G.R. No. 47953 ; October 29, 1941
ILDEFONSO QUIMZON, petitioner, vs. ALAMINOS COOPERATIVE MARKETING ASSOCIATION, INC., respondent.

FACTS

In 1929, Ildefonso Quimzon and 25 others formed an unregistered partnership called “Alaminos Rice Mill” with a capital of P14,400. Quimzon was its manager and treasurer. He purchased rice milling machinery from the Philippine Engineering Corporation on installment, signing the promissory notes and chattel mortgage in his personal capacity because the partnership lacked legal personality. On June 15, 1932, upon the Director of Commerce’s recommendation, the partnership was incorporated under Act No. 3425 as the “Alaminos Cooperative Marketing Association, Inc.” The corporation’s capital consisted of the partnership’s original capital, distributed as fully paid shares to the partners. All partnership properties (the rice mill and a camarin) were transferred to the corporation in exchange for the partners’ proportionate shares of stock. Quimzon continued as manager and treasurer until relieved on December 17, 1935.
On February 5, 1936, the corporation sued Quimzon in the Court of First Instance of Pangasinan to compel him to render an accounting of the business from 1929 to December 17, 1935. Quimzon’s demurrer, arguing the corporation could not demand an accounting for the partnership period, was sustained. The complaint was amended to limit the cause of action to the period from incorporation (June 15, 1932) to December 17, 1935. In his answer, Quimzon denied liability and set up eight counterclaims.
On January 4, 1937, the trial court ordered Quimzon to render a detailed account of his receipts and expenses as treasurer from June 15, 1932, to December 17, 1935, and dismissed his counterclaims. After Quimzon submitted his accounting, the court, on October 25, 1939, found him indebted to the corporation in the sum of P2,721.47. The Court of Appeals affirmed this judgment on November 28, 1940. Quimzon appealed to the Supreme Court via certiorari, assigning errors primarily concerning the disallowance of his claim for reimbursement of P11,887.73 paid to the Philippine Engineering Corporation for the rice mill balance and other expenses.

ISSUE

Whether the respondent corporation is liable for the debts of the pre-existing unregistered partnership, specifically the balance paid for the rice mill machinery, and whether a complete accounting of the business from 1929 (the partnership’s inception) is required.

RULING

The Supreme Court set aside the decision of the Court of Appeals and remanded the case to the trial court for a complete accounting from 1929 to December 17, 1935.
The Court held that while there is no legal identity between the corporation and the pre-existing partnership, the corporation impliedly assumes the partnership debts under the doctrine that when a corporation is formed by the members of a partnership, the former partners being the only members, and the partnership assets are transferred to the corporation for the continuance of the business in exchange for stock without other consideration, the corporation prima facie assumes the partnership debts. The legal entity of the corporation may be disregarded, as the members essentially “put on a new coat.” Therefore, the Alaminos Cooperative Marketing Association, Inc., is liable for the partnership’s obligation to the Philippine Engineering Corporation for the rice mill.
Consequently, Quimzon is entitled to be reimbursed for all sums he paid to the Philippine Engineering Corporation for the rice mill transferred to the corporation. However, he is also liable to account to the corporation for all receipts and expenses of the partnership from its organization in 1929. A full accounting is necessary to do complete justice, as the corporation contends that during the partnership’s existence, Quimzon received income more than sufficient to pay for the machinery. The oral and documentary evidence from previous hearings may be considered without retaking. No costs were pronounced.