Lyons vs. Rosenstock

A trust does not ordinarily attach to property acquired by a person who uses money belonging to another, and no general partnership arises where the claimant expressly declined to join the venture; absent use of the claimant's money or partnership funds in the acquisition, no equitable interest in the property or its shares accrues.

E. S. Lyons and Henry W. Elser had engaged in several real estate ventures in Manila, sharing profits equally, and Lyons had executed a general power of attorney authorizing Elser to manage and dispose of properties they jointly owned. Elser later organized J. K. Pickering & Company, a limited partnership, to develop the San Juan Estate. The dispute concerns whether Lyons acquired an equitable interest in the San Juan Estate or J.K. Pickering & Company shares by reason of the parties' prior joint ventures and Elser's use of the Carriedo property as security.

E. S. Lyons, a missionary or missionary agent of the Methodist Episcopal Church, and Henry W. Elser, a Manila resident engaged in buying, selling, and administering real estate, had joined in several ventures for buying and selling property, sharing profits equally. In April 1919, Lyons went on leave to the United States for nearly a year and a half, returning on September 21, 1920. On the eve of his departure, Elser made a written statement showing that Lyons was half owner with Elser of three particular pieces of real property, and Lyons concurrently executed a general power of attorney authorizing Elser to manage and dispose of those properties at will and to represent him fully to their mutual advantage. During Lyons' absence, Elser sold two of the properties, leaving only the property at 616-618 Carriedo Street, Manila, containing about 282 square meters of land with improvements.

In the spring of 1920, Elser became interested in a tract of about 1,500,000 square meters near Manila, the San Juan Estate, offered by its owners for P570,000. He paid P5,000 for an option and later P15,000 more to extend it, both amounts to be credited to the first payment if the option was exercised, and both supplied entirely from his own funds. The first payment required was P150,000; Elser had about P120,000, including the P20,000 advanced on the option, so he obtained a P50,000 loan from Uy Siuliong through Uy Cho Yee. To secure the loan, Elser gave a personal note signed by himself and two associates in the projected enterprise, and also by the Fidelity & Surety Company. The money was delivered on June 24, 1920, and with it and his bank funds Elser purchased the San Juan Estate on or about June 28, 1920. A limited partnership, J. K. Pickering & Company, was organized by Elser and three associates for the property's development, and the deed was made directly to the company. Elser, as principal capitalist, initially received 3,290 shares.

While negotiating the purchase, Elser hoped Lyons would join and supply part of the means. On May 20, 1920, he wrote Lyons about the big subdivision and said that if it were acquired and Lyons came in, both would be well fixed. On June 3, 1920, eight days before the first option expired, Elser cabled Lyons that he had bought the San Juan Estate and thought Lyons should resign his position with the mission board in New York; the same day he wrote urging Lyons to come and join him on lines they had often spoken about and saying there was plenty of business for them. Earlier communications had also sought to impress upon Lyons the need to raise money for future real estate deals. Lyons, however, was averse to joining the purchase. He had doubts about returning to Manila, and only in the summer of 1920 did the board of missions prevail upon him to return and resume his position as managing treasurer and trustee. On June 21, 1920, Lyons wrote from New York thanking Elser for the offer to take him into the new project and adding that, from the standpoint of making money, he had passed up a good thing. The board of missions was averse to his engaging in business activities outside church concerns, and missionary associates had criticized his independent commercial activities. Upon receiving Lyons' letter, Elser knew it was out of the question to expect assistance from Lyons and made no further efforts.

When Elser was concluding the purchase, his books showed he was indebted to Lyons to the extent of possibly P11,669.72 from profits and earnings on other properties. When J. K. Pickering & Company was organized and stock issued, Elser indorsed to Lyons 200 shares allocated to himself, believing Lyons would be an associate in the deal. The par value of those 200 shares exceeded by more than P8,000 the amount Elser owed Lyons. When Lyons returned to the Philippines, he accepted the shares and sold them for his own benefit. He later acted for a time as a member of the board of directors of J. K. Pickering & Company, his qualification for that office deriving from ownership of those shares.

The main basis of the action was the mortgage Elser placed on the Carriedo property. Because Uy Siuliong insisted that the Fidelity & Surety Company sign the P50,000 note, the company required security before signing. On June 30, 1920, Elser mortgaged to the Fidelity & Surety Company the equity of redemption in the Carriedo property owned by himself and Lyons. At that time Elser expected Lyons to join the San Juan purchase. When he learned from Lyons' letter of July 21, 1920, that Lyons had decided not to come in, Elser sought to relieve the Carriedo property of the encumbrance. On September 9, 1920, he asked the Fidelity & Surety Company to permit substitution of his own property at 644 M. H. del Pilar Street, Manila, and 1,000 shares of J. K. Pickering & Company for the Carriedo property. The company agreed, and on September 15, 1920, Elser executed a new mortgage on the M. H. del Pilar property and delivered it with the 1,000 shares to the company, which in turn executed and delivered to Elser a cancellation of the Carriedo mortgage. The new mortgage and the release were never registered. On September 25, 1920, Elser returned the cancellation of the Carriedo mortgage and took back the new mortgage on the M. H. del Pilar property and the 1,000 shares. The explanation was that Lyons arrived in Manila on September 21, 1920, and shortly thereafter told Elser to let the Carriedo mortgage remain on the property ("Let the Carriedo mortgage ride"). Mrs. Elser testified to that conversation, and the trial court accepted as proven Lyons' consent for the mortgage to remain. The trial court found the concession reasonable given Elser's solvency and the fact that Elser had given Lyons 200 shares worth nearly P8,000 more than his indebtedness, and it found in effect that the excess value was conceded in consideration of the assistance derived from the mortgage on Lyons' interest in the Carriedo property.

The San Juan development was a success from the start, and Elser paid the P50,000 note to Uy Siuliong on January 18, 1921, although it was not due until more than five months later. The mortgaging of the Carriedo property never caused Lyons damage to the extent of a single cent; although the trial court refused to allow the defendant to prove that Elser was solvent in an amount much greater than the entire encumbrance, the risk imposed on Lyons was negligible. No money actually deriving from the mortgage was ever applied to the purchase of the San Juan Estate; Elser merely subjected the property to a contingent liability, and no actual liability ever resulted. Apart from the modest financial participation of his three associates, the financing of the San Juan purchase was Elser's work on his own account. Lyons claimed that he did not know until after Elser's death that the Uy Siuliong money had been used to help finance the San Juan purchase; he had supposed the Carriedo property was mortgaged to aid the purchase of the "Ronquillo property," and a letter from Elser in late May 1920 stated that he had arranged a P50,000 loan on the Carriedo property and would use part of the money for the Ronquillo buy (P60,000) if the owner came through. Other correspondence showed Elser had been trying to buy the Ronquillo property. Elser's widow and a clerk testified that about June 15, 1920, Elser cabled Lyons that he had mortgaged the Carriedo Street property secured by his personal note, that Lyons was amply protected, and that he wished Lyons to join the San Juan Subdivision and borrow all the money he could; Lyons denied receiving such a cablegram. The trial court found that Elser did not act in bad faith and was guilty of no fraud, and the Supreme Court concurred, noting that Lyons knew the Carriedo mortgage had been executed and, after his arrival, consented for it to remain until it was paid off shortly thereafter. After Elser's death on June 18, 1923, Lyons sought to recover from his estate 446 2/3 shares of J. K. Pickering & Company and about P125,000 in dividends accrued before October 21, 1926, with lawful interest. The trial court absolved the executor from the complaint, finding no bad faith or fraud and no prejudice to Lyons.

• Trust and Equitable Ownership: Appellant maintained that when Elser mortgaged the Carriedo property, in which Lyons owned a half interest, Lyons became involuntarily the owner of an undivided interest in the property acquired partly with the P50,000 loan, entitling him to 446 2/3 shares of J. K. Pickering & Company and the dividends thereon.
• Partnership: Appellant emphasized that a partnership relation existed between Elser and Lyons, which made Elser's purchase of the San Juan Estate subject to Lyons' participation and gave Lyons a claim to the shares.
• Effect of the 200-Share Transfer: Appellant supposed that Elser's transfer of 200 shares to Lyons supplied a basis for the action or strengthened Lyons' equitable claim.
• Use of the Loan Proceeds: Lyons asserted that he did not know until after Elser's death that the Uy Siuliong loan had been used to help finance the San Juan Estate, having believed the Carriedo mortgage was for the Ronquillo property purchase.

• Admissibility of Lyons' Testimony: Respondent insisted that the trial court committed error in admitting Lyons' testimony upon matters that passed between him and Elser while Elser was still alive.

• Trust/Equitable Interest: Whether Lyons acquired an equitable interest in the San Juan Estate or the J. K. Pickering & Company shares because Elser mortgaged the Carriedo property, jointly owned by Lyons, to secure the loan used in part to acquire the estate.
• Partnership: Whether a general partnership existed between Elser and Lyons such that Elser's purchase of the San Juan Estate was for the partnership and entitled Lyons to the claimed shares and dividends.
• Bad Faith/Fraud and Damages: Whether Elser acted in bad faith or committed fraud, or caused damage to Lyons, by mortgaging the Carriedo property and using the loan proceeds.
• Effect of the 200-Share Transfer: Whether Elser's transfer of 200 shares to Lyons supplied a basis for further equitable rights in J. K. Pickering & Company.
• Admissibility of Testimony: Whether the trial court erred in admitting Lyons' testimony on matters between him and Elser while Elser was alive.

• Trust/Equitable Interest: No. A trust does not ordinarily attach to property acquired by a person who uses money belonging to another; no money belonging to Lyons or any partnership was used in the San Juan Estate purchase.
• Partnership: No. There was no general relation of partnership under article 1678 of the Civil Code; Elser was not acting for a partnership composed of himself and Lyons.
• Bad Faith/Fraud and Damages: No. Elser did not act in bad faith or commit fraud, and the mortgage caused no damage to Lyons; the loan was paid before maturity and created only a contingent liability.
• Effect of the 200-Share Transfer: No. Lyons accepted and sold the 200 shares, ratifying the transaction and leaving no ground for further equitable rights.
• Admissibility of Testimony: No reversible error. Any error in admitting Lyons' testimony was error without injury and not necessary to the decision.

• Trust/Equitable Interest: The governing rule is that under Philippine law a trust does not ordinarily attach with respect to property acquired by a person who uses money belonging to another; the cases of Martinez vs. Martinez and Enriquez vs. Olaguer so hold. If Elser had used money actually belonging to Lyons, he would have been obligated under article 1724 of the Civil Code and article 264 of the Code of Commerce to pay interest on the money applied to his own use. But the record showed that Elser used his own funds and the Uy Siuliong loan, secured by the Carriedo mortgage, to acquire the San Juan Estate. No money belonging to Lyons or to any Elser-Lyons partnership was in fact used in the purchase. The mortgage merely subjected the Carriedo property to a contingent liability, and no actual liability ever resulted because Elser paid the note on January 18, 1921, before maturity. The equity doctrine that property acquired with another's money should belong to both was therefore inapplicable.
• Partnership: Article 1678 of the Civil Code was cited as the partnership provision. No general relation of partnership existed between Elser and Lyons for the San Juan Estate transaction. Elser bought the estate on his own account, and Lyons expressly declined to join the venture when Elser invited him. The law cannot be distorted to make Lyons a participant contrary to his express determination. The 200 shares Elser indorsed to Lyons were given when Elser believed Lyons would be an associate, but Lyons accepted and sold them; that transaction did not create a partnership in the San Juan purchase.
• Bad Faith/Fraud and Damages: The trial court found that Elser did not act in bad faith and was guilty of no fraud, and the Supreme Court concurred. Lyons knew the Carriedo mortgage had been executed and, after returning to Manila on September 21, 1920, told Elser to let the mortgage remain on the property. The mortgage never caused Lyons damage to the extent of a single cent; Elser paid the P50,000 note on January 18, 1921, before it was due, and the risk imposed on Lyons was negligible. If damage had been caused, the estate would have been liable, but no prejudice was shown.
• Effect of the 200-Share Transfer: The transfer of 200 shares to Lyons was not a basis for further equitable rights. The par value of the shares exceeded Elser's indebtedness to Lyons by more than P8,000. Lyons accepted the shares and sold them for his own benefit, and he later served as a director of J. K. Pickering & Company by virtue of owning them. That ratification and appropriation left no ground for treating the transfer as a source of additional rights.
• Admissibility of Testimony: The admission of Lyons' testimony concerning matters that passed between him and Elser while Elser was alive was of questionable propriety, but any error was error without injury. The determination of the question was not necessary to the decision, so the Court passed the point without further discussion.

• Trust Does Not Ordinarily Attach to Property Acquired with Another's Money — Under the law prevailing in the jurisdiction, a trust does not ordinarily attach with respect to property acquired by a person who uses money belonging to another. The remedy, if any, is not a trust over the acquired property; if money belonging to Lyons had been used, Elser would have been obligated to pay interest under article 1724 of the Civil Code and article 264 of the Code of Commerce. The Court applied this because Elser used his own funds and a loan secured by the Carriedo property, not money belonging to Lyons or a partnership, to acquire the San Juan Estate.
• Equitable Trust Doctrine Requires Use of Another's Money for Property That Should Belong to Both — The English and American equity doctrine on trusts operates only where money belonging to one person is used by another for the acquisition of property that should belong to both. It was inapplicable because no money belonging to Lyons or any Elser-Lyons partnership was used in the purchase.
• No General Partnership Absent Mutual Participation in the Venture — Under article 1678 of the Civil Code, no general relation of partnership existed between Elser and Lyons for the San Juan Estate transaction. Elser bought the estate on his own account, and Lyons expressly declined to join the venture; the law cannot make him a participant contrary to his express determination.
• Ratification by Acceptance and Sale of Shares — A party who accepts and sells shares transferred to him ratifies the transaction and cannot later treat it as a source of further equitable rights. Lyons accepted and sold the 200 shares indorsed to him, and later served as a director by virtue of those shares.
• Liability for Damage from Mortgage of Joint Property — If damage had been caused to Lyons by placing the mortgage on the equity of redemption in the Carriedo property, Elser's estate would be liable for such damage. But no prejudice was shown because the loan was paid before maturity and only a contingent liability was created.
• Error Without Injury in Admission of Testimony — Even if the admission of a surviving party's testimony on matters with a deceased person is of questionable propriety, it is not reversible error where it is error without injury and the question is not necessary to the decision.

• "Under the law prevailing in this jurisdiction a trust does not ordinarily attach with respect to property acquired by a person who uses money belonging to another (Martinez vs. Martinez, 1 Phil., 647; Enriquez vs. Olaguer, 25 Phil., 641.)." — This is the Court's canonical statement of the trust rule, rejecting Lyons' claim that the San Juan Estate and its shares were held in trust for him.
• "But there was clearly no general relation of partnership, under article 1678 of the Civil Code. It is clear that Elser, in buying the San Juan Estate, was not acting for any partnership composed of himself and Lyons, and the law cannot be distorted into a proposition which would make Lyons a participant in this deal contrary to his express determination." — This passage states the partnership holding and explains why Lyons' express refusal to join the venture defeated his claim to the shares.
• "The doctrines referred to operate, however, only where money belonging to one person is used by another for the acquisition of property which should belong to both; and it takes but little discernment to see that the situation here involved is not one for the application of that doctrine, for no money belonging to Lyons or any partnership composed of Elser and Lyons was in fact used by Elser in the purchase of the San Juan Estate." — This defines the limited reach of the equitable trust doctrine and applies it to the facts.

• Martinez vs. Martinez, 1 Phil. 647 — Cited by the Court for the rule that a trust does not ordinarily attach to property acquired by a person who uses money belonging to another.
• Enriquez vs. Olaguer, 25 Phil. 641 — Cited together with Martinez vs. Martinez for the same trust rule.

• Article 1724, Civil Code — Cited for the proposition that if Elser had used money actually belonging to Lyons in the deal, he would be obligated to pay interest upon the money applied to his own use; the Court found no such use.
• Article 264, Code of Commerce — Cited alongside article 1724 for the same interest obligation; not applied because no money belonging to Lyons was used.
• Article 1678, Civil Code — Cited as the partnership provision; under it, no general relation of partnership existed between Elser and Lyons for the San Juan Estate purchase.

Avanceña, C.J., Johnson, Malcolm, Villamor, Villa-Real, and Imperial, JJ.