Civil Law

Fernando Santos vs Spouses Arsenio and Nieves Reyes

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G.R. No. 135813 – 420 Phil. 313 – 368 SCRA 261 – Civil Law – Partnership – Shares in Liquidation – Net Profit vs Gross Income

In June 1986, Fernando Santos (70%), Nieves Reyes (15%), and Melton Zabat (15%) orally instituted a partnership with them as partners. Their venture is to set up a lending business where it was agreed that Santos shall be financier and that Nieves and Zabat shall contribute their industry. **The percentages after their names denote their share in the profit.

Later, Nieves introduced Cesar Gragera to Santos. Gragera was the chairman of a corporation. It was agreed that the partnership shall provide loans to the employees of Gragera’s corporation and Gragera shall earn commission from loan payments.

In August 1986, the three partners put into writing their verbal agreement to form the partnership. As earlier agreed, Santos shall finance and Nieves shall do the daily cash flow more particularly from their dealings with Gragera, Zabat on the other hand shall be a loan investigator. But then later, Nieves and Santos found out that Zabat was engaged in another lending business which competes with their partnership hence Zabat was expelled.

The two continued with the partnership and they took with them Nieves’ husband, Arsenio, who became their loan investigator.

Later, Santos accused the spouses of not remitting Gragera’s commissions to the latter. He sued them for collection of sum of money. The spouses countered that Santos merely filed the complaint because he did not want the spouses to get their shares in the profits. Santos argued that the spouses, insofar as the dealing with Gragera is concerned, are merely his employees. Santos alleged that there is a distinct partnership between him and Gragera which is separate from the partnership formed between him, Zabat and Nieves.

The trial court as well as the Court of Appeals ruled against Santos and ordered the latter to pay the shares of the spouses.

ISSUE: Whether or not the spouses are partners.

HELD: Yes. Though it is true that the original partnership between Zabat, Santos and Nieves was terminated when Zabat was expelled, the said partnership was however considered continued when Nieves and Santos continued engaging as usual in the lending business even getting Nieves’ husband, who resigned from the Asian Development Bank, to be their loan investigator – who, in effect, substituted Zabat.

There is no separate partnership between Santos and Gragera. The latter being merely a commission agent of the partnership. This is even though the partnership was formalized shortly after Gragera met with Santos (Note that Nieves was even the one who introduced Gragera to Santos exactly for the purpose of setting up a lending agreement between the corporation and the partnership).

HOWEVER, the order of the Court of Appeals directing Santos to give the spouses their shares in the profit is premature. The accounting made by the trial court is based on the “total income” of the partnership. Such total income calculated by the trial court did not consider the expenses sustained by the partnership. All expenses incurred by the money-lending enterprise of the parties must first be deducted from the “total income” in order to arrive at the “net profit” of the partnership. The share of each one of them should be based on this “net profit” and not from the “gross income” or “total income”.

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