G.R. No. L-19819 October 26, 1977
WILLIAM UY, plaintiff-appellee, vs. BARTOLOME PUZON, substituted by FRANCO PUZON, defendant-appellant.

FACTS

Bartolome Puzon, the prime contractor for government road construction projects, sought financial assistance from William Uy. As an inducement, Puzon proposed forming a partnership, the “U.P. Construction Company,” to act as subcontractor, with profits to be divided equally. Uy agreed. The partners agreed to a capital of P100,000, each contributing P50,000. However, Puzon was short of cash, promising to contribute his share upon approval of a bank loan. Uy advanced P40,000 to Puzon to clear encumbrances on his property, which was to be used as collateral for the loan, with the understanding this amount would be reimbursed to Uy and treated as Puzon’s capital contribution. The partnership began work in October 1956, with Uy managing the projects and advancing further funds.
Puzon’s loan was approved, and he gave Uy P60,000, of which P40,000 reimbursed Uy’s advance and P20,000 was treated as Puzon’s partial capital contribution. Without Uy’s knowledge, Puzon assigned all payments from the Bureau of Public Highways to the Philippine National Bank to secure his personal loan. Consequently, most project payments were applied to Puzon’s personal debt, starving the partnership of operating funds. Despite Uy’s demands, Puzon failed to provide additional capital. Puzon eventually terminated the subcontract, excluded Uy from the partnership, and continued the projects alone. Uy filed an action for dissolution and damages.

ISSUE

Whether defendant-appellant Bartolome Puzon violated the partnership agreement, justifying its dissolution and making him liable for damages to plaintiff-appellee William Uy.

RULING

Yes. The Supreme Court affirmed the trial court’s decision, dissolving the partnership and holding Puzon liable. The legal logic rests on Puzon’s breach of fiduciary duties and fundamental partnership obligations. First, Puzon failed to fulfill his primary obligation to contribute his agreed capital share, having contributed only P20,000 of his P50,000 commitment. This failure directly hampered partnership operations. Second, and more egregiously, Puzon secretly assigned the partnership’s receivables to secure his personal loan, diverting partnership funds (P332,539.60) for his sole benefit. This act constituted fraud and a clear violation of the mutual trust and good faith required in a partnership, amounting to a flagrant breach of the partnership agreement.
The Court emphasized that a partner holds partnership assets in trust for the common benefit. By unilaterally appropriating these assets for personal debt payment, Puzon destroyed the essential delectus personarum (choice of persons) and mutual confidence underpinning the partnership. His subsequent act of terminating the subcontract and excluding Uy solidified the breach. Consequently, dissolution was warranted under the Civil Code. Puzon was ordered to reimburse Uy’s capital contributions (P115,102.13) with interest, pay Uy’s share in unrealized profits (P200,000) as computed by the trial court based on project data, and cover attorney’s fees. The ruling enforces the principle that a partner who violates the agreement and fiduciary duties is liable for resulting damages to the other partner.