Singsong vs. Isabela Sawmill

A withdrawing partner who permits the remaining partners to continue the partnership business under the same firm name without liquidating partnership assets is liable to partnership creditors who extended credit in good faith to the continuing partnership, because the partnership is not terminated upon dissolution but continues until winding up is complete, and the withdrawing partner's conduct gave occasion for the damage.

The partnership "Isabela Sawmill" was formed on January 30, 1951 among Leon Garibay, Margarita G. Saldajeno, and Timoteo Tubungbanua for the operation of a sawmill business in Isabela, Negros Occidental. The plaintiffs-appellees were various suppliers and creditors — including sellers of rice, bran, gasoline, lumber, and farm machinery — who had extended credit to the partnership in the ordinary course of its business. Saldajeno eventually withdrew from the partnership and, together with her husband, filed a separate action against the partnership and the remaining partners, leading to the execution of a chattel mortgage over partnership assets in her favor and the subsequent foreclosure sale of those assets.

On January 30, 1951, Leon Garibay, Margarita G. Saldajeno, and Timoteo Tubungbanua entered into a contract of partnership under the firm name "Isabela Sawmill." The partnership operated a sawmill business in Isabela, Negros Occidental. In the ordinary course of business, the partnership incurred obligations to various creditors. On February 3, 1956, Oppen, Esteban, Inc. sold a motor truck and two tractors to the partnership for P20,500, of which P1,288.89 remained unpaid. From October 1958 to November 1958, Agustin E. Tonsay advanced a total of P4,200 to the partnership, against which the partnership delivered lumber worth P3,266.27, leaving an unpaid balance of P933.73. Manuel G. Singsong sold rice and bran on credit to the partnership from May 25, 1958 to January 13, 1959, leaving an unpaid balance of P3,580.50 for rice and bran plus P143.00 for nipa shingles. Jose L. Espinos, through his "Guia Lumber Yard," advanced P2,500 on October 11, 1958, against which the partnership delivered P920.56 worth of lumber, leaving P1,579.44 outstanding. Bacolod Southern Lumber Yard advanced P1,500 on the same date, with P1,048.78 remaining unpaid. Jose Belzunce sold gasoline, motor fuel, and lubricating oils to the partnership from September 14 to November 27, 1958, leaving an unpaid balance of P2,052.10.

On April 25, 1958, the Saldajeno spouses filed Civil Case No. 4797 against Isabela Sawmill, Garibay, and Tubungbanua. Two days later, on April 27, 1958, the three partners entered into a "Memorandum Agreement" in connection with that case. On May 26, 1958, Garibay and Tubungbanua executed a document entitled "Assignment of Rights with Chattel Mortgage" in favor of Saldajeno, covering the properties of the partnership. The Court of First Instance of Negros Occidental rendered a decision in Civil Case No. 4797 on May 29, 1958. Thereafter, Garibay and Tubungbanua did not divide the assets and properties of the partnership between them but continued the business under the same firm name "Isabela Sawmill." The memorandum agreement expressly provided that the remaining partners had constituted themselves as the partnership entity.

On May 18, 1959, the Provincial Sheriff of Negros Occidental published notices of public auction scheduled for June 5, 1959 in connection with Civil Case No. 5223, involving the trucks, tractors, machinery, and office equipment of the partnership. On June 5, 1959, the plaintiffs filed Civil Case No. 5343 in the Court of First Instance of Negros Occidental, seeking to enjoin the sheriff's sale, to annul the chattel mortgage executed in favor of Saldajeno, and to recover the amounts owed to them by the partnership. The sheriff nevertheless conducted the auction on October 14 and 15, 1959, selling the partnership assets to Saldajeno for P38,040. One week later, on October 20, 1959, Saldajeno sold part of the same properties to Pan Oriental Lumber Company for P45,000. After trial, the court rendered judgment in favor of the plaintiffs, declaring the chattel mortgage null and void, recognizing the plaintiffs' preferred right over partnership assets, and ordering Saldajeno to pay the respective amounts owed to each plaintiff plus attorney's fees. Saldajeno and her husband appealed to the Court of Appeals, which certified the case to the Supreme Court on the ground that the appeal involved purely questions of law.

• Jurisdiction: Appellants contended that the Court of First Instance had no jurisdiction over Civil Case No. 5343 because several plaintiffs sought to collect sums of money, the biggest of which was less than P2,000.00, placing the claims within the jurisdiction of the municipal court.
• Nullity of Chattel Mortgage: Appellants argued that the chattel mortgage could no longer be annulled because it had been judicially approved in Civil Case No. 4797 and ordered foreclosed in Civil Case No. 5223, both of the Court of First Instance of Negros Occidental.
• Dissolution of Partnership: Appellants maintained that the withdrawal of Margarita G. Saldajeno from the partnership dissolved the "Isabela Sawmill" partnership formed on January 30, 1951, and that the trial court erred in not so holding.
• Lack of Cause of Action: Appellants asserted that the plaintiffs, except Oppen, Esteban, Inc., were creditors of Garibay and Tubungbanua individually and not of the defunct Isabela Sawmill, and therefore had no cause of action against the answering defendants.
• Statute of Frauds: Appellants contended that the claims of the plaintiff-creditors, except Oppen, Esteban, Inc., exceeded the limit mentioned in the statute of frauds under Article 1403 of the Civil Code and were therefore unenforceable.
• Misjoinder of Parties: Appellants argued there was a misjoinder of parties because the case was not a class suit, and the court could not take jurisdiction over the claims for payment.
• Annulment of Co-equal Court's Judgment: Appellants maintained that a court of first instance had no power to annul judgments or decrees of a coordinate court, as the complaint sought to annul the decision of another branch of the same court.
• Attorney's Fees: Appellants objected to the award of attorney's fees, asserting they acted in good faith.

• Jurisdiction: Whether the Court of First Instance had jurisdiction over Civil Case No. 5343, given that several plaintiffs sought to collect sums of money below P2,000.00 each.
• Annulment of Co-equal Court Judgment: Whether one branch of the Court of First Instance could take cognizance of an action to nullify a final judgment rendered by another branch of the same court.
• Effect of Partner's Withdrawal: Whether the withdrawal of Margarita G. Saldajeno from the partnership dissolved and terminated the partnership "Isabela Sawmill" such that the remaining partners' continued business was not attributable to the partnership.
• Standing to Annul Chattel Mortgage: Whether the plaintiffs, as creditors of the partnership and non-parties to the chattel mortgage, had standing to file an action to annul the chattel mortgage executed by the remaining partners in favor of Saldajeno.
• Liability of Withdrawing Partner: Whether Margarita G. Saldajeno was liable to the partnership creditors for the obligations incurred by the remaining partners after her withdrawal.
• Attorney's Fees: Whether the award of attorney's fees against the appellants was proper.

• Jurisdiction: Yes. The Court of First Instance had jurisdiction because the action included a prayer for the annulment of the chattel mortgage, which is a cause of action not capable of pecuniary estimation and cognizable exclusively by the Court of First Instance.
• Annulment of Co-equal Court Judgment: Yes. Under the doctrine laid down in Dulap vs. Court of Appeals, a court of first instance or a branch thereof has the authority and jurisdiction to take cognizance of a suit to annul a final and executory judgment rendered by another court of first instance or by another branch of the same court.
• Effect of Partner's Withdrawal: No, the withdrawal did not terminate the partnership. While dissolution is caused by a partner ceasing to be associated in the business, the partnership is not terminated but continues until the winding up of the business, and the remaining partners here continued the business under the same firm name.
• Standing to Annul Chattel Mortgage: Yes. A person who is not a party to a contract may exercise an action for nullity if he is prejudiced in his rights with respect to one of the contracting parties and can show detriment that would result from the contract.
• Liability of Withdrawing Partner: Yes. Saldajeno was liable because she agreed to let the remaining partners continue the business of the partnership, which misled creditors into extending credit to the partnership; where one of two innocent persons must suffer, the person who gave occasion for the damage must bear the consequences.
• Attorney's Fees: No. There was no showing that the appellants displayed wanton disregard of the plaintiffs' rights, as they believed in good faith, albeit erroneously, that they were not liable.

• Jurisdiction: The Court applied the criterion of first ascertaining the nature of the principal action or remedy sought. Where the basic issue is something other than the right to recover a sum of money, and the money claim is purely incidental to or a consequence of the principal relief sought, the action is one where the subject of the litigation is not capable of pecuniary estimation and is cognizable exclusively by courts of first instance. Here, the plaintiffs sought not merely to recover sums of money but primarily to annul the chattel mortgage — a cause of action not capable of pecuniary estimation. The money claims were incidental to the principal relief. The Court relied on Lapitan vs. Scandia, Inc. and The Good Development Corporation vs. Tutaan, where it was held that actions involving the validity or nullity of documents upon which claims are predicated are not capable of pecuniary estimation.

• Annulment of Co-equal Court Judgment: The Court traced the evolution of the doctrine on whether one branch of a court could annul the judgment of another branch. Earlier cases (Cabigao vs. Del Rosario, PNB vs. Javellana, Mas vs. Dumaraog, J.M. Tuazon & Co. vs. Torres, Sterling Investment Corp. vs. Ruiz) held that a court could not interfere with the judgments of a court of concurrent or coordinate jurisdiction, pursuant to the policy of judicial stability. However, in December 1971, the Court reversed this doctrine in Dulap vs. Court of Appeals, holding that in an action to annul a judgment, the plaintiff's cause of action springs from the alleged nullity of the judgment, which is an entirely different cause of action from that in the original case. The cause of action being distinct and separate, there is no plausible reason why the venue of the annulment action should necessarily follow the venue of the previous action. This ruling was reiterated in February 1974 in Gianan vs. Hon. Imperial. Accordingly, one branch of the Court of First Instance of Negros Occidental could take cognizance of an action to nullify a final judgment of another branch of the same court.

• Effect of Partner's Withdrawal: The Court applied Articles 1828 and 1829 of the Civil Code. While dissolution of a partnership is caused by any partner ceasing to be associated in the carrying on of the business, on dissolution the partnership is not terminated but continues until the winding up of the business. The remaining partners did not terminate the business; instead of winding up, they continued the business still in the name of "Isabela Sawmill." The memorandum agreement expressly provided that the remaining partners had constituted themselves as the partnership entity. There was no liquidation of partnership assets. The properties mortgaged to Saldajeno belonged to the partnership. Furthermore, the withdrawal of Saldajeno was not published in the newspapers, so the appellees and the public had a right to expect that credit extended to Garibay and Tubungbanua doing business in the name of "Isabela Sawmill" could be enforced against the properties of the partnership.

• Standing to Annul Chattel Mortgage: As a general rule, a contract cannot be assailed by one who is not a party thereto. However, when a contract prejudices the rights of a third person, he may file an action to annul the contract. The Court cited Teves vs. People's Homesite & Housing Corporation, holding that a person who is not a party obliged principally or subsidiarily under a contract may exercise an action for nullity if he is prejudiced in his rights with respect to one of the contracting parties and can show detriment that would positively result from the contract. The plaintiffs-appellees were prejudiced in their rights by the execution of the chattel mortgage over partnership properties in favor of Saldajeno by the remaining partners, and therefore had standing to seek its annulment.

• Liability of Withdrawing Partner: The Court applied the principle that where one of two innocent persons must suffer, the person who gave occasion for the damages to be caused must bear the consequences. Although Saldajeno may have acted in good faith, the appellees also acted in good faith in extending credit to the partnership. Had Saldajeno not entered into the memorandum agreement allowing the remaining partners to continue the business, the appellees would not have been misled into thinking they were still dealing with the partnership. The judicial foreclosure of the chattel mortgage did not relieve Saldajeno from liability to the creditors of the partnership. She was partly to blame for not insisting on the liquidation of partnership assets. The Court also noted that the memorandum agreement provided that Garibay and Tubungbanua undertook to release Saldajeno from any obligation of "Isabela Sawmill" to third persons, entitling her to reimbursement.

• Attorney's Fees: The Court found no basis for the award of attorney's fees because there was no showing that the appellants displayed wanton disregard of the plaintiffs' rights. The appellants believed in good faith, albeit erroneously, that they were not liable to pay the claims. Under Article 2208 of the Civil Code, attorney's fees are recoverable only in the instances enumerated, and bad faith or wanton disregard is essential. The deletion was therefore warranted.

• Jurisdiction over actions not capable of pecuniary estimation — The criterion for determining whether an action is one where the subject matter is not capable of pecuniary estimation is to first ascertain the nature of the principal action or remedy sought. If it is primarily for the recovery of a sum of money, the claim is capable of pecuniary estimation, and jurisdiction depends on the amount. However, where the basic issue is something other than the right to recover a sum of money, and the money claim is purely incidental to or a consequence of the principal relief sought, the action is not capable of pecuniary estimation and is cognizable exclusively by courts of first instance. Applied here: the action to annul a chattel mortgage was the principal relief, and the money claims were incidental, conferring jurisdiction on the Court of First Instance.

• Power to annul judgments of co-equal courts — Under the doctrine as revised in Dulap vs. Court of Appeals (1971), a court of first instance or a branch thereof has the authority and jurisdiction to take cognizance of a suit to annul a final and executory judgment or order rendered by another court of first instance or by another branch of the same court. The cause of action in an annulment suit (based on alleged nullity, e.g., fraud) is entirely different from the cause of action in the original case that gave rise to the judgment sought to be annulled. The earlier doctrine of judicial stability, which prohibited such annulment, was reversed.

• Dissolution does not terminate partnership — Under Articles 1828 and 1829 of the Civil Code, dissolution of a partnership caused by a partner ceasing to be associated in the business does not terminate the partnership; it continues until the winding up of the business. Where remaining partners continue the business under the same firm name without liquidating assets, the partnership entity persists for purposes of creditor claims, and the partnership's properties remain subject to the claims of partnership creditors.

• Standing of third parties to annul prejudicial contracts — A person who is not a party to a contract may exercise an action for nullity if he is prejudiced in his rights with respect to one of the contracting parties and can show detriment that would positively result from the contract. Applied here: partnership creditors prejudiced by the chattel mortgage over partnership assets had standing to seek its annulment.

• Loss distributed to the party who gave occasion for damage — Where one of two innocent persons must suffer, that person who gave occasion for the damages to be caused must bear the consequences. Applied here: Saldajeno's agreement to let the remaining partners continue the business misled creditors, so she must bear the consequences even though she may have acted in good faith.

• "Where the basic issue is something more than the right to recover a sum of money and where the money claim is purely incidental to or a consequence of the principal relief sought, the action is as a case where the subject of the litigation is not capable of pecuniary estimation and is cognizable exclusively by the Court of First Instance." — This passage articulates the controlling test for jurisdiction based on the nature of the principal relief sought, a formulation frequently cited in subsequent jurisprudence on jurisdictional questions.

• "Our conclusion must therefore be that a court of first instance or a branch thereof has the authority and jurisdiction to take cognizance of, and to act in, suit to annul final and executory judgment or order rendered by another court of first instance or by another branch of the same court..." — Quoted from Dulap vs. Court of Appeals, this passage marks the reversal of the earlier doctrine of judicial stability and establishes the modern rule permitting annulment of co-equal courts' judgments.

• "Where one of two innocent persons must suffer, that person who gave occasion for the damages to be caused must bear the consequences." — This passage states the equitable principle applied to hold the withdrawing partner liable to partnership creditors despite her good faith, because her conduct in allowing the business to continue created the appearance that misled creditors.

• "However, when a contract prejudices the rights of a third person, he may file an action to annul the contract." — This passage defines the exception to the general rule that only parties to a contract may assail its validity, establishing the standing of prejudiced third parties to seek annulment.

• Lapitan vs. Scandia, Inc., et al., 24 SCRA 479 (1969) — Followed. Established that actions for rescission or annulment, like specific performance, are not capable of pecuniary estimation and are cognizable exclusively by courts of first instance, even where damages are sought.
• The Good Development Corporation vs. Tutaan, 73 SCRA 189 (1977) — Followed. Reiterated the doctrine that where an action involves the foreclosure of a chattel mortgage covering personal properties above the jurisdictional threshold, the action falls within the competence of the Court of First Instance.
• Dulap vs. Court of Appeals, 42 SCRA 537 (1971) — Followed. Reversed the earlier doctrine of judicial stability and established that one branch of a court of first instance may annul the final judgment of another branch, because the cause of action in an annulment suit is distinct from that in the original case.
• Mas vs. Dumaraog, 12 SCRA 34 (1964) — Distinguished/overruled. Previously held that the power to open, modify, or vacate a judgment is restricted to the court that rendered it; this doctrine was reversed by Dulap.
• Cabigao and Izquierdo vs. Del Rosario, 44 Phil. 182 — Distinguished/overruled. Originally held that a court has no power to interfere with judgments of a court of concurrent or coordinate jurisdiction; this doctrine was reversed by Dulap.
• Teves vs. People's Homesite & Housing Corporation, 23 SCRA 1141 (1968) — Followed. Established that a person not party to a contract may exercise an action for nullity if prejudiced in his rights with respect to one of the contracting parties.
• Gianan vs. Hon. Imperial, 55 SCRA 755 (1974) — Followed. Reiterated the Dulap ruling on the power of one branch to annul the judgment of another branch.

• Article 1828, Civil Code of the Philippines — Provides that the dissolution of a partnership is caused by any partner ceasing to be associated in the carrying on of the business. Applied to confirm that Saldajeno's withdrawal caused dissolution but not termination of the partnership.
• Article 1829, Civil Code of the Philippines — Provides that on dissolution, the partnership is not terminated but continues until the winding up of the business. Applied to hold that the partnership continued to exist for purposes of creditor claims because the remaining partners continued the business without winding up.
• Article 2208, paragraphs (5) and (11), Civil Code of the Philippines — Enumerates the instances when attorney's fees may be recovered. Applied by the trial court to justify the award of attorney's fees, but the Supreme Court deleted the award for lack of bad faith.
• Article 1403, Civil Code of the Philippines (Statute of Frauds) — Raised by appellants as a defense that the creditors' claims were unenforceable. The Court did not sustain this defense.
• Section 2, Rule 4, Rules of Court — Cited in Dulap in support of the proposition that the venue of an annulment action need not follow the venue of the previous action, as the causes of action are distinct.

Teehankee (Chairman), Makasiar, Guerrero, De Castro, and Melencio-Herrera, JJ., concurred.