Restituto Lopez vs. Atty. Eliseo Fernandez, et al.

[SEC-SICD * CASE NO. 5140. January 12, 1998.] RESTITUTO LOPEZ , petitioner , vs . ATTY. ELISEO FERNANDEZ, ET AL. , respondents . D E C I S I O N This is a petition filed by Restituto T. Lopez on his behalf and on behalf of Fernandez, Santos and Lopez against Atty. Eliseo A. Fernandez, Wilfredo Z. Palad and Lina A. Aseneta, for the appointment of management committee/receiver with a prayer for the issuance of a restraining order and/or writ of preliminary injunction to take custody of and control over all the remaining assets, resources and properties of the partnership known as Fernandez Santos and Lopez hereinafter referred to as FS&L and to undertake the management of the said firm. prLL In support, petitioner alleged among others, that respondent Atty. Eliseo A. Fernandez, in conspiracy with junior partners of the firm, committed fraudulent and unauthorized acts and acts of gross mismanagement that have resulted in the loss, wastage and dissipation of FS&L's assets and properties, such as :(a)fraudulent and unauthorized withdrawals of partnership funds in violation of Article XVIII of FS&L's Articles of Partnership and Article XIX of its General Partnership Agreement; b) unauthorized use of FS&L's offices by Emerald Registry and Transfers Corporation hereinafter referred to as Emerald Registry, a corporation owned and controlled by respondent Eliseo A. Fernandez; (c) Fernandez's unexplainable failure to bill and collect from clients for services rendered by FS&L; (d) Fernandez's toleration and/or engagement in corrupt and unethical practices which have jeopardized FS&L integrity in the practice of public accountancy; (e) deliberate cover-up and/or withholding from petitioner Lopez by respondents Fernandez and Aseneta, who is the FS&L's Finance and Administrative Principal, of financial reports and various related documents/vital pieces of communications pertaining to FS&L's business operation and/or financial standing. On June 5, 1996, respondents filed their answer and categorically denied all the material allegations in the petition and in their special and affirmative defenses they alleged that FS&L partnership had been dissolved by virtue of the withdrawal of one of the senior partners, Mr. Petronilo Santos and that because of the dissolution of FS&L, the Executive Committee created and organized under the Articles of Partnership and General Partnership Agreement has rendered the said committee functus officio. That contrary to petitioner's allegations, respondents have not committed any fraudulent or unauthorized withdrawal of partnership funds and fraudulent removal of partnership's assets and properties and that petitioner has no cause of action against respondents. prcd After the issues were joined, preliminary conference was conducted on April 3, 1997 wherein the parties had marked their respective documentary evidence and made some stipulation and admission of facts as follows: 1) That the FS&L partnership is covered by Articles of Partnership duly registered with the Securities and Exchange Commission and the existence of the General Partnership Agreement entered into by the partners on July 1, 1990; 2) That Petronilo S. Santos is no longer a part of FS&L; 3) That petitioner admitted that he received the Notice of partner's meeting set On May 19, 1995 and that there is a profit sharing scheme in the FS&L partnership. The parties also agreed the issues to be resolved by the Commission as follows: (1) Whether or not respondents committed fraudulent acts of gross mismanagement which resulted to wastage and dissipation of partnership's assets that would justify the appointment of a Management Committee, (2) Whether the partners meeting held on May 19, 1995 and the resolution passed thereon are valid or not; (3) Whether or not the Executive Committee of FS&L still exists and continues to function as such; and (4) Whether or not Petitioner Lopez is liable for damages against respondents or vice versa. Prior to the hearing On the merits, on August 8, 1996, petitioner Lopez filed an Urgent Ex-parte Motion For Issuance of Temporary Restraining Order and/or writ of preliminary Injunction praying that the Commission issue an Order enjoining the respondents from holding a partnership meeting set on August 9, 1996 or any date thereafter pending the resolution of the instant case and for proceeding with the meeting for the purpose of replacing petitioner Lopez from FS&L partnership. After the parties submitted their respective Memoranda in support of/and in opposition to the application for issuance of the writ of preliminary injunction, the Commission on August 29, 1996 issued an Order enjoining the respondents, their agents or any person acting for and in their behalf from holding any meeting which may have for its purpose, the expulsion of petitioner Lopez from the FS&L partnership and his replacement as representative to KPMG;MCC's board of directors and management committee until further order from the Hearing Officer. Thereafter, petitioner and respondents presented their respective documentary and testimonial evidence. From the evidence adduced by the parties both testimonial and documentary evidence, the following facts were established: the partnership of FS&L is a professional partnership engaged in the practice of public accountancy which had its founding senior partners namely: Atty. Eliseo A. Fernandez, Petronilo S. Santos and Restituto T. Lopez. The partnership was organized after these three senior partners entered into Memorandum of Agreement dated April 10, 1990 (Exhs "S" to "S-1") Subsequently thereafter the three senior partners executed Articles of Partnership of Fernandez, Santos and Lopez (FS&L) on June 4, 1990 and registered with the Securities and Exchange Commission on August 10, 1990 (Exh. "A"). Thereafter they entered into General Partnership Agreement with the junior partners of FS&L Respondent Elisio A. Fernandez is the Chairman while Restituto T. Lopez and Petronilo Santos are the Vice-Chairmen. Respondent Lina A. Aseneta is the Finance and Administrative principal while respondent Wilfredo Z. Palad is a junior partner. The partnership has units of participation distributed as follows: Senior Partners 70% Junior Partners 30% 100% The Senior Partners contributed P250,000.00 each but inspite of this, Respondent Eliseo A. Fernandez holds 40% of the 70% while Mr. Petronilo S. Santos owns 30% of the 70% and the petitioner Restituto T. Lopez has 30% of the 70% (Exhs "1" & "2"). The remaining 30% were allocated to eight junior partners with 3.75% each (including Respondents W. Palad and L. Aseneta) per lists of partners attached to the General Partnership Agreement. The senior partners who are all members of the executive committee share in the losses of the partnership while the junior partners do not. The capital contribution of a resigning or withdrawing junior partner is returned to him when he leaves the partnership even if the firm is incurring losses. The senior partners consisting of Atty. Eliseo A. Fernandez, Mr. Petronilo S. Santos and Restituto T. Lopez merged their respective practices into the partnership of FS&L and later on the partnership of FS&L became a member of KPMG, one of the biggest accounting firms in the world. The affairs of the partnership are administered by an Executive Committee which is composed of the senior partners namely: Atty. Eliseo A. Fernandez, Mr. Petronilo S. Santos and the herein Petitioner Mr. Restituto T. Lopez. Exh "A". The Executive Committee in Partners' Certificate dated 7 November 1990 designated any two of Atty. Fernandez, Mr. Santos and herein Petitioner, Mr. Lopez as authorized signatories to withdraw funds from its accounts with Metropolitan Bank and Trust Company, (Exh. "C"). The Executive Committee also authorized Ms. Lina A. Aseneta, to co-sign checks with either of the three senior partners for withdrawals of funds in amounts of not more than P5,000.00 pesos. In other words, they are the only persons authorized to withdraw funds and sign checks for the partnership of FS&L. Moreover, the authority of MS. Lina A. Aseneta to co-sign checks was limited only to P5,000.00 pesos. Since Mr. Petronilo S. Santos has resigned from the partnership on June 30, 1993, the only remaining signatories of FS&L for withdrawals of funds of any amounts from its accounts with Metrobank are Atty. E. Fernandez and the petitioner. Of course, Ms. Aseneta can still sign checks if the amount of each check do not exceed P5,000.00 pesos. On May 19, 1995 or almost two years from the resignation of Mr. Petronilo S. Santos, respondents Atty. Eliseo A. Fernandez, Mr. Wilfredo Palad and Ms. Lina Aseneta held a partners meeting (Exh. "7") without the approval of the Executive Committee and passed a resolution changing the original checks signatories to any two of the following: Eliseo A. Fernandez, Restituto T. Lopez, Wilfredo C. Palad, Lina A Aseneta. The said. resolution was communicated to Metrobank by way of Partners' Certificate dated. 22 May 1995 (Exh."C-1" & "8") and Secretary's Certificate dated 5th of June 1995 (Exh. "I"). Metrobank honored the said Certificates despite the protestation of petitioner Lopez to the effect that the certificate is invalid because the May 19, 1995 meeting was held without the approval of the Executive Committee. Consequently, Petitioner Lopez considered the checks issued pursuant to said May 22, 1995 certificate as fraudulent and unauthorized. The total disbursements made pursuant to this allegedly invalid certificate amounted to P2,764,693.77 as of August 28, 1995. (TSN dated May 20, 1997 pp. 16 to 19, 30-32). It appears that some of these disbursements were payments for legitimate business expenses such as payments for salaries, office supplies, rentals, loans, and services. (Exhs. "11-13-B" inclusive). LLju Moreover, the partnership of FS&L used and occupied the 21st Floor of Metrobank Plaza, consisting of about 600 square meters of office space under lease contract with Metrobank. Later on it moved to Regogen Bldg. and subsequently to Locsin Bldg. From July 1990 up to the filing of the petition, Emerald Registry & Transfer Corporation (ERTC, for short) a corporation owned and controlled by respondent Atty. E. Fernandez occupied a portion of said office space. It is not clear from the evidences presented as to how many sq.m. was occupied by ERC. According to petitioner, the area was 80 sq. m. was occupied by ERTC. but respondent Fernandez averred that the area was only 80 square foot or 7.424 sq.m. Petitioner contended that ERTC did not share in the rent and this share would amount to thousand of pesos for the period from July 1, 1990 up to June 30, 1994. On the other hand, respondents claimed that ERTC made advances to the partnership of FS&L, hence, it is the latter that owes the former. Nevertheless, there is nothing in the records which of the two is the net debtor. LLphil Petitioner also contended and testified that respondent, Atty Fernandez failed to bill and collect from clients for works rendered by FS&L partnership. He is the chairman and he has the overall responsibility for the profitability of .the firm. While the managers in charge are responsible, the records also show that the Chairman did not actively supervise and monitor the performance of his subordinates. Petitioner testified further that uncollected bills amounted to P5.1 million as of June 30, 1995. On top of that, services already rendered have not been billed and as of April 30, 1993, according to the testimony of Mr. R.T. Lopez, amounted to P5,218,451.00 as of April 30, 1993. This led to accumulated losses of P8,088,676.00 as of December 31, 1993 broken down as follows; December 31, 1990 P2,616,312.00; December 31, 1991 P945,559.00; December 31, 1992 P2,571,274.00 and December 31, 1993 P1,955,531.00. (Exhs "M" and "N", TSN dated May 20, 1997). The petitioner also testified that respondent Fernandez had tolerated and/or engaged in corrupt and unethical practice. He made a memorandum to Atty. E. Fernandez on November 29, 1993 with respect to a disbursement of P50,000.00 that was made out of the partnership fund which was not authorized as it was not signed by Mr. Lopez. It was signed by a senior partner who has already resigned at the time he signed the same (Exh "0"). Mr. Lopez testified that the disbursement was made payable to Mr. W. Palad and the reason why Mr. Lopez was not asked to sign the check was because it has something to do with certain "under the table arrangement with BIR" (TSN dated 5/20/97, testimony of Mr. Lopez pp. 52-53). The respondent has not convincingly refuted the testimony of the Petitioner on this matter. prcd Finally, petitioner Lopez has not been receiving financial reports and related documents relative to the true financial. conditions of FS&L. The finance and administration functions of the partnership is under the responsibility of the Chairman yet, he was not making financial reports on accrual basis pursuant to the Minutes of Executive Committee Meeting No. 91-020 of FS&L partnership. However financial reports are made in cash basis. (TSN dated May 20, 1997, pp 53-57) Exhs "P to "P-7" With the foregoing established facts, we will now resolve the following issues: 1. Whether or not respondents committed fraudulent acts of gross mismanagement which resulted to wastage and dissipation of partnership's assets that would justify the appointment of a management committee. 2. Whether the partners meeting held on May 19, 1995 and the resolutions passed thereon are valid or not. 3. Whether or not the Executive Committee of FS&L still exists and continues to function as such. 4. Whether or not Petitioner Lopez is liable for damages against respondents and vice-versa. Issues 1 to 3 are interrelated and before we resolve issue number 1, it is necessary to determine whether the partners meeting on May 19, 1995 and the resolution passed thereon are valid or not. To resolve this issue we refer to the following provisions of the Articles of Partnership of FS&L, to wit: SECTION 1, ARTICLE VII The affairs of the partnership shall be administered by an Executive Committee which shall be composed of the signatories to this agreement and who shall continue to serve as members of the Executive Committee until they resign or shall have been replaced, pursuant to a holding 2/3 vote of the partners of the units of participation. SECTION 1, ARTICLE XVIII All funds of the partnership except petty cash for daily expenses, shall be deposited in the name of the firm in a bank or banks to be designated by the Executive Committee. No withdrawals from the account shall be allowed except by check or any other negotiable instrument signed by persons authorized by the Executive Committee. prLL SECTION 1, ARTICLE VIII Subject to the approval of the Executive Committee, a meeting of the partners shall be held at any time on written notice of any two Partners at least two (2) days in advance, specifying the hour and purpose or purposes of the meeting. It is very clear from the foregoing provision that no withdrawals of funds can be allowed unless signed by persons authorized by the Executive Committee. Sec. 1 of Article VIII explicitly say that partners' meeting is subject to approval by the Executive Committee. The provisions of the Articles of Partnership are binding upon the partners. Since the May 19, 1995 meeting was not approved by the Executive Committee, the said meeting was invalid. It, therefore, follows that the resolutions passed thereon amending the check signatories are also invalid. We do not agree with the contention of respondents that the partnership of FS&L was dissolved when Petronilo S. Santos withdrew or retired. The intention of the partners is to continue the partnership on a going concern basis regardless of the withdrawal or retirement of Petronilo P. Santos. This intention, coupled with the testimony of respondent Fernandez to the effect that the purpose of the merger of the Lopez Fernandez and Santos practice is to compete with big accounting firms, is manifested in Section 1 Article III of the Articles of Partnership, to wit: cdll "This agreement shall take effect on July 1, 1990 and shall continue for an indefinite duration of time unless the Executive Committee shall decide otherwise. Except as otherwise, provided by law, the death, incapacity, withdrawal or retirement of any partner shall not bring about the dissolution of the partnership, which shall continue to exist and carry on its activities among the remaining or surviving partners". We do not think that the provision of Articles 1828 and 1830 of the New Civil Code will apply in this case. As a matter of public knowledge, the partnership of other big accounting firms continue to exist despite the death or retirement of some of their respective partners. Moreover, the respondents are estopped from claiming that the partnership of FS&L was dissolved because they continue to actively pursue the business of FS&L instead of winding up its affairs. Upholding their contention is tantamount to expelling Petitioner Lopez from the partnership without due process of law. Besides, the partnership of FS&L is in the nature of a limited partnership in the sense that the junior partners, have a limited liability. In fact, Virgilio Santos who was once a junior partner testified that His capital contribution was returned to him when he resigned. He did not share the losses of the partnership. Therefore, Article 1860 of the Civil Code which in substance provides that "the retirement death, insolvency, insanity or civil interdiction of a general partner dissolves the partnership unless the business is continued by the remaining general partners" will apply to FS&L. Moreover, the units of participation of respondents W. Palad (3.75%) and L. Aseneta (3.75%) did not automatically increased to 30% just because the other junior partners had resigned (it is .to be emphasized that another junior partner, Virgilio Santos was still with the firm when the May 19, 1995 meeting was held). The share of respondent Fernandez and that of petitioner Lopez were likewise not automatically adjusted. Only the executive Committee has the power to adjust the same based on Article VII of the Articles of Partnership. ARTICLE VII. Powers and Duties of the Executive Committee . xxx xxx xxx "SECTION 2. The Executive committee shall have the following functions: xxx xxx xxx (c) To determine the number of units to be assigned to a partner upon his admission into the partnership and to increase or decrease the number of units held by a partner from time to time, based on his general performance, in the sole judgment and discretion of the Executive Committee provided that any such adjustment in number of units held by a partner shall not be exercised more than one every calendar year. " The above powers was reiterated in Articles VI of the General Partnership Agreement. In view of said provisions, and there being no showing that the original units of participation of the partners has been increased by the Executive Committee, the meeting held by the respondent on May 19, 1995, in addition to the fact that it has no approval of the Executive Committee, had no quorum, to wit: Unit of Participation E.Fernandez 40% W. Palad 3.75% L. Aseneta 3.75% 47.50% On the issue of whether the Executive Committee of FS&L still exists and function as such, the answer is in the affirmative. FS&L Executive Committee was initially composed of three (3) senior partners namely: Atty. Eliseo A. Fernandez, Mr. Petronilo S. Santos and Restituto T. Lopez. However upon the retirement of Petronilo S. Santos on June 30, 1993, there are still two (2) members left in the Executive Committee of FS&L namely: Atty. E. Fernandez and Mr. R. Lopez. The records also show that the partnership of FS&L continues to operate. From July 1, 1993 to May 19, 1995 or almost two years, the remaining majority members of the Executive Committee continue to discuss matters related to the partnership. Respondent Fernandez and petitioner Lopez remained as members of FS&L Executive Committee as both have neither resigned nor replaced. Sections 1 and 3 of Article VII of FS&L Articles of Partnership provides "that members of the Executive Committee will continue to serve in such positions until they resign or shall have been replaced " However, it appears that after the partners meeting on May 19, 1995, respondent Fernandez illegally assumed all the powers of the Executive Committee to the detriment of petitioner Lopez. On the issue of whether or not respondents committed fraudulent acts of gross mismanagement which resulted to wastage and dissipation of partnership's assets that would justify the appointment of a management committee, this Hearing Officer believes that based on the evidence adduced, there appears that gross mismanagement have been committed by respondents. Section 6 (d) P.D. 902-A, as amended provides that: "SECTION 6. In order to effectively exercise such jurisdiction, the Commission shall posses the following powers: xxx xxx xxx (d) to create and appoint a management committee, Board or body upon petition or motu proprio to undertake the management of, partnerships not supervised or regulated by other government agencies in appropriate cases when there is imminent danger of dissipation, loss, wastage or destruction of asset or other properties or paralyzation of business operations of such entities which may be prejudicial to the interest of parties-litigants or the general public; Provided, further, That the Commission may create or appoint a management committee, board or body to undertake the management of partnerships or supervised or regulated by other government agencies, such as banks and insurance companies, upon request of the government agency concerned. It is worthy to note that the purpose of the management committee is to undertake the management of the partnership when there is imminent danger of dissipation, loss, wastage or destruction of the assets or other properties or paralyzation of business operations which may be prejudicial to the interest of parties-litigants or general public. The unauthorized disbursements of the partnership funds, by themselves alone may not be considered fraudulent acts but (1) the failure to bill services already performed amounting to million of pesos as of April 30, 1993 (TSN dated May 20, 1997, Exhs. "C" to "C-1-a") (2) failure to collect receivables amounting to millions of pesos (Exhs. "M" & "N") (3) accumulation of losses amounting to P8,088,676 as of December 31, 1993 (Exhs "Q" to "Q-45", "L to L-2", TSN dated May 20, 1997 pp. 42-52) (4) failure to charge or bill Emerald Registry & Transfer Corporation its rightful share in the rentals (Exhs "K", "CC & BB" and TSN dated May 20, 1997) (5) failure to account and give petitioner Lopez his regular drawings and entitlement and (6) preventing Lopez from exercising his powers as member of the Executive Committee constitute gross mismanagement. (Exhs "Z", "Z-1", "AA" to "AA-2") As regards the issue on damages, and considering that Respondent Fernandez prevented petitioner Lopez from active participation in the tax and audit work and the fact that respondents also withdrew Lopez's rights to his drawings as a partner, petitioner Lopez is entitled to actual damages corresponding to his accrued regular monthly drawings and all other entitlement as approved by the Executive Committee. Petitioner Lopez is also entitled to moral damages for the actual injury suffered, mental anguish, anxiety and sleepless nights, respondents has caused to the petitioner and the tarnished reputation as regards petitioner's professional standing in the public accounting practice. (TSN dated May 20, 1997, pp. 58-59) WHEREFORE, in view of all the foregoing, judgment is hereby rendered: 1. Declaring the partners meeting held on May 19, 1995 and the resolutions passed thereon null and void. 2. Declaring the Executive Committee of FS&L still exist and continues to function. While there appears a justification for the creation of a Management Committee, nevertheless, the creation of the same is no longer necessary in view of the pronouncement that the Executive Committee of FS&L still in existence and therefore it should continue to administer the affairs of the partnership and exercise its duties and responsibilities in accordance with the express provisions of the Articles Of Partnership and Partnership Agreement. Considering that the two (2) remaining members of the Executive Committee of FS&L are the petitioner Restituto T. Lopez and Atty. Eliseo A. Fernandez, it is necessary that a third person be appointed to the Executive Committee in order to normalize and attain a smooth management and administration of the-affairs of the partnership and also to avoid any deadlock in the decision making. The parties are hereby directed to submit this Commission the name of the person to be appointed or named as third member of the FS&L Executive Committee who is acceptable to both parties within fifteen (15) days from receipt hereof. In the event that the parties could not agree to a neutral person, then the Commission would select from among the list of nominees the parties will submit to this Commission also within fifteen (15) days from receipt hereof. Once constituted, the Executive Committee shall immediately convene and assume the powers, duties and function of FS&L's Executive Committee. In addition thereto, the Committee is also tasked to do immediately the following: 1. To take custody of and control over all the existing assets and properties of FS&L and the management of the said firm to protect the interest of the parties-litigants, the creditors and the general public. 2. To bill services already performed and all unbilled services thereafter 3. To collect all receivables of FS&L and all other receivables of FS&L and all other receivables that will be identified by the Executive Committee. 4. To bill and require Emerald and Registry Corporation to pay immediately its unpaid share in the rental and other charges and 5. To render an accurate accounting of the FS&L's Financial transactions. 6. As to damages, petitioner, is entitled to: a. Actual damages and other entitlements as a senior partner and member of the executive committee corresponding to his accrued regular monthly drawings, which the respondents had withdrawn to be computed based on actual Excom drawings. b. Moral damages in the amount of Two Million (P2,000,000.00) Pesos for the injury suffered, mental anguish, anxiety, sleepless night that respondents have caused to the petitioner. Further the writ of preliminary injunction issued by this Commission on 2nd day of September 1996 is hereby made permanent and the preliminary Injunction bond posted by the petitioner is hereby lifted. SO ORDERED. (SGD.) JAMES K. ABUGAN Hearing Officer