Litton vs. Hill & Ceron

A partnership is bound by transactions entered into by a managing partner within the scope of the partnership's business, notwithstanding internal articles requiring the other partner's consent, where the third party contracted in good faith and the partnership's dissolution was not registered in the commercial registry.

George Litton was a seller of mining shares. Hill & Ceron was a stock brokerage partnership composed of Robert Hill and Carlos Ceron as co-equal managing partners, with Visayan Surety & Insurance Corporation as its surety. The articles of partnership, filed with the Bureau of Commerce, provided that both partners would jointly administer the business and that either could contract and sign for the partnership with the consent of the other. The partnership's stated purpose was to engage in general brokerage, including stock and bond brokerage, real estate brokerage, investment security brokerage, and shipping brokerage. An order of the Bureau of Commerce dated December 7, 1933, prohibited brokers from buying and selling shares on their own account.

George Litton was a seller of mining shares. Hill & Ceron was a stock brokerage partnership composed of Robert Hill and Carlos Ceron as co-equal managing partners, with Visayan Surety & Insurance Corporation as its surety. The articles of partnership, filed with the Bureau of Commerce, provided that both partners would jointly administer the business and that either could contract and sign for the partnership with the consent of the other. The partnership's stated purpose was to engage in general brokerage, including stock and bond brokerage, real estate brokerage, investment security brokerage, and shipping brokerage. An order of the Bureau of Commerce dated December 7, 1933, prohibited brokers from buying and selling shares on their own account.

On February 14, 1934, Litton sold and delivered to Carlos Ceron share certificates Nos. 4428, 4429, and 6699, representing 17,000 shares of Big Wedge Mining Company at P0.11 per share, totaling P1,870 less one-half percent brokerage. Ceron issued a receipt on Hill & Ceron stationery, signing it personally. Ceron paid Litton P1,150, leaving an unpaid balance of P720.

The partnership between Hill and Ceron was still in existence on February 14, 1934. Robert Hill testified that a few days before that date he had advised Litton not to deliver shares to Ceron because the partnership was about to be dissolved. The dissolution, however, had not been effected on February 14, nor was it published in the newspapers or recorded in the commercial registry. Five days later, on February 19, Hill & Ceron sold shares of Big Wedge. Hill also admitted that both partners had equal power to buy and sell and that each made transactions as partners in equal parts.

Unable to collect the unpaid balance from Hill & Ceron or its surety, Litton filed a complaint for recovery. The Court of Appeals found as a fact that Ceron did not intend to represent and did not act for the firm Hill & Ceron in the transaction, and that Litton had failed to prove that Hill had consented to the contract. The Supreme Court accepted these factual findings but held that, as a matter of law, the transaction was binding upon the partnership.

• Nature of the Transaction: Respondent argued that even admitting a partner could not engage individually in a transaction similar to the partnership's business without binding the firm, there was no law prohibiting a partner in the stock brokerage business from engaging in other transactions different from those of the partnership, because the transaction made by Ceron was a mere personal loan.
• Consent Requirement: In a motion for reconsideration, respondent Robert Hill insisted that the articles of partnership, having been recorded in the commercial registry, stipulated that either managing partner could contract for the partnership only with the consent of the other, and since Litton failed to prove that Hill had consented, the complaint must fail.

• Partnership Liability: Whether the partnership Hill & Ceron is bound by a transaction entered into by its managing partner Carlos Ceron with Litton, notwithstanding the factual finding that Ceron acted in his individual capacity.
• Effect of Internal Consent Requirement: Whether the stipulation in the articles of partnership requiring the consent of the other partner before one partner can bind the firm affects the rights of third persons contracting with the partnership.

• Partnership Liability: Yes. The transaction was deemed in law that of Hill & Ceron, because the partnership was still legally existing as to third parties (its dissolution not having been registered in the commercial registry), and under Article 130 of the Code of Commerce, a managing partner cannot engage in the same business as the partnership except on its behalf.
• Effect of Internal Consent Requirement: No. Internal partnership stipulations requiring the consent of the other partner before one partner can bind the firm create an obligation only between the partners and do not affect third persons contracting in good faith with a managing partner acting within the scope of partnership business.

• Partnership Liability: The Court accepted the Court of Appeals' factual finding that Ceron individually entered into the transaction, but held that as a matter of law the transaction bound the partnership on two independent grounds. First, under Article 226 of the Code of Commerce, the dissolution of a commercial association does not prejudice third parties until recorded in the commercial registry. The partnership was still in existence on February 14, 1934, its dissolution neither published in newspapers nor registered; Hill's verbal advice to Litton was of no legal consequence since the partnership was not in fact dissolved on the transaction date. Second, the articles of partnership defined the firm's purpose as general brokerage including stock brokerage, and under Article 130 of the Code of Commerce, none of the partners may legally engage in the same line of business as the partnership on an individual basis. Ceron therefore could not have entered into the contract of sale of shares with Litton as a private individual but only as a managing partner of Hill & Ceron. The Bureau of Commerce order of December 7, 1933, reinforced this conclusion by prohibiting brokers from buying and selling shares on their own account. The respondent's argument that the transaction was a mere personal loan was rejected, the Court noting that the only finding of fact by the Court of Appeals was that Ceron acted in his individual capacity — not that the transaction was a loan.

• Effect of Internal Consent Requirement: The sixth paragraph of the articles of partnership entrusted management to both partners and provided that either could sign for the partnership with the consent of the other. The Court of Appeals interpreted this to mean that without the other partner's consent, one partner could not bind the firm by a written contract, and that Litton bore the burden of proving such consent. The Supreme Court rejected this interpretation. Third persons are not bound to ascertain whether the partner with whom they contract has obtained the consent of the other; the public need not inquire into internal partnership agreements. There is a general presumption that each partner is an authorized agent of the firm with authority to bind it in carrying on partnership transactions, supported by the presumptions that the ordinary course of business has been followed and that the law has been obeyed (Nos. 18 and 31, Section 334, Code of Civil Procedure). A third person may presume that the partner with whom he contracts has, in the ordinary course of business, the consent of his copartner. Furthermore, Article 130 of the Code of Commerce provides that even when a new obligation is contracted against the express will of one managing partner, the contract is not annulled and shall have its effects, without prejudice to the liability of the contracting partner to reimburse the firm for any loss. The purpose of these provisions is to protect third persons contracting with a managing partner, avoiding fraud and deceit. Requiring third persons to verify internal consent would hinder business transactions, contrary to the nature of commerce which requires promptness and dispatch on the basis of good faith and honesty.

• Presumption of Agency in Partnership — There is a general presumption that each individual partner is an authorized agent for the firm and has authority to bind it in carrying on partnership transactions. This presumption permits third persons to hold the firm liable on transactions entered into by one of its members acting apparently in its behalf and within the scope of his authority. The Court applied this doctrine to hold that Litton, as a third person contracting with Ceron — a managing partner of Hill & Ceron — was entitled to presume Ceron had authority to bind the firm, without needing to verify internal consent arrangements.

• Unregistered Dissolution Does Not Prejudice Third Parties — Under Article 226 of the Code of Commerce, the dissolution of a commercial association does not prejudice third parties until it has been recorded in the commercial registry. The Court held that because Hill & Ceron's dissolution was not registered, the partnership remained legally existing as to Litton on the date of the transaction, regardless of any internal agreement or verbal notice of impending dissolution.

• Prohibition on Partner Engaging in Same Business as Partnership — Under Article 130 of the Code of Commerce, a managing partner may not legally engage in the same business as the partnership on an individual account. The Court applied this to hold that Ceron, as a managing partner of a stock brokerage firm, could not have entered into the sale of shares with Litton as a private individual; the transaction was deemed in law that of the partnership.

• Good Faith Protection of Third Parties Against Internal Partnership Limitations — Internal stipulations in the articles of partnership requiring the consent of the other partner before one partner can bind the firm create obligations only between the partners and do not affect third persons contracting in good faith. Even when a contract is entered into against the express will of one managing partner, Article 130 of the Code of Commerce provides that the contract is not annulled and shall have its effects, without prejudice to the contracting partner's liability to reimburse the firm for any resulting loss. The Court applied this to hold that Litton's contract was valid and binding on the partnership regardless of whether Hill had consented.

• "Third persons, like the plaintiff, are not bound in entering into a contract with any of the two partners, to ascertain whether or not this partner with whom the transaction is made has the consent of the other partner. The public need not make inquires as to the agreements had between the partners." — This passage articulates the ratio decidendi on the second issue: internal partnership consent requirements cannot be enforced against third parties contracting in good faith with a managing partner.

• "Ceron, therefore, could not have entered into the contract of sale of shares with Litton as a private individual, but as a managing partner of Hill & Ceron." — This sentence states the Court's conclusion on the first issue, applying Article 130 of the Code of Commerce to deem an individually-undertaken transaction as that of the partnership.

• "No new obligation shall be contracted against the will of one of the managing partners, should he have expressly stated it; but if, however, it should be contracted it shall not be annulled for this reason, and shall have its effects without prejudice to the liability of the partner or partners who contracted it to reimburse the firm for any loss occasioned by reason thereof." — This verbatim quotation of Article 130 of the Code of Commerce (as reproduced in the decision) establishes the statutory basis for protecting third parties even when a managing partner contracts against the express will of the other partner.

• "Wherefore, unless the contrary is shown, namely, that one of the partners did not consent to his copartner entering into a contract with a third person, and that the latter with knowledge thereof entered into said contract, the aforesaid presumption with all its force and legal effects should be taken into account." — From the resolution denying reconsideration, this passage defines the burden-shifting framework: the presumption of agency stands unless the third party knew the partner lacked consent.

• Cardell vs. Mañeru, 14 Phil. 368 — Cited as supporting authority for the proposition that the unregistered dissolution of a partnership does not prejudice third persons, reinforcing the application of Article 226 of the Code of Commerce.
• Mills vs. Riggle, 112 Pac. 617 — Cited for the general presumption that each individual partner is an authorized agent for the firm with authority to bind it in partnership transactions.
• Le Roy vs. Johnson, 7 U.S. (Law. ed.) 391 — Cited for the proposition that the presumption of partner agency is sufficient to permit third persons to hold the firm liable on transactions entered into by a member acting apparently on the firm's behalf and within the scope of his authority.
• Opinion of the Supreme Court of Spain, March 23, 1885 — Cited for the rule that dissolution of a partnership by the will of the partners, if not registered in the commercial registry, does not prejudice third persons.

• Article 226, Code of Commerce — Provides that the dissolution of a commercial association shall not prejudice third parties until recorded in the commercial registry. Applied to hold that Hill & Ceron's dissolution, being unregistered, did not affect Litton's rights as a third party on the date of the transaction.
• Article 130, Code of Commerce — Provides that no managing partner may engage in the same business as the partnership on an individual account, and that even a contract entered into against the express will of one managing partner is not annulled and shall have its effects, without prejudice to the contracting partner's liability to reimburse the firm for any loss. Applied to deem Ceron's share-sale transaction as that of the partnership and to protect Litton's contract regardless of Hill's consent.
• Section 334, Nos. 18 and 31, Code of Civil Procedure — Establishes the presumptions that the ordinary course of business has been followed (No. 18) and that the law has been obeyed (No. 31). Applied in the resolution to support the presumption that a managing partner contracting with a third person has the consent of his copartner and is acting in accordance with the articles of partnership.
• Bureau of Commerce Order, December 7, 1933 — Prohibits stock and bond brokers from buying or selling shares on their own account for purposes of speculation or market manipulation. Applied to reinforce the conclusion that Ceron, as a broker, could not have purchased Litton's shares in his individual capacity.

Avanceña, C.J., Villa-Real, Imperial, Diaz, Laurel, and Moran, JJ., concurred in both the April 25, 1939 decision and the July 13, 1939 resolution denying reconsideration.