G.R. No. 84197 and G.R. No. 84157, July 28, 1989.
PIONEER INSURANCE & SURETY CORPORATION, petitioner, vs. THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA and JACOB S. LIM, respondents. (Consolidated with) JACOB S. LIM, petitioner, vs. COURT OF APPEALS, PIONEER INSURANCE AND SURETY CORPORATION, BORDER MACHINERY and HEAVY EQUIPMENT CO., INC., FRANCISCO and MODESTO CERVANTES and CONSTANCIO MAGLANA, respondents.

FACTS

In 1965, Jacob S. Lim, owner-operator of Southern Air Lines (SAL), entered into a contract to purchase two aircraft and spare parts from Japan Domestic Airlines. Pioneer Insurance & Surety Corporation issued a surety bond in favor of JDA, guaranteeing Lim’s payments. To secure this suretyship, Lim executed a chattel mortgage over the aircraft in favor of Pioneer. Separately, respondents Bormaheco, the Cervanteses, and Constancio Maglana contributed funds to Lim, intended as their investment in a proposed new corporation to expand the airline business. They also executed indemnity agreements in favor of Pioneer.
Lim defaulted on his payments, prompting Pioneer to pay JDA and subsequently file for judicial foreclosure of the chattel mortgage. The respondents filed a third-party claim, asserting co-ownership of the aircraft. The trial court ruled against Lim, ordering him to reimburse Pioneer and to pay the respondents for their contributions. It dismissed Pioneer’s complaint against the respondents but ordered Pioneer to pay them attorney’s fees. The Court of Appeals modified this decision, dismissing Pioneer’s complaint against all parties.

ISSUE

The core issue is whether a partnership or co-ownership was created among Lim and the respondents (Bormaheco, Cervanteses, and Maglana) by virtue of their financial contributions for the purchase of the aircraft, such that Lim could claim reimbursement for losses from them, or whether they are merely creditors entitled to a return of their advances.

RULING

The Supreme Court affirmed the Court of Appeals, holding that no partnership or co-ownership was created. The legal logic rests on the distinction between a partnership and a creditor-debtor relationship. For a partnership to exist, there must be a clear mutual agreement to carry on a business for profit and to share in the profits and losses. The evidence showed only that the respondents advanced money to Lim based on his proposal to form a corporation in the future. Their contributions were conditional upon the incorporation, which never materialized. Lim acted in his own name in all transactions—purchasing the aircraft, executing the mortgage, and dealing with Pioneer. The respondents did not participate in these managerial acts. Consequently, their relationship with Lim was merely that of creditors financing a specific transaction, not partners jointly liable for business losses. Since no partnership was established, Lim could not pass on the losses from the failed venture to the respondents. Their right was limited to demanding the return of their advances, as found by the lower courts. The indemnity agreements with Pioneer did not alter this fundamental relationship among the parties, as they were separate contracts for suretyship.