Guy vs. Gacott

A partner must be separately and distinctly impleaded in a civil action against the partnership before he can be bound by the judgment and have his personal property subjected to execution, and absent any wrongful act or misapplication of partnership property under Articles 1822 to 1824, a partner's liability for partnership contracts is joint and subsidiary under Article 1816, not solidary.

Atty. Glenn Gacott, a lawyer from Palawan, purchased two brand-new transreceivers from Quantech Systems Corporation (QSC) in Manila through its employee Rey Medestomas. QSC was registered with the Securities and Exchange Commission not as a corporation but as a general partnership, and petitioner Michael C. Guy was appointed General Manager of QSC under its articles of partnership. After the transreceivers proved defective and QSC failed to deliver replacements or refund the purchase price despite repeated demands, Gacott filed a complaint for damages against QSC and Medestomas. Guy was never impleaded in that complaint.

On March 3, 1997, Atty. Glenn Gacott purchased two brand-new transreceivers from Quantech Systems Corporation (QSC) in Manila through its employee Rey Medestomas, for a total of P18,000.00. On May 10, 1997, finding the units to have major defects, Gacott personally returned them to QSC and requested replacements. Medestomas received the returned units and promised to send replacements within two weeks. The replacements never arrived. QSC informed Gacott that no units were available and that it could not refund the purchase price. Despite several oral and written demands, Gacott received neither a replacement nor a refund, and incurred expenses totaling P40,936.44 in the process.

Gacott filed a complaint for damages against QSC and Medestomas. Summons was served upon them, and they filed an Answer verified by Medestomas and one Elton Ong. Neither QSC nor Medestomas presented any evidence during trial. On March 16, 2007, the RTC rendered judgment finding the transreceivers defective and ordering QSC and Medestomas to jointly and severally pay Gacott the purchase price with 6% interest, actual damages of P40,000.00, moral damages of P75,000.00, corrective damages of P100,000.00, and attorney's fees of P60,000.00. The decision became final, as no appeal was interposed.

During the execution stage, Gacott discovered that QSC was not a corporation but a general partnership registered with the SEC. The articles of partnership listed Michael C. Guy as General Manager. Branch Sheriff Ronnie L. Felizarte went to the DOTC-LTO main office in Quezon City to verify whether Medestomas, QSC, and Guy had personal properties registered there. Upon learning that Guy had vehicles registered in his name, Gacott instructed the sheriff to attach one of them. On March 3, 2009, the sheriff served a Notice of Attachment/Levy upon Personalty on the record custodian of the DOTC-LTO in Mandaluyong City, and a similar notice was served on Guy through his housemaid at his residence.

Guy filed a Motion to Lift Attachment Upon Personalty, arguing that he was not a judgment debtor and that his vehicle could not be attached. The RTC denied the motion on June 28, 2009, treating Guy as a general partner under Section 21 of the Corporation Code and holding him jointly and severally liable. Guy's motion for reconsideration was denied on February 19, 2010. The Court of Appeals affirmed on June 25, 2012, additionally holding that Guy was bound by the summons served on QSC's authorized officer and that he was solidarily liable whether or not he participated in the suit. The CA denied reconsideration on March 5, 2013. No genuine efforts were made by the sheriff to locate or exhaust the properties of QSC before levying on Guy's personal property.

• Not a Judgment Debtor: Guy argued that he was not a judgment debtor because he was never impleaded as a defendant in the civil case and was never validly served with summons; thus, the trial court never acquired jurisdiction over his person.
• Nature of Partners' Liability: Guy maintained that the solidary liability of partners under Articles 1822, 1823, and 1824 of the Civil Code applies only when the liability stems from the wrongful act or omission of a partner, which was not the case here, where the claim arose from a breach of warranty in a contract of sale.
• Joint and Subsidiary Liability: Guy invoked Article 1816 of the Civil Code, arguing that the liability of partners to third persons for partnership contracts is merely joint and subsidiary in nature, and that partnership assets must first be exhausted before a partner's personal property may be levied upon.
• Invalid Service of Summons on the Partnership: Guy contended in his Reply that jurisdiction over the partnership was not acquired because summons was never served upon it through any of its authorized officers enumerated in Section 11, Rule 14 of the Rules of Court.

• Partner Cannot Feign Ignorance: Gacott countered that because Guy was a general and managing partner of QSC, he could not feign ignorance of the transactions undertaken by QSC.
• Notice to One Partner Is Notice to All: Gacott insisted that notice to one partner must be considered as notice to the whole partnership, including the pendency of the civil suit against it, and that Guy was therefore bound by the proceedings.

• Service of Summons on the Partnership: Whether the service of summons on QSC was valid, and if not, whether jurisdiction over the partnership was nevertheless acquired.
• Binding Effect of Judgment on a Non-Impleaded Partner: Whether the trial court's jurisdiction over QSC extended to the person of Guy so as to hold him solidarily liable with the partnership, notwithstanding that he was never impleaded in the complaint.
• Nature of Partners' Liability: Whether Guy's liability for the partnership's obligation, if any, is solidary or joint and subsidiary under the Civil Code.
• Applicability of Section 21, Corporation Code: Whether Section 21 of the Corporation Code may be applied to sustain Guy's solidary liability as a general partner of an ostensible corporation.

• Service of Summons on the Partnership: The service was defective, but jurisdiction over QSC was acquired through voluntary appearance. Summons was never served on any of the officers enumerated in Section 11, Rule 14 of the Rules of Court, rendering the service invalid; however, QSC's filing of an Answer cured the defect.

• Binding Effect of Judgment on a Non-Impleaded Partner: No. The trial court's jurisdiction over QSC did not extend to Guy. A partnership has a juridical personality distinct from its partners, and a judgment binds only the parties impleaded; a partner must be separately and distinctly impleaded before he can be prejudiced by a judgment against the partnership.

• Nature of Partners' Liability: The liability is joint and subsidiary, not solidary. Under Article 1816, partners are liable pro rata and only after all partnership assets have been exhausted; solidary liability arises only under the exceptional circumstances in Articles 1822 to 1824, which require a wrongful act or misapplication by a partner—circumstances not present here.

• Applicability of Section 21, Corporation Code: Section 21 cannot sustain solidary liability. Even if QSC were an ostensible corporation, Section 21 must be read in conjunction with Article 1816, so that Guy's liability, if any, would remain joint and subsidiary.

• Service of Summons on the Partnership: Under Section 11, Rule 14 of the 1997 Revised Rules of Civil Procedure, service of summons on a corporation, partnership, or association with juridical personality may be made on the president, managing partner, general manager, corporate secretary, treasurer, or in-house counsel—an exclusive enumeration. The records showed that QSC was never served with summons through any of these authorized officers; service upon persons other than those enumerated is invalid, and even substantial compliance is insufficient. The CA erred in holding it immaterial whether the summons was served on the theory that QSC was a corporation. Nevertheless, while proper service of summons is necessary to vest the court with jurisdiction over the defendant, the requirement is procedural in nature and may be cured by the defendant's voluntary submission to the court's jurisdiction through the filing of a responsive pleading. Because QSC filed an Answer despite the defective summons, jurisdiction over its person was acquired through voluntary appearance.

• Binding Effect of Judgment on a Non-Impleaded Partner: Although a partnership is based on delectus personae or mutual agency, it does not follow that a suit against the partnership is necessarily a suit impleading each and every partner. A partnership is a juridical entity with a personality distinct and separate from the persons composing it (Article 1768, Civil Code). A judgment is conclusive and binding only upon the parties and their successors-in-interest; a decision does not bind or prejudice a person not impleaded therein, for no person shall be adversely affected by the outcome of a civil action in which he is not a party—a principle conforming to the constitutional guarantee of due process. In Muñoz vs. Yabut, Jr., the Court declared that a person not impleaded and given the opportunity to take part in the proceedings was not bound by the decision. In Aguila vs. Court of Appeals, the Court held that it is the partnership, not its partners, which should be impleaded for a cause of action against the partnership, and that partners cannot be held liable unless the legal fiction of separate juridical personality is used for fraudulent, unfair, or illegal purposes. Here, Guy was never made a party to the case and had no participation until his vehicle was levied upon. Money judgments are enforceable only against property incontrovertibly belonging to the judgment debtor; execution can be issued only against a party and not against one who did not have his day in court. Article 1821 of the Civil Code provides that notice to any partner operates as notice to the partnership—not the reverse. There is no law stating that a partner is automatically charged in a complaint against the partnership. Accordingly, due process requires that a partner must first be impleaded before he can be considered a judgment debtor.

• Nature of Partners' Liability: Article 1816 of the Civil Code governs the liability of partners to third persons, providing that all partners shall be liable pro rata with all their property and after all partnership assets have been exhausted for contracts entered into in the name and for the account of the partnership. This provision establishes two principles: first, the partners' obligation is subsidiary in nature—resort to a partner's properties may be made only after partnership assets have been exhausted or proven insufficient; second, the partners' obligation is pro rata or joint, not solidary. Under Article 1207, solidary liability is not presumed unless the obligation expressly so states or the law or nature of the obligation requires it. Ordinarily, the liability of partners is not solidary. Solidary liability arises only under the exceptional circumstances in Articles 1822 to 1824, which require a wrongful act or omission by a partner acting in the ordinary course of business, or misapplication of money or property received by the partnership from a third person. In this case, Gacott's claim stemmed from defective transreceivers purchased from QSC through its employee Medestomas—a breach of warranty in a contractual obligation entered into in the name and account of QSC, not due to any wrongful act or misapplication by any partner. The general rule under Article 1816 therefore governs, not the exceptions under Articles 1822 to 1824. Moreover, the sheriff's report showed no genuine efforts were made to locate or exhaust the properties of QSC before levying on Guy's vehicle, contrary to the clear mandate of Article 1816.

• Applicability of Section 21, Corporation Code: Section 21 of the Corporation Code provides that persons who assume to act as a corporation knowing it to be without authority shall be liable as general partners for all debts, liabilities, and damages incurred. However, this provision must be read in conjunction with Article 1816 of the Civil Code, which governs the liabilities of partners against third persons. Whether QSC was an ostensible corporation or a duly registered partnership, Guy's liability, if any, would remain joint and subsidiary, because all partners shall be liable pro rata with all their property and after all partnership assets have been exhausted for contracts entered into in the name and for the account of the partnership.

• Separate Juridical Personality of Partnership — A partnership is a juridical entity with a personality distinct and separate from the persons composing it (Article 1768, Civil Code). A suit against the partnership is not necessarily a suit against each and every partner; the judgment binds only the parties impleaded and their successors-in-interest. The Court applied this doctrine to hold that Guy, never impleaded in the complaint, was not bound by the judgment against QSC.

• Due Process Requirement of Impleading a Partner — A partner must be separately and distinctly impleaded before he can be bound by a judgment against the partnership and before his personal property can be subjected to execution. This conforms to the constitutional guarantee of due process: no person shall be adversely affected by the outcome of a civil action in which he is not a party. Article 1821 of the Civil Code provides that notice to a partner operates as notice to the partnership, but it does not provide for the reverse—that notice to the partnership is notice to the partners. The Court held that absent an unequivocal law automatically charging a partner in a complaint against the partnership, due process requires that the partner first be impleaded.

• Joint and Subsidiary Liability of Partners (Article 1816) — All partners, including industrial ones, shall be liable pro rata with all their property and after all partnership assets have been exhausted for contracts entered into in the name and for the account of the partnership. The liability is subsidiary because it arises only if the partnership, primarily liable, fails to satisfy the obligation; and it is joint (pro rata), not solidary, because each partner is liable only for a proportionate part of the debt. Solidary liability is not presumed under Article 1207 unless expressly stated or required by law or the nature of the obligation.

• Exceptional Solidary Liability of Partners (Articles 1822–1824) — Solidary liability of all partners with the partnership arises only when loss or injury is caused to a third person by (a) any wrongful act or omission of a partner acting in the ordinary course of business or with authority of co-partners (Article 1822), or (b) misapplication by a partner of money or property received from a third person while in the custody of the partnership (Article 1823). Article 1824 makes all partners solidarily liable for everything chargeable to the partnership under Articles 1822 and 1823. The Court found that Gacott's claim arose from a breach of warranty in a contract of sale, not from any wrongful act or misapplication by a partner, so the exceptions did not apply.

• Service of Summons on Juridical Entities (Section 11, Rule 14) — When the defendant is a corporation, partnership, or association with juridical personality, service of summons may be made on the president, managing partner, general manager, corporate secretary, treasurer, or in-house counsel. This is an exclusive enumeration; service upon persons other than those enumerated is invalid, and even substantial compliance is insufficient. However, defective service of summons may be cured by the defendant's voluntary appearance through the filing of a responsive pleading.

• "it is non sequitur that a suit against the partnership is necessarily a suit impleading each and every partner. It must be remembered that a partnership is a juridical entity that has a distinct and separate personality from the persons composing it." — This passage articulates the ratio decidendi on why jurisdiction over the partnership does not automatically extend to its partners, grounding the due process requirement that a partner must be separately impleaded.

• "a partner must first be impleaded before he could be prejudiced by the judgment against the partnership." — This is the canonical formulation of the rule that a non-impleaded partner cannot be bound by a judgment against the partnership, directly linking the separate juridical personality doctrine to the due process guarantee.

• "the partners' obligation with respect to the partnership liabilities is subsidiary in nature. It provides that the partners shall only be liable with their property after all the partnership assets have been exhausted." — This passage defines the subsidiary nature of partners' liability under Article 1816, establishing that execution against a partner's personal property is premature unless partnership assets have first been exhausted.

• "Unless there is an unequivocal law which states that a partner is automatically charged in a complaint against the partnership, the constitutional right to due process takes precedence and a partner must first be impleaded before he can be considered as a judgment debtor." — This statement resolves the interplay between Article 1821 (notice to partner as notice to partnership) and due process, clarifying that the provision operates in only one direction and does not dispense with the requirement to implead a partner individually.

• Muñoz vs. Yabut, Jr., 665 Phil. 488 (2011) — Followed. The Court relied on this case for the principle that a person not impleaded and given the opportunity to take part in proceedings is not bound by the decision, and that the effect of a judgment cannot be extended to non-parties by simply issuing an alias writ of execution against them.

• Aguila vs. Court of Appeals, 377 Phil. 257 (1999) — Followed. The Court cited this case for the rule that it is the partnership, not its partners, officers, or agents, which should be impleaded for a cause of action against the partnership, and that partners cannot be held liable unless the legal fiction of separate juridical personality is used for fraudulent, unfair, or illegal purposes.

• Cathay Metal Corp. vs. Laguna West Multi-Purpose Cooperative, Inc., G.R. No. 172204, July 2, 2014, 728 SCRA 482 — Followed. Cited for the proposition that Section 11, Rule 14 provides an exclusive enumeration of persons authorized to receive summons for juridical entities, and that service upon persons other than those enumerated is invalid.

• Macasaet vs. Co, Jr., G.R. No. 156759, June 5, 2013, 697 SCRA 187 — Followed. Cited for the principles that jurisdiction over the person of the defendant is acquired either by proper service of summons or by voluntary appearance, and that such jurisdiction is an element of due process essential in all actions in personam.

• Villasi vs. Garcia, G.R. No. 190106, January 15, 2014, 713 SCRA 629 — Followed. Cited for the principle that money judgments are enforceable only against property incontrovertibly belonging to the judgment debtor, and that execution can be issued only against a party and not against one who did not have his day in court.

• Liwanag vs. Workmen's Compensation Commission, 105 Phil. 741 (1959) — Followed. Cited for the proposition that, with regard to partnerships, the liability of partners is ordinarily not solidary.

• Muñasque vs. Court of Appeals, 224 Phil. 79 (1985) — Followed. Cited for the principle that solidary liability of partners under Articles 1822–1824 arises because the law protects a third person who in good faith relied upon the authority of a partner, whether real or apparent.

• Article 1768, Civil Code — Provides that a partnership has a juridical personality separate and distinct from that of each of the partners. The Court applied this to hold that a suit against the partnership does not automatically bind its partners.

• Article 1207, Civil Code — Provides that there is a solidary liability only when the obligation expressly so states, or when the law or nature of the obligation requires solidarity. The Court relied on this to hold that solidary liability is not presumed and that partners' liability is ordinarily joint.

• Article 1816, Civil Code — Provides that all partners, including industrial ones, shall be liable pro rata with all their property and after all partnership assets have been exhausted for contracts entered into in the name and for the account of the partnership. The Court applied this as the governing provision for Guy's liability, holding it to be joint and subsidiary, not solidary.

• Article 1821, Civil Code — Provides that notice to any partner of any matter relating to partnership affairs operates as notice to or knowledge of the partnership. The Court carefully construed this provision as operating in one direction only—notice to a partner is notice to the partnership—and held that it does not provide that notice to the partnership is notice to the partners.

• Articles 1822, 1823, and 1824, Civil Code — Article 1822 provides that where a wrongful act or omission of a partner acting in the ordinary course of business causes loss or injury to a non-partner, the partnership is liable. Article 1823 provides that the partnership is bound to make good the loss where a partner misapplies money or property of a third person. Article 1824 makes all partners solidarily liable with the partnership for everything chargeable under Articles 1822 and 1823. The Court held these exceptions inapplicable because Gacott's claim arose from a breach of warranty, not from any wrongful act or misapplication by a partner.

• Section 21, Corporation Code — Provides that persons who assume to act as a corporation knowing it to be without authority shall be liable as general partners for all debts, liabilities, and damages incurred. The Court held that this provision must be read in conjunction with Article 1816, so that Guy's liability, if any, remains joint and subsidiary regardless of whether QSC was an ostensible corporation or a registered partnership.

• Section 11, Rule 14, 1997 Revised Rules of Civil Procedure — Provides that service of summons on a corporation, partnership, or association with juridical personality may be made on the president, managing partner, general manager, corporate secretary, treasurer, or in-house counsel. The Court held this to be an exclusive enumeration and found that summons was never served on any of these authorized officers, rendering the service invalid, though cured by QSC's voluntary appearance through filing an Answer.

Justices Carpio (Chairperson), Brion, Del Castillo, and Leonen concurred.