Magdusa vs. Albaran

A retiring partner's share cannot be refunded, and no judgment for such refund can be rendered, without first dissolving and liquidating the partnership and impleading all partners, since the firm's creditors have preference and all partners are interested and entitled to be heard; the managing partner is not personally liable for the refund, which is an obligation of the partnership.

Gregorio Magdusa and the respondents, together with various other persons, were found by the Court of Appeals to have verbally formed a de facto partnership for the sale of general merchandise in Surigao, Surigao. Magdusa contributed P2,000 as capital, while the respondents and others contributed their labor, under a condition that 25% of net profits would be added to the original capital and the remaining 75% divided among the members in proportion to the length of service of each. The present controversy concerns the legal requirements for refunding the shares of partners from such a common enterprise.

Gregorio Magdusa and Gerundio Albaran, Pascual Albaran, Zosimo Albaran, and Telesforo Bebero, together with various other persons, were found by the Court of Appeals to have verbally formed a de facto partnership for the sale of general merchandise in Surigao, Surigao. Magdusa contributed P2,000 as capital, while the others contributed their labor. Under their arrangement, 25% of the net profits of the business would be added to the original capital, and the remaining 75% would be divided among the members in proportion to the length of service of each.

Sometime in 1953 and 1954, the appellees expressed their desire to withdraw from the partnership. Magdusa thereupon made a computation to determine the value of the partners' shares to that date. The results of the computation were embodied in the document Exhibit "C", drawn in the handwriting of Magdusa.

The appellees thereafter made demands upon Magdusa for payment. Magdusa refused, and the appellees filed the initial complaint in the court below. Magdusa defended by denying any partnership with the appellees, whom he claimed to be mere employees of his. The partnership, with Magdusa as managing partner, was brought into the case as an alternative defendant only. According to the Court of Appeals, the appellees' action was based on the allegation, substantiated in evidence, that Magdusa, having taken delivery of their shares, failed and refused and still fails and refuses to pay them their claims.

The Court of First Instance of Bohol refused to give credence to Exhibit "C" and considered the other partners indispensable but not impleaded. The Court of Appeals, in turn, found that some amounts were due the plaintiffs and that Magdusa had taken delivery of their shares. Exhibit "C" was not signed by the other members of the partnership besides the appellees and appellant, and it did not appear that they had approved, authorized, or ratified it.

• Indispensable Parties: Petitioner maintained that the appellees' action cannot be entertained because, in the distribution of all or part of a partnership's assets, all the partners are indispensable parties without whose intervention no decree of distribution can be validly entered.
• Denial of Partnership: Petitioner defended by denying any partnership with the appellees, whom he claimed to be mere employees of his.

• Indispensable Parties and Liquidation: Whether an action by retiring partners for refund of their shares can be entertained without impleading all members of the partnership and without prior dissolution and liquidation of the partnership.
• Personal Liability of Managing Partner: Whether Gregorio Magdusa can be held personally liable for the refund of the partners' shares.
• Binding Effect of Exhibit "C": Whether Exhibit "C", a computation of partners' shares in Magdusa's handwriting and not signed by the other partners, can bind the other members of the partnership.

• Indispensable Parties and Liquidation: No. A partner's share cannot be returned without first dissolving and liquidating the partnership; all members are interested and entitled to be heard, and absent their impleading, no judgment for refund can be rendered.
• Personal Liability of Managing Partner: No. Magdusa cannot be held liable in his personal capacity because he does not hold the shares except as manager of, or trustee for, the partnership; the partnership must refund them.
• Binding Effect of Exhibit "C": No. Exhibit "C" is not binding on the other partners because it was not signed by them and not shown to have been approved, authorized, or ratified; at the very least, they are entitled to be heard upon its correctness.

• Indispensable Parties and Liquidation: The Court of Appeals' reasoning—that the action was merely for recovery of a sum of money and that Magdusa's liability was personal—was rejected. A partner's share cannot be returned without first dissolving and liquidating the partnership, as held in Po Yeng Cheo vs. Lim Ka Yam, 44 Phil. 177, because the return depends on the discharge of creditors, whose claims enjoy preference over those of the partners. All members of the partnership are interested in its assets and business and are entitled to be heard in the liquidation and distribution of its property. The liquidation Exhibit "C" was not signed by the other members besides appellees and appellant, and it did not appear that they had approved, authorized, or ratified it; thus it was not binding on them, and at the very least they were entitled to be heard on its correctness. Unless a proper accounting and liquidation was first had, the capital shares of the appellees as retiring partners could not be repaid, because the firm's outside creditors had preference over the assets under Article 1839 of the Civil Code, and the firm's property could not be diminished to their prejudice. Since not all members of the partnership were impleaded, no judgment for refund could be rendered, and the action should have been dismissed.
• Personal Liability of Managing Partner: Appellant could not be held liable in his personal capacity for the payment of partners' shares because he did not hold them except as manager of, or trustee for, the partnership. It was the partnership that had to refund their shares to the retiring partners. Thus the judgment against Magdusa personally was untenable.
• Binding Effect of Exhibit "C": The liquidation Exhibit "C" was not signed by the other members of the partnership besides appellees and appellant, and it did not appear that they had approved, authorized, or ratified the same. Therefore, it was not binding upon them; at the very least, they were entitled to be heard upon its correctness. This supported the conclusion that all partners were indispensable and that no refund could be ordered without liquidation.

• Partnership Liquidation Before Return of Share — A partner's share cannot be returned without first dissolving and liquidating the partnership. The return is dependent on the discharge of the partnership's creditors, whose claims enjoy preference over those of the partners. In this case, the Court applied the doctrine to reverse the Court of Appeals' award of refund to the retiring partners, because no prior dissolution and liquidation had been had.
• Indispensable Parties in Partnership Liquidation — All members of a partnership are interested in its assets and business and are entitled to be heard in the matter of the firm's liquidation and distribution of its property. Because not all members were impleaded, no judgment for refund could be rendered. The Court held that the action should have been dismissed.
• Preference of Firm's Outside Creditors — Unless a proper accounting and liquidation of partnership affairs is first had, the capital shares of retiring partners cannot be repaid, for the firm's outside creditors have preference over the assets of the enterprise, and the firm's property cannot be diminished to their prejudice. The Court cited Article 1839 of the Civil Code in support.
• Personal Liability of Managing Partner — A managing partner cannot be held personally liable for the payment of partners' shares because he does not hold them except as manager of, or trustee for, the partnership. It is the partnership that must refund the shares to retiring partners. The Court applied this to set aside the Court of Appeals' judgment against Gregorio Magdusa personally.
• Binding Effect of Unratified Liquidation — A liquidation or computation of partners' shares not signed by the other members of the partnership and not shown to have been approved, authorized, or ratified by them is not binding upon them; at the very least, they are entitled to be heard upon its correctness. The Court applied this to Exhibit "C".

• "A partner's share can not be returned without first dissolving and liquidating the partnership (Po Yeng Cheo vs. Lim Ka Yam, 44 Phil. 177), for the return is dependent on the discharge of the creditors, whose claims enjoy preference over those of the partners; and it is self-evident that all members of the partnership are interested in his assets and business, and are entitled to be heard in the matter of the firm's liquidation and the distribution of its property." — This is the ratio decidendi: it states the foundational rule that liquidation must precede the return of a partner's share and explains why all partners are interested and entitled to be heard.
• "In addition, unless a proper accounting and liquidation of the partnership affairs is first had, the capital shares of the appellees, as retiring partners, can not be repaid, for the firm's outside creditors have preference over the assets of the enterprise (Civ. Code, Art. 1839), and the firm's property can not be diminished to their prejudice." — This passage applies Article 1839 of the Civil Code and reinforces the requirement of prior accounting and liquidation before any refund to retiring partners.
• "Finally, the appellant can not be held liable in his personal capacity for the payment of partners' shares for he does not hold them except as manager of, or trustee for, the partnership. It is the latter that must refund their shares to the retiring partners." — This defines the personal-liability rule: the managing partner is not personally liable because the shares are held for the partnership, which is the proper obligor.
• "Since not all the members of the partnership have been impleaded, no judgment for refund can be rendered, and the action should have been dismissed." — This is the dispositive legal conclusion: absent all indispensable partners, the action for refund cannot proceed.

• Po Yeng Cheo vs. Lim Ka Yam, 44 Phil. 177 — Cited by the Court for the rule that a partner's share cannot be returned without first dissolving and liquidating the partnership. The Court relied on this precedent to reject the Court of Appeals' award of refund to the retiring partners.

• Article 1839, Civil Code — Cited by the Court to hold that the firm's outside creditors have preference over the assets of the enterprise, so the capital shares of retiring partners cannot be repaid unless a proper accounting and liquidation is first had, and the firm's property cannot be diminished to their prejudice.
• Article 1814, Civil Code — Mentioned in the Court of Appeals' reasoning quoted in the decision, as the condition subject to which judgment creditors may satisfy a judgment against Gregorio Magdusa's interest in the partnership. The Supreme Court did not adopt this reasoning; it reversed the Court of Appeals.

Bengzon, C.J.; Padilla, J.; Bautista Angelo, J.; Labrador, J.; Concepcion, J.; Barrera, J.; Paredes, J.; Dizon, J.; Regala, J.; and Makalintal, J.