PIONEER INSURANCE & SURETY CORPORATION, PETITIONER, VS. THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA AND JACOB S. LIM …

The subject matter of these consolidated petitions is the
decision of the Court of Appeals in CA-G.R. CV No. 66195 which modified the
decision of the then Court of First Instance of Manila in Civil Case No.
66135.  The plaintiff’s complaint
(petitioner in G.R. No. 84197) against all defendants (respondents in G.R. No.
84197) was dismissed but in all other respects the trial court’s decision was
affirmed.

The dispositive portion of the trial
court’s decision reads as follows:

“WHEREFORE, judgment is
rendered against defendant Jacob S. Lim requiring him to pay plaintiff
the amount of P311,056.02, with interest at the rate
of 12% per annum compounded monthly; plus 15% of the amount awarded to
plaintiff as attorney’s fees from July
2, 1966, until full payment is made; plus P70,000.00 moral and
exemplary damages.

“It is found in the records that the cross party plaintiffs
incurred additional miscellaneous expenses aside from P151,000.00,
making a total of P184,878.74.  Defendant
Jacob S. Lim is further required to pay cross party plaintiff, Bormaheco, the Cervanteses one-half and Maglana
the other half, the amount of P184,878.74 with
interest from the filing of the cross-complaints until the amount is fully
paid; plus moral and exemplary damages in the amount of P184,878.84 with
interest from filing of the cross-complaints until the amount is fully paid;
plus moral and exemplary damages in the amount of P50,000.00 for each of the
two Cervanteses.

“Furthermore, he is required to pay P20,000.00
to Bormaheco and the Cervanteses,
and another P20,000.00 to Constancio B. Maglana as attorney’s fees.

xxx                               xxx                               xxx

“WHEREFORE, in view of all above, the complaint of plaintiff
Pioneer against defendants Bormaheco, the Cervanteses and Constancio B. Maglana, is dismissed. 
Instead, plaintiff is required
to indemnify the defendants Bormaheco and the Cervanteses the amount of P20,000.00
as attorney’s fees and the amount of P4,379.21, per year from 1966 with legal
rate of interest up to the time it is paid.

“Furthermore, the plaintiff is required to pay Constancio B. Maglana the amount
of P20,000.00 as attorney’s fees and costs.

“No moral or exemplary damages is
awarded against plaintiff for this action was filed in good faith.  The fact that the properties of the Bormaheco and the Cervanteses
were attached and that they were required to file a counterbond
in order to dissolve the attachment, is
not an act of bad faith.  When a man
tries to protect his rights, he should not be saddled with moral or
exemplary damages.  Furthermore, the
rights exercised were provided for in
the Rules of Court, and it was the court that ordered it, in the exercise of
its discretion.

“No damage is decided against Malayan Insurance Company, Inc.,
the third-party defendant, for it only secured the attachment prayed for by the
plaintiff Pioneer.  If an insurance
company would be liable for damages in performing an act which is clearly
within its power and which is the reason for its being, then nobody would
engage in the insurance business.  No
further claim or counter-claim for or against anybody is declared by this Court.” (Rollo – G.R. No. 24197, pp. 15-16)

In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged
in the airline business as owner-operator of Southern Air Lines (SAL) a single
proprietorship.

On May 17, 1965, at Tokyo, Japan, Japan
Domestic Airlines (JDA) and Lim entered into and executed a sales contract (Exhibit A) for the sale and
purchase of two (2) DC-3A Type aircrafts and one (1) set of necessary spare
parts for the total agreed price of US $109,000.00 to be paid in
installments.  One DC-3
Aircraft with Registry No. PIC-718, arrived in Manila
on June 7, 1965 while the other aircraft, arrived in Manila
on July 18, 1965.

On May 22,
1965, Pioneer
Insurance and Surety Corporation (Pioneer, petitioner in G.R. No. 84197) as
surety executed and issued its Surety Bond No. 6639 (Exhibit C) in favor
of JDA, in behalf of its principal, Lim, for the balance price of the aircrafts
and spare parts.

It appears that Border
Machinery and Heavy Equipment Company, Inc. (Bormaheco),
Francisco and Modesto Cervantes (Cervanteses) and Constancio Maglana (respondents
in both petitions) contributed some funds used in the purchase of the above
aircrafts and spare parts.  The funds
were supposed to be their contributions to a new corporation proposed by Lim to
expand his airline business.  They
executed two (2) separate indemnity agreements (Exhibits D-1 and D-2) in favor
of Pioneer, one signed by Maglana and the other jointly signed by Lim for
SAL, Bormaheco and the Cervanteses.  The indemnity agreements stipulated that the indemnitors principally agree and bind themselves jointly
and severally to indemnify and hold and save harmless Pioneer from and against
any/all damages, losses, costs, damages, taxes, penalties, charges and expenses
of whatever kind and nature which Pioneer may incur in consequence of having
become surety upon the bond/note and to pay, reimburse and make good to
Pioneer, its successors and assigns, all
sums and amounts of money which it or its representatives should or may
pay or cause to be paid or become liable to pay on them of whatever kind and
nature.

On June 10, 1965,
Lim doing business under the name and style of SAL executed in favor of Pioneer
a deed of chattel mortgage as security for the latter’s suretyship
in favor of the former.  It was
stipulated therein that Lim transfer and convey to the surety the two
aircrafts.  The deed (Exhibit D) was duly
registered with the Office of the Register of Deeds of the City of Manila
and with the Civil Aeronautics Administration pursuant to the Chattel Mortgage
Law and the Civil Aeronautics Law (Republic Act No. 776), respectively.

Lim defaulted on his subsequent installment payments prompting
JDA to request payments from the surety. 
Pioneer paid a total sum of P298,626.12.

Pioneer then filed a petition for the extrajudicial foreclosure
of the said chattel mortgage before the Sheriff of Davao
City.  The Cervanteses
and Maglana, however, filed a third party claim
alleging that they are co-owners of the aircrafts.

On July 19, 1966,
Pioneer filed an action for judicial foreclosure with an application for a writ of preliminary attachment against Lim
and respondents, the Cervanteses, Bormaheco
and Maglana.

In their Answers, Maglana, Bormaheco and the Cervanteses
filed cross-claims against Lim alleging that they were not privies to the
contracts signed by Lim and, by way of counterclaim, sought for damages for being exposed to
litigation and for recovery of the sums of money they advanced to Lim for the
purchase of the aircrafts in question.

After trial on the merits, a decision was rendered holding Lim
liable to pay Pioneer but dismissed Pioneer’s complaint against all other
defendants.

As stated earlier, the appellate court modified the trial court’s
decision in that the plaintiff’s complaint against all the defendants was
dismissed.  In all other respects the
trial court’s decision was affirmed.

We first resolve G.R. No. 84197.

Petitioner Pioneer Insurance and Surety Corporation avers that:

RESPONDENT COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DISMISSED THE
APPEAL OF PETITIONER ON THE SOLE GROUND THAT PETITIONER HAD ALREADY COLLECTED
THE PROCEEDS OF THE REINSURANCE ON ITS BOND IN FAVOR OF THE JDA AND THAT IT
CANNOT REPRESENT A REINSURER TO RECOVER THE AMOUNT FROM HEREIN PRIVATE
RESPONDENTS AS DEFENDANTS IN THE TRIAL COURT. 
(Rollo – G.R. No. 84197, p. 10)

The petitioner questions the following findings of the appellate
court:

“We find no merit in plaintiff’s appeal.  It is undisputed that plaintiff Pioneer had
reinsured its risk of liability under the surety bond in favor of JDA and
subsequently collected the proceeds of such reinsurance in the sum of
P295,000.00.  Defendants’ alleged
obligation to Pioneer amounts to P295,000.00, hence,
plaintiff’s instant action for the recovery of the amount of P298,666.28 from
defendants will no longer prosper. 
Plaintiff Pioneer is not the real party in interest to institute the
instant action as it does not stand to be benefited or injured by the judgment.

 “Plaintiff Pioneer’s
contention that it is representing the reinsurer to
recover the amount from defendants, hence, it instituted the action is utterly
devoid of merit.  Plaintiff did not even
present any evidence that it is the attorney-in-fact of the reinsurance company,
authorized to institute an action for and in behalf of the latter.  To qualify a person to be a real party in
interest in whose name an action must be prosecuted, he must appear to be the
present real owner of the right sought to be enforced (Moran, Vol. I, Comments
on the Rules of Court, 1979 ed., p. 155). 
It has been held that the real party in interest is the party who would
be benefited or injured by the judgment or the party entitled to the avails of
the suit (Salonga v. Warner Barnes & Co., Ltd.,
88 Phil. 125, 131).  By real party in
interest is meant a present substantial interest as distinguished from a mere
expectancy or a future, contingent, subordinate or consequential interest
(Garcia v. David, 67 Phil. 27; Oglleaby v.
Springfield Marine Bank, 52 N.E. 2d. 1600, 385 III, 414, Flowers v. Germana, 1 NW 2d 424; Weber v. City of Cheye,
97 P. 2d 667, 669, quoting 47 C.V. 35).

“Based on the foregoing
premises, plaintiff Pioneer cannot be considered as the real party in interest as it has already been
paid by the reinsurer the sum of P295,000.00 – the bulk of defendants’ alleged obligation to
Pioneer.

“In addition to the said proceeds of the reinsurance received
by plaintiff Pioneer from its reinsurer, the former
was able to foreclose extra-judicially one of the subject airplanes and its
spare engine, realizing the total amount of P37,050.00
from the sale of the mortgaged chattels. 
Adding the sum of P37,050..00. to the proceeds
of the reinsurance amounting to P295,000.00, it is patent that plaintiff has been overpaid in the amount of
P33,383.72 considering that the total amount it had paid to JDA totals to only
P298,666.28.  To allow plaintiff Pioneer
to recover from defendants the amount in excess of P298,666.28 would be
tantamount to unjust enrichment as it has already been paid by the reinsurance
company of the amount plaintiff has paid to JDA as surety of defendant Lim vis-a-vis defendant Lim’s liability to JDA.  Well settled is the rule that no person
should unjustly enrich himself at the expense of another (Article 22, New Civil
Code).” (Rollo – 84197, pp. 24-25)

The petitioner contends that — (1) it is at a loss where
respondent court based its finding that petitioner was paid by its reinsurer in the aforesaid amount, as this matter has never
been raised by any of the parties herein both in their answers in the court
below and in their respective briefs with respondent court; (Rollo, p. 11) (2) even assuming hypothetically that it was
paid by its reinsurer, still none of the respondents
had any interest in the matter since the reinsurance is strictly between the
petitioner and the re-insurer pursuant to section 91 of the Insurance Code; (3)
pursuant to the indemnity agreements, the petitioner is entitled to recover
from respondents Bormaheco and Maglana;
and (4) the principle of unjust enrichment is not applicable considering that
whatever amount he would recover from the co-indemnitor
will be paid to the reinsurer.

The records belie the petitioner’s contention that the issue on
the reinsurance money was never raised by the parties.

A cursory reading of the trial court’s lengthy decision shows
that two of the issues threshed out were:

xxx                               xxx
                              xxx

“1.  Has
Pioneer a cause of action against defendants with respect to so much of its
obligations to JDA as has been paid with reinsurance money?

2.   If the answer to the
preceding question is in the negative, has Pioneer still any claim against
defendants, considering the amount it has realized from the sale of the
mortgaged properties?  (Record on Appeal,
p. 359, Annex B of G.R. No. 84157)

In resolving these issues, the trial court made the following
findings:

“It appearing that Pioneer reinsured its risk of liability under the surety
bond it had executed in favor of JDA, collected the proceeds of such
reinsurance in the sum of P295,000, and paid with the
said amount the bulk of its alleged liability to JDA under the said surety
bond, it is plain that on this score it no longer has any right to collect to
the extent of the said amount.

On the question of why it is Pioneer, instead of the reinsurance
(sic), that is suing defendants for the amount paid to it by the reinsurers, notwithstanding that the cause of action
pertains to the latter, Pioneer says: 
‘The reinsurers opted instead that the Pioneer
Insurance & Surety Corporation shall pursue alone the case.’ ‘….Pioneer
Insurance & Surety Corporation is representing the reinsurers
to recover the amount.’ In other words, insofar as the amount paid to it by the
reinsurers Pioneer is suing defendants as their
attorney-in-fact.

But in the first place, there is not the slightest indication in
the complaint that Pioneer is suing as attorney-in-fact of the reinsurers for any amount. 
Lastly, and most important of all, Pioneer has no right to institute and
maintain in its own name an action for the benefit of the reinsurers.  It is well-settled that an action brought by
an attorney-in-fact in his own name instead of that of the principal will not
prosper, and this is so even where the name of the principal is disclosed in
the complaint.

“‘Section 2 of Rule 3 of the Old Rules of Court provides that
‘Every action must be prosecuted in the name of the real party in interest.’
This provision is mandatory.  The real
party in interest is the party who would be benefitted
or injured by the judgment or is the party entitled to the avails of the suit.

‘”This Court has held in various cases that an attorney-in?fact
is not a real party in interest, that there is no law permitting an action to
be brought by an attorney-in-fact. 
Arroyo v. Gradana and Gentero,
18 Phil. Rep. 484; Luchauco v. Limjuco
and Gonzalo, 19 Phil. Rep. 12; Filipinas Industrial Corporation v. San Diego,
G.R. No. L-22347, 1968, 23 SACRA 706, 710-714.'”

“The total amount paid by Pioneer to JDA is P299,666.29.  Since
Pioneer has collected P295,000.00 from the reinsurers, the uninsured portion of what it paid to JDA is
the difference between the two amounts, or P3,666.28.  This is the amount for which Pioneer may sue
defendants, assuming that the indemnity agreement is still valid and
effective.  But since the amount realized
from the sale of the mortgaged chattels are P35,000.00
for one of the airplanes and P2,050.00 for a spare engine, or a total of
P37,050.00, Pioneer is still overpaid by P33,383.72.  Therefore, Pioneer has no more claim against defendants.’ ” (Record
on Appeal, pp. 360-363)

The payment to the petitioner made by the reinsurers
was not disputed in the appellate court. 
Considering this admitted payment, the only issue that cropped up was
the effect of payment made by the reinsurers to the
petitioner.  Therefore, the petitioner’s
argument that the respondents had no interest in the reinsurance contract as
this is strictly between the petitioner as insured and the reinsuring company
pursuant to Section 91 (should be Section 98) of the Insurance Code has no
basis.

“In general a reinsurer, on payment
of a loss acquires the same rights by subrogation as are acquired in similar
cases where the original insurer pays a loss (Universal Ins. Co. v. Old Time Molasses Co. C.C.A. La.,
46 F 2d 925.

“The rules of practice in actions on original insurance
policies are in general applicable to actions or contracts of reinsurance.  (Delaware, Ins. Co. v. Pennsylvania Fire Ins.
Co., 55 S.E. 330, 126 GA. 380, 7 Ann. Con. 1134)”

Hence the applicable law is Article 2207 of the new Civil Code,
to wit:

“Art. 2207.  If the
plaintiff’s property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of the wrong or breach of
contract complained of, the insurance company shall be subrogated to the rights
of the insured against the wrongdoer or the person who has violated the
contract.  If the amount paid by the
insurance company does not fully cover the injury or loss, the aggrieved party
shall be entitled to recover the deficiency from the person causing the loss or
injury.”

Interpreting the aforesaid provision, we ruled in the case of Phil.
Air Lines, Inc. v. Heald
Lumber Co. (101 Phil. 1031 [1957]) which we subsequently applied
in Manila Mahogany Manufacturing Corporation v.
Court of Appeals (154 SCRA 650 [1987]):

“Note that if a property is insured and the owner receives the
indemnity from the insurer, it is provided in said article that the insurer is
deemed subrogated to the rights of the insured against the wrongdoer and if the
amount paid by the insurer does not fully cover the loss, then the aggrieved
party is the one entitled to recover the deficiency.  Evidently, under this legal
provision, the real party in
interest with regard to the portion of
the indemnity paid is the insurer and
not the insured.” (Underscoring supplied)

It is clear from the records that Pioneer sued in its own name and not as an attorney-in-fact
of the reinsurer.

Accordingly, the appellate court did not commit a reversible
error in dismissing the petitioner’s complaint as against the respondents for
the reason that the petitioner was not the real party in interest in the complaint and, therefore, has no
cause of action against the respondents.

Nevertheless, the petitioner argues that the appeal as regards
the counter indemnitors should not have been
dismissed on the premise that the evidence on record shows that it is entitled
to recover from the counter indemnitors.  It does not, however, cite any grounds except
its allegation that respondent “Maglana’s
defense and evidence are certainly incredible” (p. 12, Rollo)
to back up its contention.

On the other hand, we find the trial court’s findings on the matter replete with evidence to
substantiate its finding that the counter-indemnitors
are not liable to the petitioner.  The
trial court stated:

“Apart from the foregoing proposition, the indemnity agreement
ceased to be valid and effective after the execution of the chattel mortgage.

“Testimonies of defendants Francisco Cervantes
and Modesto Cervantes.

“Pioneer Insurance, knowing the value of the aircrafts and the
spare parts involved, agreed to issue the bond provided that the same would be
mortgaged to it, but this was not possible because the planes were still in Japan
and could not be mortgaged here in the Philippines.  As soon as the aircrafts were brought to the Philippines,
they would be mortgaged to Pioneer Insurance to cover the bond, and this
indemnity agreement would be cancelled.

“The following is averred under oath by Pioneer in the
original complaint:

” ‘The various conflicting claims
over the mortgaged properties have impaired and rendered insufficient the security
under the chattel mortgage and there is thus no other sufficient security for
the claim sought to be enforced by this action.’ “

“This is judicial admission and aside from the chattel
mortgage there is no other security for the claim sought to be enforced by this
action, which necessarily means that the indemnity agreement had ceased to have
any force and effect at the time this action was instituted.  Sec. 2, Rule 129, Revised Rules of Court.

“Prescinding from the foregoing,
Pioneer, having foreclosed the chattel mortgage on the planes and spare parts,
no longer has any further action against the defendants as indemnitors
to recover any unpaid balance of the price. 
The indemnity agreement was ipso jure
extinguished upon the foreclosure of the chattel mortgage.  These defendants, as indemnitors,
would be entitled to be subrogated to the right of Pioneer should they make
payments to the latter.  Articles 2067 and 2080 of the New Civil Code of the Philippines.

Independently of the preceding proposition Pioneer’s election of
the remedy of foreclosure precludes any further action to recover any unpaid
balance of the price.

SAL or Lim, having failed to pay the second to the eight and last
installments to JDA and Pioneer as surety having made of the payments to JDA,
the alternative remedies open to Pioneer were as provided in Article 1484 of
the New Civil Code, known as the Recto Law.

Pioneer exercised the remedy of foreclosure of the chattel mortgage
both by extrajudicial foreclosure and the instant suit.  Such being the case, as provided by the
aforementioned provisions, Pioneer ‘shall have no further action against the
purchaser to recover any unpaid balance and any agreement to the contrary is void.’ Cruz, et al.
v. Filipinas Investment & Finance Corp. No. L? 24772, May 27, 1968, 23 SCRA 791, 795-6.

The operation of the foregoing
provision cannot be escaped from through the contention that Pioneer is not the
vendor but JDA.  The reason is that
Pioneer is actually exercising the rights of JDA as vendor, having subrogated
it in such rights.  Nor may the
application of the provision be validly opposed on the ground that these
defendants and defendant Maglana are not the vendee
but indemnitors. 
Pascual, et al. v. Universal Motors Corporation, G.R. No. L-27862, Nov. 20, 1974, 61 SCRA 124.

The restructuring of the obligations of SAL or Lim, thru the change
of their maturity dates discharged these defendants from any liability as
alleged indemnitors. 
The change of the maturity dates of the obligations of Lim, or SAL,
extinguished the original obligations thru novations,
thus discharging the indemnitors.

”
‘The principal hereof shall be paid in eight equal successive three
months interval installments, the first of which shall be due and payable 25
August 1965, the remainder of which x x x shall be due and payable on the 26th day xxx of each
succeeding three months and the last of which shall be due and payable 26th May
1967.’ “

“However, at the trial of this case, Pioneer produced a
memorandum executed by SAL, or Lim and JDA, modifying the maturity dates of the obligations, as follows:

” ‘The principal
hereof shall be paid in eight equal successive three month interval
installments the first of which shall be due and payable 4 September 1965, the
remainder of which xxx shall be due and payable on the 4th day xxx of each
succeeding months and the last of which shall be due and payable 4th June
1967.’ “

“Not only that, Pioneer also produced eight purported
promissory notes bearing maturity dates different from that fixed in the
aforesaid memorandum; the due date of the first installment appears as October
15, 1965, and those of the rest of the installments, the 15th of each
succeeding three months, that of the last installment being July 15, 1967.

“These restructuring of the obligations with regard to their
maturity dates, effected twice, were done without the knowledge, much less,
would have it believed that these defendants Maglana
(sic).  Pioneer’s official Numeriano Carbonel, would have it
believed that these defendants and defendant Maglana
knew of and consented to the modification of the obligations.  But if that were so, there would have been
the corresponding documents in the form of a written notice to as well as
written conformity of these defendants, and there are no such documents.  The consequence of this was the
extinguishments of the obligations and of the surety bond secured by the
indemnity agreement which was thereby also extinguished.  Applicable by analogy are the rulings of the
Supreme Court in the case of Kabankalan Sugar Co. v.
Pacheco, 55 Phil. 553, 563, and
the case of Asiatic Petroleum Co. v. Hizon David, 45
Phil. 532, 538.

” ‘Art. 2079.
An extension granted to the debtor by the creditor without the consent of the
guarantor extinguishes the guaranty.  The
mere failure on the part of the creditor to demand payment after the debt has
become due does not of itself constitute any extension of time referred to
herein (New Civil Code).’ “

“Manresa,
4th ed., Vol. 12, pp. 316-317, Vol. Vi, pp. 562-563,
M.F. Stevenson & Co., Ltd., v. Climacom et al. (C.A.) 36 O.G. 1571.

“Pioneer’s liability as surety to JDA had already prescribed
when Pioneer paid the same. 
Consequently, Pioneer has no more cause of action to recover from these defendants,
as supposed indemnitors, what it has paid to
JDA.  By virtue of an express stipulation
in the surety bond, the failure of JDA to present its claim to Pioneer within
ten days from default of Lim or SAL on every installment, released Pioneer from
liability from the claim.

“Therefore, Pioneer is not entitled to exact reimbursement
from these defendants thru the indemnity.

” ‘Art. 1318.  Payment by a solidary
debtor shall not entitle him to reimbursement from his co-debtors if such
payment made after the obligation has prescribed or became illegal.’ “

 “These defendants are
entitled to recover damages and attorney’s fees from Pioneer and its surety by
reason of the filing of the instant case against them and the attachment and
garnishment of their properties.  The
instant action is clearly unfounded insofar as plaintiff drags these defendants
and defendant Maglana.” (Record on Appeal, pp.
363-369, Rollo of G.R. No. 84157)

We find no cogent reason to reverse or modify these findings.

Hence, it is our conclusion that the petition in G.R. No. 84197
is not meritorious.

We now discuss the merits of G.R. No. 84157.

Petitioner Jacob S. Lim poses the following issues:

“1. 
What legal rules govern the relationship among co-investors whose
agreement was to do business through the corporate vehicle but who failed to
incorporate the entity in which they had chosen to invest?  How are the losses to be treated in
situations where their contributions to the intended ‘corporation’ were
invested not through the corporate form? 
This Petition presents these fundamental questions which we believe were
resolved erroneously by the Court of Appeals (‘CA’).” (Rollo,
p. 6)

These questions are premised on the petitioner’s theory that as a
result of the failure of respondents Bormaheco,
Spouses Cervantes, Constancio Maglana
and petitioner Lim to incorporate, a de facto partnership
among them was created, and that as a consequence of
such relationship all must share in the losses and/or gains of the venture in
proportion to their contribution.  The
petitioner, therefore, questions the appellate court’s findings ordering him to
reimburse certain amounts given by the respondents to the petitioner as their
contributions to the intended corporation, to wit:

“However, defendant Lim should be held liable to pay his
co-defendants’ cross-claims in the total amount of P184,878.74
as correctly found by the trial court, with interest from the filing of the
cross-complaints until the amount is fully paid.  Defendant Lim should pay one-half of the said
amount to Bormaheco and the Cervanteses and the other one-half to defendant Maglana.  It is
established in the records that defendant Lim had duly received the amount of of P151,000.00 from defendants Bormaheco and Maglana
representing the latter’s participation in the ownership of the subject
airplanes and spare parts (Exhibit 58). 
In addition, the cross-party plaintiffs incurred additional expenses,
hence, the total sum of P184,878.74.”

We first state the principles.

“While it has been held that as between themselves the rights
of the stockholders in a defectively incorporated association should be
governed by the supposed charter and the laws of the state relating thereto and
not by the rules governing partners (Cannon v. Brush Electric Co., 54 A. 121,
96 Md. 446, 94 Am. S.R. 584), it is ordinarily held that persons who attempt,
but fail, to form a corporation and who carry on business under the corporate
name occupy the position of partners inter se (Lynch v. Perryman, 119 P. 229,
29 Okl. 615, Ann.Cas.
1913A 1065). 
Thus, where persons associate themselves together under articles to
purchase property to carry on a business, and their organization is so
defective as to come short of creating a corporation within the statute, they
become in legal effect partners inter se, and their rights as members of the
company to the property acquired by the company will be recognized (Smith v. Schoodoc Pond Packing Co., 84 A. 268, 109 Me. 555; Whipple
v. Parker, 29 Mich. 369).  So, where
certain persons associated themselves as a
corporation for the development of land for irrigation purposes, and
each conveyed land to the corporation, and two of them contracted to pay a
third the difference in the proportionate value of the land conveyed by him,
and no stock was ever issued in the corporation, it was treated as a trustee
for the associates in an action between them for an accounting, and its capital
stock was treated as partnership assets, sold, and the proceeds distributed
among them in proportion to the value of the property contributed by each (Shorb v. Beaudry, 56 Cal.
446).  However, such a
relation does not necessarily exist, for
ordinarily persons cannot be made to assume the relation of
partners, as between themselves, when their
purpose is that no partnership shall exist
(London Assur. Corp. v. Drennen, Minn.,
6 S.Ct. 442, 116 U. S.
461, 472, 29 L.Ed. 688), and
it should be implied only when necessary
to do justice between the parties; thus,
one who takes no part except to
subscribe for stock in a proposed corporation
which is never legally formed does not become a partner
with other subscribers who engage in business under the
name of the pretended corporation, so
as to be liable as such in an
action for settlement of the alleged partnership
and contribution (Ward v. Brigham, 127 Mass. 24).  A partnership relation between certain
stockholders and other stockholders, who were also directors, will not be
implied in the absence of an
agreement, so as to make the former
liable to contribute for payment of debts
illegally contracted by the latter (Heald v. Owen, 44 N.W. 210, 79 Iowa 23).  (Corpus Juris Secundum, Vol. 68, p. 464) (Underlining supplied)

In the instant case, it is to be noted that the petitioner was declared
non-suited for his failure to appear during the pre-trial despite
notification.  In his answer, the
petitioner denied having received any amount from respondents Bormaheco, the Cervanteses and Maglana.  The trial
court and the appellate court, however, found through Exhibit 58, that the
petitioner received the amount of P151,000.00
representing the participation of Bormaheco and Atty.
Constancio B. Maglana in
the ownership of the subject
airplanes and spare parts.  The record shows that defendant Maglana gave P75,000.00 to
petitioner Jacob Lim thru the Cervanteses.

It is therefore clear that the petitioner never had the intention to form a
corporation with the respondents despite representations to them.  This gives credence to the cross-claims the respondents
to the effect that they were induced and lured by the petitioner to make
contributions to a proposed
corporation which was never formed because the petitioner reneged on their agreement.  Maglana alleged in
his cross-claim:

“x x x that sometime in early 1965,
Jacob Lim proposed to Francisco Cervantes and Maglana
to expand his airline business. 
Lim was to procure two DC-3’s from Japan and secure the
necessary certificates of public convenience and necessity as well as the
required permits for the operation thereof. 
Maglana sometime in May 1965, gave Cervantes,
his share of P75,000.00 for delivery to Lim which
Cervantes did and Lim acknowledged receipt thereof.  Cervantes, likewise, delivered his share of
the undertaking.  Lim in an undertaking sometime
on or about August 9, 1965,
promised to incorporate his airline in accordance with their agreement and
proceeded to acquire the planes on his own account.  Since then up to the filing of this answer,
Lim has refused, failed and still refuses to set up
the corporation or return the money of Maglana.”
(Record on Appeal, pp. 337-338)

while
respondents Bormaheco and the Cervanteses
alleged in their answer, counterclaim, cross-claim and third party complaint:

“Sometime in April 1965, defendant Lim lured and induced the
answering defendants to purchase two airplanes and spare parts from Japan
which the latter considered as their lawful contribution and participation in
the proposed corporation to be known as SAL. 
Arrangements and negotiations were undertaken by defendant Lim.  Down payments were advanced by defendants Bormaheco and the Cervanteses and
Constancio Maglana (Exh. E-1).  Contrary to the agreement among the defendants, defendant Lim in
connivance with the plaintiff, signed and executed the alleged chattel mortgage
and surety bond agreement in his personal capacity as the alleged proprietor of
the SAL.  The answering defendants
learned for the first time of this trickery and misrepresentation of the other,
Jacob Lim, when the herein plaintiff chattel mortgage (sic) allegedly executed
by defendant Lim, thereby forcing them to file an adverse claim in the form of
third party claim.  Notwithstanding
repeated oral demands made by defendants Bormaheco
and Cervanteses, to defendant Lim, to surrender the possession
of the two planes and their accessories and or return the amount advanced by
the former amounting to an aggregate sum of P178,997.14
as evidenced by a statement of accounts, the latter ignored, omitted and
refused to comply with them.” (Record on Appeal, pp. 341-342)

Applying therefore the principles of law earlier cited to the
facts of the case, necessarily, no de facto partnership was
created among the parties which would entitle the petitioner to a reimbursement
of the supposed losses of the proposed corporation.  The record shows that the petitioner was
acting on his own and not in behalf of his other would-be incorporators in
transacting the sale of the airplanes and spare parts.

WHEREFORE, the instant petitions are DISMISSED.  The questioned decision of the Court of
Appeals is AFFIRMED.

SO
ORDERED.

Fernan, C.J., (Chairman), Bidin, and Cortes, JJ., concur.

Feliciano, J., no part.