V.
OBLIGATIONS OF THE PARTNERSHIP may have contracted in good faith in the interest of the partnership
A. Bound by Authorized Acts of Partners
Article 1803. When the manner of management has not been
agreed upon, the following rules shall be observed:
(1) All the partners shall be considered agents and whatever any
one of them may do alone shall bind the partnership,
without prejudice to the provisions of article 1801.
(2) None of the partners may, without the consent of the others,
make any important alteration in the immovable property of the
partnership, even if it may be useful to the partnership. But if the
refusal of consent by the other partners is manifestly prejudicial to
the interest of the partnership, the court's intervention may be
sought. (1695a)
Article 1818. Every partner is an agent of the partnership for the
purpose of its business, and the act of every partner, including the
execution in the partnership name of any instrument, for apparently
carrying on in the usual way the business of the partnership of
which he is a member binds the partnership, unless the partner so
acting has in fact no authority to act for the partnership in the
particular matter, and the person with whom he is dealing has
knowledge of the fact that he has no such authority.
An act of a partner which is not apparently for the carrying on of
business of the partnership in the usual way does not bind the
partnership unless authorized by the other partners.
Except when authorized by the other partners or unless they have
abandoned the business, one or more but less than all the partners
have no authority to:
(1) Assign the partnership property in trust for creditors or on the
assignee's promise to pay the debts of the partnership; (2) Dispose
of the good-will of the business;
(3) Do any other act which would make it impossible to carry on the
ordinary business of a partnership;
(4) Confess a judgment;
(5) Enter into a compromise concerning a partnership claim or
liability; (6) Submit a partnership claim or liability to arbitration;
(7) Renounce a claim of the partnership.
No act of a partner in contravention of a restriction on authority shall
bind the partnership to persons having knowledge of the restriction.
(n)
The above articles provide the circumstances wherein the partner is
bound by the act of a partner. [Discussed in the previous chapter]
B. Bear risk of Certain Types of Contribution
Article 1795. The risk of specific and determinate things, which are
not fungible, contributed to the partnership so that only their use
and fruits may be for the common benefit, shall be borne by the
partner who owns them.
If the things contribute are fungible, or cannot be kept without
deteriorating, or if they were contributed to be sold, the risk shall be
borne by the partnership. In the absence of stipulation, the risk of
the things brought and appraised in the inventory, shall also be
borne by the partnership, and in such case the claim shall be limited
to the value at which they were appraised. (1687)
Partnership bears the risk of loss of contributions which are:
 Fungible or
 Cannot be kept without deteriorating or
 If they were contributed to be sold
IF there is no stipulation  THEN the risk of things brought and
appraised in the inventory is also borne by the partnership
 In such a case, the claim shall be limited to the value at
which they were appraised
C. Repay Disbursement of Partners
Article 1796. The partnership shall be responsible to every partner
for the amounts he may have disbursed on behalf of the partnership
and for the corresponding interest, from the time the expense are
made; it shall also answer to each partner for the obligations he
business, and for risks in consequence of its management. (1688a)
Partnership is:
 Responsible to every partner for:
o the AMOUNTS the partner may have disbursed on
behalf of the partnership and
o for the corresponding INTEREST, from the time
expenses are made
 Answerable to each partner for:
o The OBLIGATIONS the partner may have
contracted in good faith in the interest of the
partnership and
o For RISKS in consequence of its management
D. Bound by Admission or Representation
Article 1820. An admission or representation made by any partner
concerning partnership affairs within the scope of his authority in
accordance with this Title is evidence against the partnership. (n)
This rule is adapted from Sec 11 of the UPA. American Jurisprudence
has held that:
 In an action against partners or their partnership on a
partnership liability: a partner’s admission or declarations
during the existence of the partnership and while engaged in
transacting it legitimate business, or relating to matters
within the scope of the partnership  ADMISSIBLE
 For this to apply, it is necessary that the fact of existence
of partnership must be independently shown
o But the admissibility of a partner’s admissions is
limited to matters within the scope of his authority
E. Bound by Notice to Or Knowledge of a Partner
1. General Rule
Article 1821. Notice to any partner of any matter relating to
partnership affairs, and the knowledge of the partner acting in the
particular matter, acquired while a partner or then present to his
mind, and the knowledge of any other partner who reasonably could
and should have communicated it to the acting partner, operate as
notice to or knowledge of the partnership, except in the case of
fraud on the partnership, committed by or with the consent of that
partner. (n)
This article is identical with Sec 12 of the UPA.
The following operate as notice to or knowledge of the partnership
1. Notice to any partner of any matter relating to partnership
affairs; and
2. Knowledge of the partner acting in the particular matter,
acquired while a partner or then present to his mind; and
3. Knowledge of any other partner who reasonably could and
should have communicated it to the acting partner
2. Exception
a. Knowledge Derived From Transactions Unconnected with
Partnership
 Rule on constructive notice doesn’t apply where knowledge
is derived from distinct transactions unconnected with
partnership affairs
HARRIS v FAULTFINDERS INC
 Court found that the rule doesn’t apply when “the suit is not
brought by or directed against the partnership or the partners
as members of the partnership” or if “it does not relate to
partnership business”
b. Fraud by a Partner Against the Partnership
 Rule doesn’t apply in the case of a fraud on the partnership,
committed by or with the consent of that partner who had
knowledge
o “An independent fraudulent act of a partner, for his
own business and personal interest and adverse
to the partnership”
 Exception arises where the knowledge otherwise imputable
to the partnership would necessarily prevent consummation
of the fraud, or where third persons, who seek to claim the
 benefit of having knowledge imputed to the partnership by
the partner’s conduct, act in collusion with the partner to
cheat or defraud the partnership
 Effect: Partnership is still bound by such knowledge with
respect to a third party who has no knowledge of such fraud
SUSSEL CO v FIRST FEDERAL
 Argument:
o Exception where the conduct and dealings of the
agent are such as to raise a clear presumption
that he will not communicate to the principal the
facts in controversy
o Such is also the case where the third persons, or
their representatives, who claim the benefit of the
imputation of the agent’s knowledge to the
principal, collude with the agent to cheat or
defraud the principal
 Court: Didn’t reject the argument but merely ruled that it
couldn’t apply the exception
 ITC: The facts in evidence didn’t support the application of
the exception
o There was no finding that the partner was acting
fraudulently and neither was the third person
aware of any fraud
F. Liability for Loss or Injury
Article 1822. Where, by any wrongful act or omission of any
partner acting in the ordinary course of the business of the
partnership or with the authority of his co-partners, loss or injury is
caused to any person, not being a partner in the partnership, or any
penalty is incurred, the partnership is liable therefor to the same
extent as the partner so acting or omitting to act. (n)
IF by any wrongful act or omission of any partner acting in the ordinary
course of the business of the partnership or with the authority of his co-
partners, loss or injury is caused to a third party  THEN partnership
is liable to the same extent as the partner so acting or omitting to act
 Rule makes the partnership solidarily liable with the partner
who has caused the loss or injury
 Partner who commits the wrong must be acting with the
authorization of the partners, not that the violation itself be
authorized
1. Tort
 Bautista: Based on the principle of mutual agency, the
partnership or every member thereof is liable for torts
committed by one of the members acting within the scope of
firm business, though they do not participate in, ratify, or
have knowledge of such torts
o Test of liability: whether the wrong was committed
in behalf of the partnership and within the
reasonable scope of its business
o If so committed  partners are all liable as joint
tortfeasors
 “Tort” doesn’t appear in the Philippine Civil Code but there
are tort-like provisions and the SC has in several instances
equated quasi-delicts with torts
one partner to the partnership and copartners, in the
absence of contrary proof
2. Crime
Partnership has a separate juridical personality from the partners
which may be held responsible for the commission of a criminal act
 to the same extent as the partner or partners committing the
act
Bautista: Partnership is responsible even when the partner, in making
the fraudulent representation on behalf of the partnership, has for his
object only his personal benefit.
G. Misapplication of Funds
Article 1823. The partnership is bound to make good the loss:
(1) Where one partner acting within the scope of his apparent
authority receives money or property of a third person and
misapplies it; and
(2) Where the partnership in the course of its business receives
money or property of a third person and the money or property so
received is misapplied by any partner while it is in the custody of the
partnership. (n)
Partnership is bound to make good the loss:
1. Where one partner acting within the scope of his apparent
authority receives money or property of a third person and
misapplies it; and
2. Where the partnership in the course of its business receives
money or property of a third person and the money or
property so received is misapplied by any partner while it is
in the custody of the partnership
US Jurisprudence: Liability of the partnership, imposed without
regard to fault when a partner’s breach of trust causes a
partnership client to suffer monetary loss, is not strict liability but
arises under respondeat superior
 Partnership – in the position of an insurer guaranteeing that
the innocent client will not bear loss because of the wrongful
act
o Must reimburse client and then may recover loss
from guilty partner
But for partnership to be liable!  partner who misappropriated must
have been authorized to receive the funds

Article 2176. Whoever by act or omission causes damage to

another, there being fault or negligence, is obliged to pay for the
damage done. Such fault or negligence, if there is no pre-existing
contractual relation between the parties, is called a quasi-delict and
is governed by the provisions of this Chapter. (1902a)

Following rules (based on US case law)

1. To determine whether the partnership is liable for a partner’s
intentional tort, the test is not the illegality or malicious and
willful character of the wrong but whether it falls within the
scope of the partner’s authority
2. If the partner committing the act acted outside the purview
of the partnership business in committing the acts,
whether from wantonness or other motive, he alone is
responsible
3. Once the plaintiff proves the existence of a partnership at the
time of his injury, an inference arise that the partnership
continues to exist for purposes of imputing the negligence of
VI. ENDING THE PARTNERSHIP
A. Dissolution
1. Meaning and Effect
Article 1828. The dissolution of a partnership is the change in the
relation of the partners caused by any partner ceasing to be associated
in the carrying on as distinguished from the winding up of the business.
(n)
DISSOLUTION
- act that changes the legal relationship of the partnership
- the partnership is not terminated but continues until the winding
up of partnership affairs is completed
- merely designates the point in time when the partners cease to
carry the business together
- may culminate in termination
- preparatory step to termination in which an accounting and a
wind-up of the business are necessary steps
Dissolution Winding up or Termination
liquidation
Point in time when Process of settling Point in time when all
the partners cease to partnership affairs the partnership
carry on the business after dissolution affairs are wound up
together
TESTATE ESTATE OF MOTA V. SERRA
HELD: The Court ruled against the argument that any person, who has
contracted a valid obligation with a partnership, is exempt from
complying with his obligation by the mere fact of the dissolution of the
partnership. Also, the dissolution does not relieve any of its members
from liability for existing obligations, although it does save them from
new obligations to which they have not expressly or impliedly
assented, and any of them may be discharged from old obligations by
novation or other form of release. A partnership continues, even after
dissolution, for the purpose of winding up its affairs.
SY V. CA
HELD: The SEC retained jurisdiction over a partnership during
dissolution. The dissolution did not mean that the juridical entity was
immediately terminated. It simply effected a change in the relationship
among the partners. The partnership, although dissolved, continues to
exist until termination, at which time the winding up of its affairs should
have been completed and the net partnership assets are partitioned
and distributed to the partners.
ROJAS V. MAGLANA
FACTS: Maglana and Rojas established a partnership called
Eastcoast Dev’t Enterprises (EDE), with an indefinite term (1st
partnership). Eventually, they took in an industrial partner,
Pahamotang, and executed another partnership agreement but
retained the name EDE (2nd partnership). They also changed the
purpose of the partnership and fixed the term of the partnership at 30
years. Later on, Maglana and Rojas purchased Pagamotang’s interest
in the partnership. After Pahamotang’s withdrawal, Maglana and Rojas
continued the partnership without a new agreement. Rojas entered into
a contract with CMS Estate and abandoned the partnership. Maglana
notified Rojas that he dissolved the partnership. Rojas filed an action
aganst Maglana for the recovery of properties, accounting,
receivership, and damages.
ISSUE: What is the nature of the partnership and the legal
relationship of Maglana and Rojas after Pahamotang retired from
the 2nd partnership?
HELD: It was not the intention of the partners to dissolve the 1st
partnership, upon the constitution of the 2nd one. There were no
changes between the 1st partnership and the 2nd except for the taking
in of an industrial partner, and fixing the term to 30 years. They
adopted the same name, same purposes, and same amounts of
contributions. The subsequent renewals of timber licenses were in
favor of the 1st partnership. The 1st Articles of Partnership was also
retained with only a few amendments in the form of the Supplementary
Articles of Co-Partnership, which were not even registered. No rights
and obligations accrued in the name of the 2nd partnership except in
favor of Pahamotang.
Casis’ opinion on the Rojas v. Maglana case:
The Civil Code defines dissolution as the change in the relation of the
partners. ITC, the partners took in an additional partner. They also
changed the partnership from a partnership at will to a partnership with
a specific term. These are major changes.
That the subsequent renewals of timber licenses were in favor of the
1st partnership is of no moment since the 2nd partnership had the same
name.
By saying that the 1st articles of partnership were amended, then under
the definition in the Civil Code, there was in fact a dissolution.
Perhaps what the Court meant to say was that there was no
termination or liquidation.
2. Causes
Article 1830. Dissolution is caused:
(1) Without violation of the agreement between the partners:
(a) By the termination of the definite term or particular undertaking
specified in the agreement;
(b) By the express will of any partner, who must act in good faith,
when no definite term or particular is specified;
(c) By the express will of all the partners who have not assigned their
interests or suffered them to be charged for their separate debts, either
before or after the termination of any specified term or particular
undertaking;
(d) By the expulsion of any partner from the business bona fide in
accordance with such a power conferred by the agreement between
the partners;
(2) In contravention of the agreement between the partners, where the
circumstances do not permit a dissolution under any other provision of
this article, by the express will of any partner at any time;
(3) By any event which makes it unlawful for the business of the
partnership to be carried on or for the members to carry it on in
partnership;
(4) When a specific thing which a partner had promised to contribute to
the partnership, perishes before the delivery; in any case by the loss of
the thing, when the partner who contributed it having reserved the
ownership thereof, has only transferred to the partnership the use or
enjoyment of the same; but the partnership shall not be dissolved by
the loss of the thing when it occurs after the partnership has acquired
the ownership thereof;
(5) By the death of any partner;
(6) By the insolvency of any partner or of the partnership;
(7) By the civil interdiction of any partner;
(8) By decree of court under the following article. (1700a and 1701a)
GR: partnership is dissolved through the instances enumerated in Art.
1830.
EX: When the partners agree otherwise.
CAGNOLATTI V. GUINN
HELD: Circumstances otherwise working adissolution of a partnership
may not have that effect where a partnership agreement expressly
provides that the partnership will continue and that dissolution and
winding up are not required on the occurrence of certain events.
ITC, the partnership agreement specifically provided that the
withdrawal of a partner would not effect a dissolution, but such partner
would be paid the value of his equity.
The causes of dissolution may generally be divided into 4
categories:
a. Dissolution without violating partnership agreement
i. Termination of definite term or particular
undertaking specified in the agreement
 a partnership created for a specific undertaking is one
created for a specific project, which impliedly has a point of
completion
ORTEGA V. CA
FACTS: The partnership agreement provided that the partnership shall
continue so long as mutually satisfactory and upon the death or legal
incapacity of one of the partners, shall be continued by the surviving
partners. The purpose for which the partnership is formed, is to act as
legal adviser and representative of any individual, firm and corporation
engaged in commercial, industrial or other lawful businesses and
occupations; to counsel and advise such persons and entities with
respect to their legal and other affairs; and to appear for and represent
their principals and client in all courts of justice and government
departments and offices.
HELD: The partnership is considered to have been established without
a specified term. Also, the purpose of the partnership is not the specific
undertaking referred to in the law. Otherwise, all partnerships, which
necessarily must have a purpose, would all be considered as
partnerships for a definite undertaking.
ii. Termination of partnership at will of any partner
acting in good faith
 A partnership that does not fix its term is a partnership at will
which may be dissolved by a partner at any time
 The absence of good faith will not prevent dissolution, but
will make the dissolving partner liable for damages
 There is no prescribed mode for a partner to terminate at a
partnership at will. No particular form or notice is required
o In Ortega v. CA, the Court allowed a partner’s
withdrawal from the partnership via letter to the
other partners
o All that is required is an actual notice of an
intention to treat the business relationship as
dissolved
o Notice may be implied from circumstances
inconsistent with the continuation of the
partnership
 The fact that the dissolution was voluntary must be proved
by evidence that the parties mutually agreed to dissolve it
and that they performed acts in accordance with their mutual
agreement for dissolution
 Conveyance by a partner of his whole interest does not of
itself dissolve the partnership (Art. 1813)
o There is dissolution only if there is other conduct
constituting a withdrawal of the partner whose
interest is assigned
o There is also dissolution if an assignment of
partnership interests effectively reduces the
membership to a single partner
iii.Termination by all partners who have retained their
interest in the partnership
 The partners who agree to dissolve are those who:
o Have not assigned their interests OR
o Have not suffered their interests to be charged for
their separate debts, either before or after the
termination of the specified term or particular
undertaking
iv. Expulsion of a Partner
 In accordance with a power to expel another partner, as
conferred by the partnership agreement
 If the partnership agreement does not provide for a power to
expel, the partnership will be dissolved not because of the
expulsion but as an express act of one of the partners.
b. Dissolution violating partnership agreement
 a partner may dissolve the partnership, whether the articles
of partnership provide for a definite term or for the
accomplishment of a particular purpose, or whether its
articles contain an express or implied agreement on its
duration
o No one can be forced to continue a partnership
against his will
 Every partner has the power to dissolve but he does not
necessarily have the right to do so
o If a partner exercises the power to dissolve without
the corresponding right, he must suffer the
penalties provided in the agreement
ROJAS v. MAGLANA
FACTS: The partnership was for a specified term, but the partner
nonetheless caused its dissolution by expressly withdrawing even
before the expiration of the period.
HELD: A partner may cause the dissolution even before the expiration
of the period, with or without justifiable cause. If there is no justifiable
cause, the withdrawing partner is liable for damages but in no case can
he be compelled to remain in the firm. There is dissolution because the
number of members is decreased.
c. Dissolution by operation of law
 An event which makes it unlawful for the business of the
partnership to be carried on or for the members to carry it on
in partnership
 When a specific thing which a partner had promised to
contribute to the partnership, perishes before the delivery; in
any case by the loss of the thing, when the partner who
contributed it having reserved the ownership thereof, has
only transferred to the partnership the use or enjoyment of
the same; but the partnership shall not be dissolved by the
loss of the thing when it occurs after the partnership has
acquired the ownership thereof
 By the death of any partner
o Partnership may survive despite the death of a
partner. The partnership may be dissolved as to
him, but it continues to exist as to the remaining
partners
o Casis: even under this scenario, there is a
dissolution of the first partnership and the
establishment of a new partnership with respect to
the remaining partners
 By the insolvency of any partner or of the partnership
o Because of the inability of the insolvent partner to
perform his obligations to the partnership and
share in the liability to creditors (effectively a
withdrawal by partner)
 By the civil interdiction of any partner (also effectively a
withdrawal by a partner
 IN THESE INSTANCES, the effective date of dissolution is
the date of occurrence of the event causing it.
d. Dissolution by judicial decree
Article 1831. On application by or for a partner the court shall decree a
dissolution whenever:
(1) A partner has been declared insane in any judicial proceeding or is
shown to be of unsound mind;
(2) A partner becomes in any other way incapable of performing his
part of the partnership contract;
(3) A partner has been guilty of such conduct as tends to affect
prejudicially the carrying on of the business;
(4) A partner wilfully or persistently commits a breach of the
partnership agreement, or otherwise so conducts himself in matters
relating to the partnership business that it is not reasonably practicable
to carry on the business in partnership with him;
(5) The business of the partnership can only be carried on at a loss;
(6) Other circumstances render a dissolution equitable.
On the application of the purchaser of a partner's interest under article
1813 or 1814:
(1) After the termination of the specified term or particular undertaking;
(2) At any time if the partnership was a partnership at will when the
interest was assigned or when the charging order was issued. (n)
 Examples of being “in any other way incapable of performing
his part of the partnership contract”:
o Convicted of a crime
o Change in personal or professional status
o Illness which is lasting (rather than temporary) and
which materially affects ability to discharge duties
imposed by partnership contract
o Effects of alcohol and drug addiction
o Casis: But for insolvency or civil interdiction, no
need for a court of decree because these are
causes of dissolution by operation of law
 Examples of “wilfully or persistently commits a breach of the
partnership agreement, or otherwise so conducts himself in
matters relating to the partnership business that it is not
 reasonably practicable to carry on the business in
partnership with him”:
o Failure or refusal to comply with the terms of the
partnership agreement as to contributing capital or
services required for the successful prosecution of
the business
o Refusal of a partner to render accounting or to
permit the other partners’ inspecton of partnership
books
o Wrongful withholding or disposition of funds
o Competition with the partnership
 Examples of other circumstances which render a dissolution
equitable:
o Fraud or misrepresentation of one of the parties
(Art. 1838)
o Dissensions and disagreement among the
partners  must be serious and permanent
character as to prevent profitable continuance of
the partnership business
3. Consequences of Dissolution
a. Continuation Until Winding Up
Article 1829. On dissolution the partnership is not terminated, but
continues until the winding up of partnership affairs is completed. (n)
 the dissolution operates to terminate the partnership only
with respect to future transactions
 partnership continues only until the winding up is completed
unless the partners agree to continue the partnership
business after dissolution
 it is possible that the dissolution will not cause liquidation if:
o there is an agreement among the partners
o a partner is expelled pursuant to the terms of the
partnership agreement
b. Termination of Partner’s Authority to Act for Partnership
Article 1832. Except so far as may be necessary to wind up
partnership affairs or to complete transactions begun but not then
finished, dissolution terminates all authority of any partner to act for the
partnership:
(1) With respect to the partners,
(a) When the dissolution is not by the act, insolvency or death of a
partner; or
(b) When the dissolution is by such act, insolvency or death of a
partner, in cases where article 1833 so requires;
(2) With respect to persons not partners, as declared in article 1834.
(n)
GENERAL RULE: dissolution terminates all authority of any partner to
act for the partnership
 general agency of one partner for his copartners ceases
 absolute revocation of all implied authority of the partners to
bind one another
EXCEPTION: it does not terminate the authority necessary to wind up
partnership affairs or to complete transactions begun but not then
finished
Article 1833. Where the dissolution is caused by the act, death or
insolvency of a partner, each partner is liable to his co-partners for his
share of any liability created by any partner acting for the partnership
as if the partnership had not been dissolved unless:
(1) The dissolution being by act of any partner, the partner acting for
the partnership had knowledge of the dissolution; or
(2) The dissolution being by the death or insolvency of a partner, the
partner acting for the partnership had knowledge or notice of the death
or insolvency.
 A partner who was unaware of a dissolution caused by the
act, death or insolvency of his copartner, has the right to act
and therefore the right to contribution
Article 1834. After dissolution, a partner can bind the partnership,
except as provided in the third paragraph of this article:
(1) By any act appropriate for winding up partnership affairs or
completing transactions unfinished at dissolution;
(2) By any transaction which would bind the partnership if dissolution
had not taken place, provided the other party to the transaction:
(a) Had extended credit to the partnership prior to dissolution and had
no knowledge or notice of the dissolution; or
(b) Though he had not so extended credit, had nevertheless known of
the partnership prior to dissolution, and, having no knowledge or notice
of dissolution, the fact of dissolution had not been advertised in a
newspaper of general circulation in the place (or in each place if more
than one) at which the partnership business was regularly carried on.
The liability of a partner under the first paragraph, No. 2, shall be
satisfied out of partnership assets alone when such partner had been
prior to dissolution:
(1) Unknown as a partner to the person with whom the contract is
made; and
(2) So far unknown and inactive in partnership affairs that the business
reputation of the partnership could not be said to have been in any
degree due to his connection with it.
The partnership is in no case bound by any act of a partner after
dissolution:
(1) Where the partnership is dissolved because it is unlawful to carry
on the business, unless the act is appropriate for winding up
partnership affairs; or
(2) Where the partner has become insolvent; or
(3) Where the partner has no authority to wind up partnership affairs;
except by a transaction with one who –
(a) Had extended credit to the partnership prior to dissolution and had
no knowledge or notice of his want of authority; or
(b) Had not extended credit to the partnership prior to dissolution, and,
having no knowledge or notice of his want of authority, the fact of his
want of authority has not been advertised in the manner provided for
advertising the fact of dissolution in the first paragraph, No. 2 (b).
Nothing in this article shall affect the liability under article 1825 of any
person who after dissolution represents himself or consents to another
representing him as a partner in a partnership engaged in carrying on
business. (n)
Thus, a partner in a dissolved partnership can still bind the partnership
to third persons depending on the:
 Nature of the transaction – dissolved partnership still bound
by the act of a partner if the transaction is
o Appropriate for winding up partnership affairs or
o Commenced prior to dissolution and remains
unfinished
 Identity of the third party - dissolved partnership still bound
by the act of a partner if the 3rd party:
o extended credit to the partnership and had no
knowledge or notice of the dissolution or
o did not extend credit but knew of the partnership
prior to dissolution and had no knowledge or
notice of the dissolution, the happening of which
was not published in a newspaper of general
circulation
 to protect innocent third parties when partners dissolve a
partnership or when dissolution is effected by the withdrawal
of a partner, partners have a duty to give them notice of the
dissolution, failing which the partners risk being bound to
third persons
LEMAY BANK & TRUST CO V LAWRENCE
FACTS: HEIMOS and LAWRENCE were engaged in a business
partnership known as H&G EQUIPMENT CO. HEIMOS and his wife
executed a continuing guaranty whereby they guaranteed payment of
any existing or future debts owed by H&G to LEMAY BANK.
 At some point in 1975, HEIMOS and LAWRENCE dissolved their
partnership by mutual agreement.
 FRANK ZIEGLER, VP of the Bank supervised all of H&G’s credit
transactions with the Bank. He testified that HEIMOS and
LAWRENCE had indicated to him in 1975 that they were “having
problems”. He further testified that he had no knowledge of H&G’s
dissolution until 1979, when this action was filed.
 HEIMOS testified that that in 1975 he told ZIEGLER he “wanted
to split” and to “get out of” his business with Lawrence. Some time
in 1975 or 1976 he told ZIEGLER that he and LAWRENCE
thought they “could take over the business”
 In 1977, $18,000 remained due on H&G’s demand line of credit,
and an additional $3,800 was owing on the installment loans.
 ZIEGLER: at the time HEIMOS and LAWRENCE indicated to him
they could no longer make the make monthly payments. The
Bank consolidated the loans into the demand line of credit for a
total of $21,800.
 H&G executed a demand note renewing its debt under the
consolidated line of credit. 3 more renewals were executed, the
last one on Dec 1979. Although the signatures of both
LAWRENCE and HEIMOS appear on each of the notes,
ZEIGLER testified that only LAWRENCE signed them in his
presence at the bank. After signing, LAWRENCE would take the
note with him for the stated purpose of securing HEIMOS’
signature. Each note was returned to ZEIGLER bearing what
appeared to be HEIMOS’ signature.
 HEIMOS: He never signed any of the renewal notes and at some
point in 1976 or 1977 ZEIGLER called him to ask when he was
going to sign a note, whereupon he told him that he had not
signed any notes and was unaware of such notes.
o Introduced into evidence the written report of a
handwriting expert who opined that his signature had
been forged on the renewal notes.
 When the last renewal note became due, the Bank demanded
that the HEIMOSes pay. They failed to pay and Bank brought this
action to enforce the continuing guaranty against them.
 The court concluded that the Bank had effectively released
defendants from their obligation under the continuing guaranty.
ISSUE: WON the bank had notice of a partnership’s dissolution?
RULING: The appropriate standard for determining whether notice of
dissolution has been given to a partnership creditor is whether such
notice has been “brought home” to the creditor.
 Such notice must be given directly, or delivered through some
channels that the law recognizes as legitimate means of
communication.
 IN CASE AT BAR, notice of dissolution was not “brought home”
to the Bank before 1979. ZIEGLER denied receiving such notice,
and HEIMOS, in his communications with ZIELGER, never gave
any direct notice of dissolution
o Defendants suggest that ZIEGLER should have inferred
from the circumstances or discovered through his own
investigation that the partnership had been dissolved
o The law, however, places no such duty upon a
partnership creditor; rather, it is the duty of the
partners to “bring home” the notice of dissolution
to the creditors.
o ITC, HEIMOS and LAWRENCE failed to do this.
The sufficiency of notice to third parties “to relieve a partner form
liability for his former’s partner’s acts, depends in large part on
whether the person to whom notice is given had former dealings
with the firm”.
 Parties who engaged in actual dealings with the firm are entitled
to direct notice of the dissolution
 Parties who have known of the existence of the firm but have not
dealt with it or have dealt with it on some non-credit basis are
entitled merely to constructive or general notice
 Where direct notice is required, it must be given through some
channel that the law recognizes as a legitimate means of
communication
STANDARD FOR SUFFICIENCY OF NOTICE: Reasonableness
under the circumstances
 No notice is required when the partnership is dissolved:
o On the ground that it is unlawful to carry on the business of
the firm; or
o On the ground of insolvency; or
o On the withdrawal of a dormant partner
c. Discharge of Liabilities
The dissolution of the partnership does not of itself discharge the
existing liability of any partner
 A partner is discharged from any existing liability upon
dissolution of the partnership by an agreement to that effect
between himself, the partnership creditor and the person or
partnership continuing the business.
o Such agreement may be inferred from the course of
dealing between the creditor having knowledge of the
dissolution and the person or partnership continuing the
business
o A partner who leaves the partnership by withdrawal,
retirement, or otherwise, remains liable to the creditors of
the partnership for all existing debts of the firm to the
same extent as if he had remained a partner
 UNLESS the creditors of the partnership assent to the
partner’s departure and agree to look solely to the
other partners from payment
o Creditors of a partnership existing at the time of the
withdrawal or retirement of a partner may by their own
voluntary agreement look to the remaining active partner
for payment of their debts, but they are not required to do so,
nor may an outgoing partner absolve himself form liability for
firm debts contracted while he is a member of the firm, in the
absence of an agreement on the part of the creditor, even
though notice of his withdrawal is given to the creditor
o
The individual property of a deceased partner shall be liable for all
obligations of the partnership incurred while he was a partner, but
subject to the prior payment of his separate debts
d. Election to Continue the Business
i. Dissolution Not Due to Wrongful Causes
GENERAL RULE: A partnership dissolution that is not wrongful
causes a wind up of a partnership business rather than a continuation
EXCEPTION: When the outgoing partner consents to a continuation of
the business
LANGE V BARTLETT
FACTS: LANGE and BARTLETT formed a partnership called “Pool
Boys” engaged in the business of installing swimming pools
 LANGE told BARTLETT that he no longer wanted to participate in
the partnership and thus retired as a partner
 BARTLETT offered LANGE $3,000 as his share. LANGE refused
and sued BARTLETT to recover his share of the partnership
RULING: At the point of dissolution, the retiring partner makes an
election
(1) He can force the business to wind up and take his part of the
proceeds, sharing in profits and losses after dissolution; or
o The partner receives the value of his interest at the date of
liquidation or final settlement
o He shares in both profits and losses until termination
(2) He can permit the business to continue and claim as creditor
the value of his interest at dissolution
o He can receive either legal interest or profits from the date of
dissolution, in addition to the value of his or her interest in
the partnership
 The determination of WON the retiring partner consented to or
acquiesced in the continuation of the business is a question of
fact
 Election need not be made until there has bene a final accounting
of the partnership
o Right of election is one which he should be permitted to
exercise “after an accounting shall have been taken of the
earnings subsequent to dissolution”
ii. Dissolution Due to Wrongful Causes
Art 1837. When dissolution is caused in any way, except in
contravention of the partnership agreement, each partner, as against
his co-partners and all persons claiming through them in respect of
their interests in the partnership, unless otherwise agreed, may have
the partnership property applied to discharge its liabilities, and the
surplus applied to pay in cash the net amount owing to the respective
partners. But if dissolution is caused by expulsion of a partner, bona
fide under the partnership agreement and if the expelled partner is
discharged from all partnership liabilities, either by payment or
agreement under the second paragraph of Article 1835, he shall
receive in cash only the net amount due him from the partnership.
When dissolution is caused in contravention of the partnership
agreement the rights of the partners shall be as follows:
(1) Each partner who has not caused dissolution wrongfully shall
have:
(a) All the rights specified in the first paragraph of this article,
and
(b) The right, as against each partner who has caused the
dissolution wrongfully, to damages breach of the agreement.
(2) The partners who have not caused the dissolution wrongfully, if
they all desire to continue the business in the same name either
by themselves or jointly with others, may do so, during the agreed
term for the partnership and for that purpose may possess the
partnership property, provided they secure the payment by bond
approved by the court, or pay any partner who has caused the
dissolution wrongfully, the value of his interest in the partnership
at the dissolution, less any damages recoverable under the
second paragraph, No. 1 (b) of this article, and in like manner
indemnify him against all present or future partnership liabilities.
(3) A partner who has caused the dissolution wrongfully shall have:
(a) If the business is not continued under the provisions of the
second paragraph, No. 2, all the rights of a partner under the
first paragraph, subject to liability for damages in the second
paragraph, No. 1 (b), of this article.
(b) If the business is continued under the second paragraph,
No. 2, of this article, the right as against his co-partners and
all claiming through them in respect of their interests in the
partnership, to have the value of his interest in the
partnership, less any damage caused to his co-partners by
the dissolution, ascertained and paid to him in cash, or the
payment secured by a bond approved by the court, and to
be released from all existing liabilities of the partnership; but
in ascertaining the value of the partner's interest the value of
the good-will of the business shall not be considered.
Art 1837 – DISSOLUTION: caused in contravention of the partnership
agreement
 Partners who have not caused the dissolution wrongfully, if they
all desire to continue the business in the same name either by
themselves or jointly with others, may do so during the agreed
term for the partnership and for that purpose may possess
the partnership property
 They must secure the payment by bond approved by the
court, or pay any partner who has caused the dissolution
wrongfully, the value of his interest in the partnership at the
dissolution, less any damages recoverable for breach of the
agreement and indemnify him against all present or future
partnership liabilities
To avert a dissolution on notice by another partner of his intention to
wrongfully terminate the partnership, the innocent partner must comply
with the requirements
e. Liability of Person/Partnership Continuing the Business
If a person or a partnership continues the business of the dissolved
partnership, creditors of the dissolved partnership are also creditors of
the person or partnership continuing the business:
(1) When any new partner is admitted into an existing partnership
or when a partner retires and assigns (or the representative of
the deceased partner assigns) his rights in the partnership
property to 2 or more of the partners, or to one or more of the
partners and one or more third persons, and if the business is
continued without liquidation of the partnership affairs
(2) When all but 1 partner retire and assign (or the representative
of a deceased partner assigns) their rights in partnership property
to the remaining partner who continues the business without
liquidation of partnership affairs, either alone or with others
(3) When any partner retires or dies and the business of the
dissolved partnership is continued with the consent of the
retired partners or the representative of the deceased
partner, but without any assignment of his right in the partnership
property
(4) When all the partners or their representatives assign their
rights in partnership property to one or more third person who
promise to pay the debts and who continue the business of the
dissolved partnership
 RULE: One who did not promise to pay the debts of the
prior partnership cannot be held liable for its obligations in
the absence of conduct on his part or on the part of the new
partnership giving rise to an express or implied agreement
to assume the debts of the prior partnership
o Without a promise to pay, the creditors have no claim
on the partnership continuing the business or its
property, unless the assignment can be set aside as
fraud on creditors
(5) When any partner wrongfully causes a dissolution and the
remaining partners continue the business (Art 1837 2nd par no 2),
either alone or with others, and without liquidation of the
partnership affairs
(6) When a partner is expelled and the remaining partners continue
the business either alone or with others without liquidation of the
partnership affairs
RULE: Liability of a third person becoming a partner in the
partnership continuing the business to the creditors of the dissolved
partnership shall be satisfied out of the partnership property only,
unless there is a stipulation to the contrary.
PURPOSE: To eliminate the difficulty which arises when a new partner
is admitted without liquidation of firm debts
YU V NLRC
FACTS: YU was formerly the Assistant General Manager of Jade
Mountain. The partnership was originally organized with LEA and
RHODORA BENDAL as general partners and CHIU SHIAN JENG,
CHEN HO-FU and YU CHANG as limited partners
 The general partners sold and transferred their interests to the
partnership to CO and to ZAPANTA. CHANG (limited) also sold
and transferred his interest to CO.
 The partnership then constituted solely by CO and ZAPANTA
continued to use the old firm name, though they moved the firm’s
main office from Makati to Mandaluyong. The actual operations
continued as before and all employees continued working in the
business except YU.
 YU filed a complaint for illegal dismissal and recovery of unpaid
salaries. CO and ZAPANTA claimed that YU was never hired by
the new partnership.
RULING: The sale of 82% of the total partnership interest in the
original partnership to CO and ZAPANTA coupled with the retirement
or withdrawal of the partners who originally owned such interest was
enough to constitute a new partnership
 BUT, the occurrence of events which precipitate the legal
consequence of the dissolution of a partnership does not
automatically result in the termination of the legal personality of
the old partnership
 ITC, the business of the old partnership was simply continued by
the new partners without the old partnership undergoing the
procedure relating to dissolution and winding up of its business
affairs
 Not only the retiring partners but also the new parntership itself
which continued the business of the old, dissolved one are liable
for the debts of the preceding partnership (Art 1840)
SIR CASIS: It was necessary to determine which case under Art 1840
applies in the case
 Purpose of enumerating the scenarios when the creditors of the
dissolved partnership become the creditors of the person(s) or
partnership continuing the business of the dissolved partnership is
precisely to limit the application of the rule to such situations
 OTHERWISE, the code could have simply stated that the
creditors of the dissolved partnership become the creditors of the
person(s) or partnership continuing the business of the dissolved
partnership
 ITC, it is most reflective of Art 1840(4) which is when all the
partners assign their rights to one or more third persons
o BUT, Art 1840(4) requires the assignee “promise to pay
debts” of the dissolved partnership
o If there is no such promise, the new partnership should not
be liable for the obligations of the dissolved partnership
4. Rights of Partners upon Dissolution
a. Right to Wind-Up
Art. 1836. Unless otherwise agreed, the partners who have not
wrongfully dissolved the partnership or the legal representative of the
last surviving partner, not insolvent, has the right to wind up the
partnership affairs, provided, however, that any partner, his legal
representative or his assignee, upon cause shown, may obtain winding
up by the court.
 Art 1836 authorizes the partners who have not wrongfully
dissolved the partnership or the legal representative of the last
surviving partner, not insolvent to wind up the partnership
affairs, subject to any agreement made by the partners
 Also allows any partner or his legal representative or his
assignee, upon cause shown, to obtain winding up by the court
 Winding up may be: extrajudicial or judicial
b. Right to Damages for/Continue Business on Wrongful
Dissolution
i. Right of the Innocent Partner
Art. 1837, 2nd par. When dissolution is caused in contravention of
the partnership agreement the rights of the partners shall be as
follows:
(1) Each partner who has not caused dissolution wrongfully shall
have:
(a) All the rights specified in the first paragraph of this article, and
(b) The right, as against each partner who has caused the
dissolution wrongfully, to damages breach of the agreement.
(2) The partners who have not caused the dissolution wrongfully, if
they all desire to continue the business in the same name either by
themselves or jointly with others, may do so, during the agreed term
for the partnership and for that purpose may possess the
partnership property, provided they secure the payment by bond
approved by the court, or pay any partner who has caused the
dissolution wrongfully, the value of his interest in the partnership at
the dissolution, less any damages recoverable under the second
paragraph, No. 1 (b) of this article, and in like manner indemnify him
against all present or future partnership liabilities.
Requirements for the remaining partners to continue business
after wrongful dissolution:
a) All remaining partners desire to continue the business in the
same name either by themselves or jointly with others
b) Secure the payment by bond approved by the court, or pay
any partner who has caused the dissolution wrongfully, the
value of his interest in the partnership at the dissolution, less
any damages recoverable
c) Indemnify partner who has caused the dissolution wrongfully
against all present and future partnership liabilities
ii. Right of the Guilty Partner
Art. 1837, 2nd par (cont.).
(3) A partner who has caused the dissolution wrongfully shall have:
(a) If the business is not continued under the provisions of the
second paragraph, No. 2, all the rights of a partner under the first
paragraph, subject to liability for damages in the second paragraph,
No. 1 (b), of this article.
(b) If the business is continued under the second paragraph, No. 2,
of this article, the right as against his co-partners and all claiming
through them in respect of their interests in the partnership, to have
the value of his interest in the partnership, less any damage caused
to his co-partners by the dissolution, ascertained and paid to him in
cash, or the payment secured by a bond approved by the court, and
to be released from all existing liabilities of the partnership; but in
ascertaining the value of the partner's interest the value of the
good-will of the business shall not be considered.
 The guilty partner does NOT forfeit his partnership interest,
but is entitled to receive it LESS the damages caused by his
breach.
c. Right to Lien or Retention, Stand in Place of Creditor, to be
Indemnified
Art. 1838. Where a partnership contract is rescinded on the ground
of the fraud or misrepresentation of one of the parties thereto,
the party entitled to rescind is, without prejudice to any other right,
entitled:
(1) To a lien on, or right of retention of, the surplus of the
partnership property after satisfying the partnership
liabilities to third persons for any sum of money paid by
him for the purchase of an interest in the partnership and
for any capital or advances contributed by him;
(2) To stand, after all liabilities to third persons have been
satisfied, in the place of the creditors of the partnership
for any payments made by him in respect of the
partnership liabilities; and
(3) To be indemnified by the person guilty of the fraud or
making the representation against all debts and liabilities
of the partnership.
 “without prejudice to any other right” = “not permit the
defrauded partner to plead fraud as a bar to liability to third
party creditors”
 VAN ANDEL V. SMITH: Even though the partnership
contract was procured by the fraud of one of the partners,
nevertheless the partnership entity is created and until it is
dissolved the defrauded partner is LIABLE for debts of the
partnership TO THIRD PERSONS incurred during the life of
the partnership.
d. Right of Retiring/Deceased Partner
Art. 1841. When any partner retires or dies, and the business is
continued under any of the conditions set forth in the preceding
article, or in Article 1837, second paragraph, No. 2, without any
settlement of accounts as between him or his estate and the
person or partnership continuing the business, unless otherwise
agreed, he or his legal representative as against such person or
partnership may have the value of his interest at the date of
dissolution ascertained, and shall receive as an ordinary creditor an
amount equal to the value of his interest in the dissolved
partnership with interest, or, at his option or at the option of his legal
representative, in lieu of interest, the profits attributable to the use
of his right in the property of the dissolved partnership; provided
that the creditors of the dissolved partnership as against the
separate creditors, or the representative of the retired or deceased
partner, shall have priority on any claim arising under this article, as
provided Article 1840, third paragraph.
 He or his legal representative:
o May have the value of his interest at the date of
dissolution ascertained, and
o Shall receive as an ordinary creditor
 An amount equal to the value of his
interest in the dissolved partnership with
interest, or
 In lieu of interest, the profits attributable
to the use of his right in the property of
the dissolved partnership
 Creditors of the dissolved partnership shall have priority on
any claim as against the separate creditors, or the
representative of the retired or deceased partner (1841).
e. Right to Account
Art. 1842. The right to an account of his interest shall accrue to
any partner, or his legal representative as against the winding up
partners or the surviving partners or the person or partnership
continuing the business, at the date of dissolution, in the absence of
any agreement to the contrary.
B. Winding-Up and Liquidation
1. Meaning of Winding-Up
WINDING UP = the administration of assets for the purpose of
terminating the business and discharging the obligations of a
partnership to its member, and its creditors, or the process of settling
partnership affairs after dissolution.
  It involves liquidation (liquidation is part of winding-up; they
are not equivalent concepts so the terms can’t be used
interchangeably)
 Thus, a partnership is wound-up by means of an
accounting generally followed by a liquidation of
partnership assets.
2. The Right to Wind-Up
Art. 1836. Unless otherwise agreed, the partners who have not
wrongfully dissolved the partnership or the legal representative of
the last surviving partner, not insolvent, has the right to wind up
the partnership affairs, provided, however, that any partner, his
legal representative or his assignee, upon cause shown, may obtain
winding up by the court.
 Who has right to wind-up? ALL partners
o NO partner is excluded
o NO further authority required from them for the
right to be exercised
o But they are NOT necessarily forced to wind-up
partnership affairs
 When? If partnership is dissolved by MUTUAL CONSENT or
by EXPIRATION OF TERM
 What happens during winding-up? Possession and
control of assets are lodged with the partners
o Thus, EACH partner has the obligation of
administering the partnership assets
o Partners having majority interest do NOT have the
absolute right to control partnership assets
3. The Liquidating Partner
 Partners with right to wind-up, by agreement, may appoint
one or more of them as liquidating partners.
 If liquidating partner dies = authority reverts back to partners
who had authority to wind-up
 Authority to act as liquidating partner NEED NOT be
expressly conferred (may be implied or presumed from acts
of the partner, with the knowledge of his co-partners).
4. Period for Winding-Up
 Period is NOT IMPORTANT
 NO specific deadline for completion
 BUT, a partner aggrieved may apply for judicial relief if he
believes there has been unreasonable delay.
5. Rules on Setting Accounts
Art. 1839. In settling accounts between the partners after
dissolution, the following rules shall be observed, subject to any
agreement to the contrary:
(1) The assets of the partnership are:
(a) The partnership property,
(b) The contributions of the partners necessary for the payment of
all the liabilities specified in No. 2.
(2) The liabilities of the partnership shall rank in order of
payment, as follows:
(a) Those owing to creditors other than partners,
(b) Those owing to partners other than for capital and profits,
(c) Those owing to partners in respect of capital,
(d) Those owing to partners in respect of profits.
(3) The assets shall be applied in the order of their
declaration in No. 1 of this article to the satisfaction of the
liabilities.
(4) The partners shall contribute, as provided by article 1797,
the amount necessary to satisfy the liabilities.
(5) An assignee for the benefit of creditors or any person
appointed by the court shall have the right to enforce the
contributions specified in the preceding number.
(6) Any partner or his legal representative shall have the right
to enforce the contributions specified in No. 4, to the
extent of the amount which he has paid in excess of his
share of the liability.
(7) The individual property of a deceased partner shall be
liable for the contributions specified in No. 4.
(8) When partnership property and the individual properties
of the partners are in possession of a court for
distribution, partnership creditors shall have priority on
partnership property and separate creditors on individual
property, saving the rights of lien or secured creditors.
(9) Where a partner has become insolvent or his estate is
insolvent, the claims against his separate property shall
rank in the following order:
(a) Those owing to separate creditors;
(b) Those owing to partnership creditors;
(c) Those owing to partners by way of contribution. (n)
 ORTEGA v. CA: The liquidation of the assets of the
partnership following its dissolution is governed by various
provisions of the Civil Code; however, an agreement of the
partners, like any other contract, is binding among them and
normally takes precedence to the extent applicable over the
Code’s general provisions.
a. Order of Payment
1. those owing creditors other than partners
2. those owing to partners other than for capital and profits
3. those owing to partners in respect of capital
o The capital contributed by partner is a DEBT of the
partnership which must be paid AFTER the
outside creditors BUT BEFORE there is any
division of the profits.
4. those owing to partners in respect of profits
VILLAREAL v. RAMIREZ
FACTS: Villareal (V), Carmelito (C), and Jesus formed a partnership
with a P750k capital for the operation of a restaurant business.
Ramirez subsequently joined as partner with a P250k capital
contribution, paid by his parents (P). Afterwards, Jesus withdrew from
the partnership and was refunded his capital contribution. Soon after,
without Ramirez’ knowledge, V and C closed down the restaurant
because of alleged increase in rental. The restaurant furniture and
equipment were stored in Ramirez’ house. P wrote to V and C saying
that they were no longer interested in continuing the partnership and
that they accept C’s offer to return their capital contribution. They
further added in another letter that they request for the return of their
1/3 share in the equity of the partnership. After their requests were
unheeded, they filed a collection of a sum of money against V and C.
HELD: P has no right to demand from V and C their equity share.
Because capital was contributed to the partnership, not to V and C, it is
the partnership that must refund the equity of the retiring partners.
 The amount of refund equivalent to Ramirez’ 1/3 share in the
partnership cannot be determined UNTIL all the partnership
assets have been liquidated (i.e. sold and converted to cash)
and all partnership creditors paid.
 IN THIS CASE, considering the depreciation of the furniture,
the amortization of the goodwill, the capitalization paid to
Jose, etc. it will show that the partnership was actually
sustaining substantial losses, decreasing the capital of the
partnership.
 THUS, the Court set aside the appellate court’s decision,
without prejudice to proper proceedings, for the accounting,
liquidation and distribution of the remaining partnership
assets, if any.
MAHAN v. MAHAN
FACTS: In 1969, Helen Mahan, widow of Terrell Mahan, sued Gordon
Mahan who had an agriculture partnership with Terrell. The
partnership’s profits were divided on an equal basis. One time, the
partnership traded one of the partnership properties for a $23k-worth
home for Terrell and Helen, so the bookkeeper reduced the capital
account of Terrell to $23k. The partnership became inactive at about
that time. In dividing the share, Gordon contended that Helen’s share
was reduced to 1/8 because Terrell’s capital account was reduced by
$23k. On the other hand, Helen contended that after payment of the
partnership debts, she should share with Gordon on a 50-50 basis.
HELD: By reducing his capital account, the partner did not
proportionately reduce his share of the surplus which remained after
recoupment of capital and the partner was entitled to ½ of the value of
the remaining partnership profits.
b. Payment Sources
 Partnership will first apply partnership property to pay for
partnership liabilities.
  If not enough, partners will contribute the amount
necessary to satisfy liabilities (even including individual
property of deceased partner)
 If a partner has become insolvent, the claims against his
separate property shall rank in the ff. order:
o Those owing separate creditors
o Those owing to partnership creditors
o Those owing to partners by way of contribution
 Effect of rule: to prevent the partnership or partners from
representing it from sharing in the separate estate until the
separate creditors are paid

6. Right of Creditors
Art. 1827. The creditors of the partnership shall be preferred to
those of each partner as regards the partnership property. Without
prejudice to this right, the private creditors of each partner may ask
the attachment and public sale of the share of the latter in the
partnership assets. (n)

Art. 1839. In settling accounts between the partners after

dissolution, the following rules shall be observed, subject to any
agreement to the contrary:
xxx
(8) When partnership property and the individual properties of the
partners are in possession of a court for distribution, partnership
creditors shall have priority on partnership property and separate
creditors on individual property, saving the rights of lien or secured
creditors.

Doctrine of marshalling of assets = partnership creditors are in the

first instance satisfied from the partnership estate, and separate and
private creditors of the individual partners from the separate and
private estates of the partners with whom they have made private and
individual contracts.
 Private and individual property of partners is NOT applied in
the extinguishment of partnership debts UNTIL the separate
and individual creditors of the respective partners are PAID.
 Neither class of creditors is allowed to trespass on the fund
belonging to the other until the claims of that other are
satisfied.

7. Right of Expelled Partner

Art. 1837, 1st par (last sent.). But if dissolution is caused by
expulsion of a partner, bona fide under the partnership agreement
and if the expelled partner is discharged from all partnership
liabilities, either by payment or agreement under the second
paragraph of Article 1835, he shall receive in cash only the net
amount due him from the partnership.

 Expelled partner becomes a CREDITOR of the other

partners on the date of his expulsion to the extent of the
current value of the partnership interest.
 As an ordinary creditor, he is entitled to be paid his interest
BEFORE the balance is divided between the remaining
partners.

i.