraud, the price was not grossly inadequate, relationship alone is not a badge of fraud, and rescission was not maintainable because it is subsidiary and Goquiolay had other legal means.

• Status of Kong Chai Pin: The majority reasoned that Goquiolay admitted telling Yu Eng Lai in 1945 that the widow could continue to manage the properties, and this admission, being against interest, outweighed the testimonies of Young and Lim, which concerned the Japanese occupation rather than the period after 1945. The articles of partnership expressly provided that upon death the partnership would be continued with the heirs or assigns; this contemplated general, not limited, successors. Although the heir ordinarily becomes a limited partner for her protection, that limitation is for the heir’s benefit and may be waived by electing to become a general partner without the surviving partner’s assent. Under Article 148, last paragraph, of the Code of Commerce, a limited partner cannot administer even as an agent; by authorizing the widow to manage, Goquiolay necessarily recognized her as a general partner and was estopped to deny that status.

• Authority to Sell Real Property: The resolution distinguished between real estate acquired and held as stock-in-trade and real estate held merely as a business site. Because the express and avowed purpose of the partnership was to engage in real estate by buying and selling, the immovables acquired formed part of its stock-in-trade, and their sale was in pursuance of partnership purposes and within the ordinary powers of a partner. This was supported by Gay de Montella and by American authorities such as Rosen vs. Rosen, Chester vs. Dickerson, and Revelsky vs. Brown. The Court distinguished McGrath, et al. vs. Cowen, et al., because there the firm was insolvent, the sale included fixtures necessary for carrying on the business, creditors were not pressing, and the purpose was to terminate the partnership; here the lands were acquired to be sold, creditors had been unpaid for over seven years, and the sale yielded cash and discharged firm debts.

• Third-Party Reliance and Estoppel: Relying on Litton vs. Hill and Ceron, et al., the resolution held that a third person dealing with a managing partner may presume that the partner has the co-partner’s consent in the ordinary and natural course of business, and that the ordinary course of business has been followed and the law obeyed. Third parties were not required to ascertain whether prior consent had been obtained. Goquiolay’s failure for seven years to manage the properties, pay or settle overdue debts, or register a warning confirmed the appearance that the widow was a general partner, and his laches contributed to the belief shared even by the probate court.

• Fraud and Rescission: No direct evidence of fraud existed. As to price, the total consideration was ₱153,726.04, comprising ₱37,000 cash and assumption of court-approved debts; the 1955 realtor valuation of ₱312,000 came six years after the sale, during a rising real estate market, and the transaction was practically forced because the partnership had no other means to pay its legitimate debts. The evidence did not show gross inadequacy. Relationship alone is not a badge of fraud, and there was no evidence the original buyers lacked independent means. Filing the claims in the estate proceedings was proper because the obligation was solidary under Rule 87, Section 6, and the mortgage was indivisible under Article 1860 of the old Civil Code and Article 2089 of the new Civil Code. Finally, any fraud would be fraud of creditors rather than deceit inducing consent, and the action for rescission is subsidiary under Article 1294 of the old Civil Code and Article 1383 of the new Civil Code; Goquiolay did not allege or prove that he could not obtain reparation from the widow and heirs.

• Heir’s Election to Become a General Partner — The heir of a deceased general partner ordinarily becomes a limited partner by operation of law for the heir’s own protection, but that statutory limitation may be waived because it is designed to protect the heir. The heir may elect to become a collective or general partner without the surviving partner’s assent, assuming personal and unlimited liability. The Court applied this to hold that Kong Chai Pin could choose general-partner status and that the partnership continuation clause contemplated that result.

• Stock-in-Trade Realty Doctrine — Where the express and avowed purpose of a partnership is to buy and sell real estate, immovables acquired by the firm form part of its stock-in-trade. Their sale is in pursuance of partnership purposes and is therefore within the ordinary powers of a partner. Real estate held merely as a business site stands on a different footing and is not within the ordinary power of sale.

• Third-Party Presumption of Partner Authority — A third person dealing with a managing partner has the right to presume that the partner has obtained the co-partner’s consent and that the ordinary course of business and the law have been followed. The co-partner may be estopped by acquiescence, authorization, or laches from denying the managing partner’s apparent authority as to third persons.

• Rescission as a Subsidiary Remedy — The action for rescission on the ground of fraud of creditors is subsidiary; it cannot be instituted except when the party suffering damage has no other legal means to obtain reparation. The Court applied this to bar rescission because there was no showing that Goquiolay could not obtain reparation from the widow and heirs of Tan Sin An.

• "By authorizing the widow to manage partnership property (which a limited partner could not be authorized to do), Goquiolay recognized her as such partner, and is now in estoppel to deny her position as a general partner, with authority to administer and alienate partnership property." — This states the estoppel and status rationale central to the denial of reconsideration.

• "But where the express and avowed purpose of the partnership is to buy and sell real estate (as in the present case), the immovables thus acquired by the firm from part of its stock-in-trade, and the sale thereof is in pursuance of partnership purposes, hence within the ordinary powers of the partner." — This defines the stock-in-trade exception on which the validity of the sale rested.

• "A third person may and has a right to presume that the partner with whom he contracts has, in the ordinary and natural course of business, the consent of his copartner; for otherwise he would not enter into the contract." — This is the third-party reliance principle preserving the sale as against the surviving partner.

• "Limited partners may not perform any act of administration with respect to the interests of the copartnership, not even in the capacity of agents of the managing partners." — This statutory prohibition was used to show that Goquiolay’s authorization could not be reconciled with treating Kong Chai Pin as merely a limited partner.

• Litton vs. Hill and Ceron, et al., 67 Phil. 513 (also 67 Phil. 409, 516) — Followed as controlling authority that third persons may presume a managing partner has the co-partner’s consent and that the ordinary course of business and the law have been obeyed.

• Rosen vs. Rosen, 212 N.Y. Supp. 405, 406 — Followed as persuasive American authority that in a partnership to deal in real estate, either partner has legal right to sell firm real estate.

• Chester vs. Dickerson, 54 N.Y. 1, 13 Am. Rep. 550 — Followed as persuasive authority that a partner in a real estate dealing partnership has ample power as general agent to enter into contracts for the sale of real property.

• Revelsky vs. Brown, 92 Ala. 522, 9 South 182, 25 Am. St. Rep. 83 — Followed as persuasive authority that partners engaged in buying and selling real estate must be able to bind the firm by purchases or sales in the ordinary course of business.

• McGrath, et al. vs. Cowen, et al., 49 N.E. 338 — Distinguished; the sale there covered tangible property and fixtures necessary for the business, was made by an insolvent firm without pressing creditors, and was intended to terminate the partnership, unlike the present sale of stock-in-trade realty.

• Oria Hnos. vs. McMicking, 21 Phil. 243; Hermandad del Smo. Nombre de Jesus vs. Sanchez, 40 Off. Gaz. 1685 — Followed for the rule that relationship alone is not a badge of fraud.

• Article 148, last paragraph, Code of Commerce — Prohibits limited partners from performing acts of administration even as agents of managing partners. The Court applied it to show that Goquiolay’s authorization to manage was incompatible with limited-partner status and effectively recognized Kong Chai Pin as a general partner.

• Article 1713, Civil Code of 1889 — Cited by appellant for the rule that a general agency includes only acts of administration and an express power is required to sell; held inapposite because the widow was not a mere agent but had become a general partner.

• Rule 87, Section 6 — Allows a claim against a decedent as if he were the sole debtor when the obligation is joint and several. The Court applied it to uphold the filing of creditor claims against Tan Sin An’s estate.

• Article 1860, Civil Code of 1889; Article 2089, New Civil Code — Provides that a mortgage is indivisible and each parcel answers for the whole debt. The Court applied these provisions to reject the claim of anomaly in the estate proceedings involving partnership properties.

• Article 1294, Civil Code of 1889; Article 1383, New Civil Code — Provides that the action for rescission is subsidiary and cannot be instituted when the injured party has another legal means of reparation. The Court applied these provisions to bar rescission for the alleged fraud.

Bengzon, C.J., Padilla, Concepcion, Barrera, and Dizon, JJ. Regala, J., took no part.

• Bautista Angelo, J., joined by Labrador, Paredes, and Makalintal, JJ.) — Dissented and voted to grant reconsideration. The dissent maintained that the factual premise of acts of management was not proven because appellees’ own witnesses denied it and the buyers did not rely on it; that a limited partner cannot become a general partner through prohibited acts of management under Article 148 of the Code of Commerce; that even as a general partner Kong Chai Pin lacked express authority to sell real property, since the sale was to pay debts rather than in the usual course of the firm’s buying-and-selling business; and that the sale was tainted by inadequate price, close relationships among buyers, creditors, and the widow, and absence of necessity to sell rather than borrow.