[No. 35469.

 March 17, 1932]

E. S. LYONS, plaintiff and appellant, vs. C. W. ROSENSTOCK, Executor of the Estate of Henry

W. Elser, deceased, defendant and appellee.

1. PRINCIPAL AND AGENT;  RATIFICATION OF ACT OF AGENT;  RIGHTS INCIDENT TO

OWNERSHIP.—Where one of two individuals who had been associated in certain real estate deals,
owing a sum of money to his associate, invested it in the shares of a new company promoted by
himself, and this action was ratified by the associate, to whom the shares were accordingly issued, no
legal or equitable rights, other than those ordinarily incident to ownership, can be deduced from the
transaction in favor of the owner thus acquiring such shares.

2. ID.; AGENT'S LIABILITY FOR INTEREST ON, MONEY OF HIS CONSTITUENT.—Under article

1724 of the Civil Code and article 264 of the Code of Commerce, an agent is liable for interest on
funds belonging to his principal (constituent) which have been applied by the agent to unauthorized
uses.

3. EQUITY;  TRUSTS;  FOLLOWING TRUST FUNDS;  WHEN CASE GOVERNED BY ORDINARY

RULE OF CIVIL LIABILITY.—The doctrine developed in the courts of England and the United
States relative to the pursuing of trust funds is conversant with rights deducible from the
application, by a person in a trust relation with another,

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Lyons vs. Rosenstock

of specific property belonging to such other person to some unauthorized purpose. The fact that one
of two coöwners subjects their joint property to a contingent liability which results in no damage
does not create a trust in favor of the other, and the liability thereby incurred must be determined in
conformity with the principles of the civil law properly applicable to the case.

4. ID.; ID.; ID.; ID.; CASE AT BAR.—Where two individuals had been jointly associated in various real
estate deals, one of them, while the other was away, bought a valuable piece of property with a view
to the promotion of a suburban development, and as he expected that his absent former associate
would come into this deal and contribute some capital to the purchase and development of the
property, he subjected a piece of mortgaged property owned by them jointly to a second mortgage, to
secure against loss a surety company which had been induced to sign a note with the active promoter
to secure a loan necessary to complete the first payment on the property purchased. After the second
individual returned to Manila he consented for this second mortgage (which had been executed
under a sufficient power of attorney) to remain upon the property until it was paid off, as was
presently done. Held, that the use to which the joint property was thus subjected did not create a
trust in favor of the second individual, with the effect of making him a co-partner in the ownership of
the property purchased as aforesaid.

APPEAL from a judgment of the Court of First Instance of Manila. Concepcion, J.

The facts are stated in the opinion of the court.
Harvey & O'Brien for appellant.
DeWitt, Perkins & Brady for appellee.
STREET, J.:

This action was instituted in the Court of First Instance of the City of Manila, by E. S. Lyons
against C. W. Rosenstock, as executor of the estate of H. W. Elser, deceased, consequent upon the
taking of an appeal by the executor from the allowance of the claim sued upon by the committee
on claims in said estate. The purpose of the action is to recover four hundred forty-six and two
thirds shares
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of the stock of J. K. Pickering & Co., Ltd., together with the sum of about P125,000, representing
the dividends which accrued on said stock prior to October 21, 1926, with lawful interest. Upon
hearing the cause the trial court absolved the defendant executor from the complaint, and the
plaintiff appealed.
Prior to his death on June 18, 1923, Henry W. Elser had been a resident of the City of Manila
where he was engaged during the years with which we are here concerned in buying, selling, and
administering real estate. In several ventures which he had made in buying and selling property
of this kind the plaintiff, E. S. Lyons, had joined with him, the profits being shared by the two in
equal parts. In April, 1919, Lyons, whose regular vocation was that of a missionary, or
missionary agent, of the Methodist Episcopal Church, went on leave to the United States and was
gone for nearly a year and a half, returning on September 21, 1920. On the eve of his departure
Elser made a written statement showing that Lyons was, at that time, half owner with Elser of
three particular pieces of real property. Concurrently with this act Lyons executed in favor of
Elser a general power of attorney empowering him to manage and dispose of said properties at
will and to represent Lyons fully and amply, to the mutual advantage of both. During the absence
of Lyons two of the pieces of- property above referred to were sold by Elser, leaving in his hands a
single piece of property located at 616-618 Carriedo Street, in the City of Manila, containing
about 282 square meters of land, with the improvements thereon.
In the spring of 1920 the attention of Elser was drawn to a piece of land, containing about
1,500,000 square meters, near the City of Manila, and he discerned therein a fine opportunity for
the promotion and development of a suburban improvement. This property, which will be herein
referred to as the San Juan Estate, was offered by its owners for P570,000. To afford a little time
for maturing his plans, Elser purchased an option on this property for
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P5,000, and when this option was about to expire without his having been able to raise the
necessary funds, he paid P15,000 more for an extension of the option, with the understanding in
both cases that, in case the option should be exercised, the amounts thus paid should be credited
as part of the first payment. The amounts paid for this option and its extension were supplied by
Elser entirely from his own funds. In the end he was able from his own means, and with the
assistance which he obtained from others, to acquire said estate. The amount required for the
first payment was P150,000, and as Elser had available only about P120,000, including the
P20,000 advanced upon the option, it was necessary to raise the remainder by obtaining a loan
for P50,000. This amount was finally obtained from a Chinese merchant of the city named Uy
Siuliong. This loan was secured through Uy Cho Yee, a son of the lender; and in order to get the
money it was necessary for Elser not only to give a personal note signed by himself and his two
associates in the projected enterprise, but also by the Fidelity & Surety Company. The money
thus raised was delivered to Elser by Uy Siuliong on June 24, 1920. With this money and what he
already had in bank Elser purchased the San Juan Estate on or about June 28, 1920. For the
purpose of the further development of the property a limited partnership had, about this time,
been organized by Elser and three associates, under the name of J. K. Pickering & Company; and
when the transfer of the property was effected the deed was made directly to this company. As
Elser was the principal capitalist in the enterprise he received by far the greater number of the
shares issued, his portion amounting in the beginning .to 3,290 shares.
While these negotiations were coming to a head, Elser contemplated and hoped that Lyons
might be induced to come in with him and supply part of the means necessary to carry the
enterprise through. In this connection it appears that on May 20, 1920, Elser wrote Lyons a
letter,
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informing him that he had made an offer f or a big subdivision and that, if it should be acquired
and Lyons would come in, the two would be well fixed. (Exhibit M-5.) On June 3, 1920, eight days
before the first option expired, Elser cabled Lyons that he had bought the San Juan Estate and
thought it advisable for Lyons to resign (Exhibit M-13), meaning that he should resign his
position with the mission board in New York. On the same date he wrote Lyons a letter
explaining some details of the purchase, and added "Have advised in my cable that you resign
and I hope you can do so immediately and will come and join me on the lines we have so often
spoken about. * * * There is plenty of business for us all now and I believe we have started
something that will keep us going for some time." In one or more communications prior to this,
Elser had sought to impress Lyons with the idea that he should raise all the money he could for
the purpose of giving the necessary assistance in future deals in real estate.
The enthusiasm of Elser did not communicate itself in any marked degree to Lyons, and found
him averse from joining in the purchase of the San Juan Estate. In fact upon this visit of Lyons to
the United States a grave doubt had arisen as to whether he would ever return to Manila, and it
was only in the summer of 1920 that the board of missions of his church prevailed upon him to
return to Manila and resume his position as managing treasurer and one of its trustees.
Accordingly, on June 21, 1920, Lyons wrote a letter from New York thanking Elser for his offer to
take Lyons into his new project and adding that from the standpoint of making money, he had
passed up a good thing.
One source of embarrassment which had operated on Lyons to bring him to the resolution to
stay out of this venture, was that the board of missions was averse to his engaging in business
activities other than those in which the church was concerned; and some of Lyons' missionary
associates had apparently been criticizing his independent
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commercial activities. This fact was dwelt upon in the letter above-mentioned. Upon receipt of
this letter Elser was of course informed that it would be out of the question to expect assistance
from Lyons in carrying out the San Juan project. No further efforts to this end were therefore
made by Elser.
When Elser was concluding the transaction for the purchase of the San Juan Estate, his books
showed that he was indebted to Lyons to the extent of, possibly, P11,669.72, which had accrued to
Lyons from profits and earnings derived f rom other properties; and when the J. K. Pickering &
Company was organized and stock issued, Elser indorsed to Lyons 200 of the shares allocated to
himself, as he then believed that Lyons would be one of his associates in the deal. It will be noted
that the par value of these 200 shares was more than P8,000 in excess of the amount which Elser
in fact owed to Lyons; and when the latter returned to the Philippine Islands, he accepted these
shares and sold them for his own benefit. It seems to be supposed in the appellant's brief that the
transfer of these shares to Lyons by Elser supplies some sort of basis for the present action, or at
least strengthens the considerations involved in a feature of the case to be presently explained.
This view is manifestly untenable, since the ratification of the transaction by Lyons and the
appropriation by him of the shares which were issued to him leaves no ground whatever for
treating the transaction as a source of further equitable rights in Lyons. We should perhaps add
that after Lyons' return to the Philippine Islands he acted for a time as one of the members of the
board of directors of the J. K. Pickering & Company, his qualification for this office being derived
precisely from the ownership of these shares.
We now turn to the incident which supplies the main basis of this action. It will be
remembered that, when Elser obtained the loan of P50,000 to complete the amount needed for
the first payment on the San Juan Estate, the lender, Uy Siuliong, insisted that he should
procure the sig-
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nature of the Fidelity & Surety Co. on the note to be given for said loan. But before signing the
note with Elser and his associates, the Fidelity & Surety Co. insisted upon having security for the
liability thus assumed by it. To meet this requirement Elser mortgaged to the Fidelity & Surety
Co. the equity of redemption in the property owned by himself and Lyons on Carriedo Street. This
mortgage was executed on June 30, 1920, at which time Elser expected that Lyons would come in
on the purchase of the San Juan Estate. But when he learned from the letter from Lyons of July
21, 1920, that the latter had determined not to come into this deal, Elser began to cast around for
means to relieve the Carriedo property of the encumbrance which he had placed upon it. For this
purpose, on September 9, 1920, he addressed a letter to the Fidelity & Surety Co., asking it to
permit him to substitute a property owned by himself at 644 M. H. del Pilar Street, Manila, and
1,000 shares of the J. K. Pickering & Company, in lieu of the Carriedo property, as security. The
Fidelity & Surety Co. agreed to the proposition; and on September 15, 1920, Elser executed in
favor of the Fidelity & Surety Co. a new mortgage on the M. H. del Pilar property and delivered
the same, with 1,000 shares of J. K. Pickering & Company, to said company. The latter thereupon
in turn executed a cancellation of the mortgage on the Carriedo property and delivered it to Elser.
But notwithstanding the fact that these documents were executed and delivered, the new
mortgage and the release of the old were never registered; and on September 25, 1920, thereafter,
Elser returned the cancellation of the mortgage on the Carriedo property and took back from the
Fidelity & Surety Co. the new mortgage on the M. H. del Pilar property, together with the 1,000
shares of the J. K. Pickering & Company which he had delivered to it.
The explanation of this change of purpose is undoubtedly to be found in the fact that Lyons
had arrived in Manila on September 21, 1920, and shortly thereafter, in the course of
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a conversation with Elser told him to let the Carriedo mortgage remain on the property ("Let the
Carriedo mortgage ride"). Mrs. Elser testified to the conversation in which Lyons used the words
above quoted, and as that conversation supplies the most reasonable explanation of Elser's
recession from his purpose of relieving the Carriedo property, the trial court was, in our opinion,
well justified in accepting as a proven fact the consent of Lyons for the mortgage to remain on the
Carriedo property. This concession was not only reasonable under the circumstances, in view of
the abundant solvency of Elser, but in view of the further fact that Elser had given to Lyons 200
shares of the stock of the J. K. Pickering & Co., having a value of nearly P8,000 in excess of the
indebtedness which Elser had owed to Lyons upon statement of account. The trial court found in
effect that the excess value of these shares over Elser's actual indebtedness was conceded by
Elser to Lyons in consideration of the assistance that had been derived from the mortgage placed
upon Lyons' interest in the Carriedo property. Whether the agreement was reached exactly upon
this precise line of thought is of little moment, but the relations of the parties had been such that
it was to be expected that Elser would be generous; and he could scarcely have failed to take
account of the use he had made of the joint property of the two.
As the development of the San Juan Estate was a success from the start, Elser paid the note of
P50,000 to Uy Siuliong on January 18, 1921, although it was not due until more than five months
later. It will thus be seen that the mortgaging of the Carriedo property never resulted in damage
to Lyons to the extent of a single cent; and although the court refused to allow the defendant to
prove that Elser was solvent at this time in an amount much greater than the entire
encumbrance placed upon the property, it is evident that the risk imposed upon Lyons was
negligible. It is also plain that no money actually deriving from this mortgage was ever applied to
the purchase of the San Juan
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Estate. What really happened was that Elser merely subjected the property to a contingent
liability, and no actual liability ever resulted therefrom. The financing of the purchase of the San
Juan Estate, apart from the modest financial participation of his three associates in the San Juan
deal, was the work of Elser accomplished entirely upon his own account.
The case for the plaintiff supposes that, when Elser placed a mortgage for P50,000 upon the
equity of redemption in the Carriedo property, Lyons, as half owner of said property, became, as
it were, involuntarily the owner of an undivided interest in the property acquired partly by that
money; and it is insisted for him that, in consideration of this fact, he is entitled to the four
hundred forty-six and two-thirds shares of J. K. Pickering & Company, with the earnings
thereon, as claimed in his complaint.
 Lyons tells us that he did not know until after Elser's death that the money obtained from Uy
Siuliong in the manner already explained had been used to help finance the purchase of the San
Juan Estate. He seems to have supposed that the Carriedo property had been mortgaged to aid in
putting through another deal, namely, the purchase of a property referred to in the
correspondence as the "Ronquillo property"; and in this connection a letter of Elser of the latter
part of May, 1920, can be quoted in which he uses this language:
"As stated in cablegram I have arranged for P50,000 loan on Carriedo property. Will use part
of the money for Ronquillo buy (P60,000) if the owner comes through."
Other correspondence shows that Elser had apparently been trying to buy the Ronquillo
property, and Lyons leads us to infer that he thought that the money obtained by mortgaging the
Carriedo property had been used in the purchase of this property. It doubtless appeared so to him
in the retrospect, but certain considerations show that he was inattentive to the contents of the
quotation from the letter above given. He had already been informed that,
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although Elser was angling for the Ronquillo property, its price had gone up, thus introducing a
doubt as to whether he would get it; and the quotation above given shows that the intended use of
the money obtained by mortgaging the Carriedo property was that only part of the P50,000 thus
obtained would be used in this way, if the deal went through. Naturally, upon the arrival of
Lyons in September, 1920, one of his first inquiries would have been, if he did not know before,
what was the status of the proposed trade for the Ronquillo property.
Elser's widow and one of his clerks testified that about June 15, 1920, Elser cabled Lyons
something to this effect: "I have mortgaged the property on Carriedo Street, secured by my
personal note, You are amply protected. I wish you to join me in the San Juan Subdivision.
Borrow all money you can." Lyons says that no such cablegram was received by him, and we
consider this point of fact of little moment, since the proof shows that Lyons knew that the
Carriedo mortgage had been executed, and after his arrival in Manila he consented for the
mortgage to remain on the property until it was paid off, as shortly occurred. It may well be that
Lyons did not at first clearly understand all the ramifications of the situation, but he knew
enough, we think, to apprise him of the material factors in the situation, and we concur in the
conclusion of the trial court that Elser did not act in bad faith and was guilty of no fraud.
In the purely legal aspect of the case, the position of the appellant is, in our opinion,
untenable. If Elser had used any money .actually belonging to Lyons in this deal, he would under
article 1724 of the Civil Code and article 264 of the Code of Commerce, be obligated to pay
interest upon the money so applied to his own use. Under the law prevailing in this jurisdiction a
trust does not ordinarily attach with respect to property acquired by a person who uses money
belonging to another (Martinez vs. Martinez, 1 Phil., 647; Enriquez vs. Olaguer, 25 Phil., 641). Of
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course, if an actual relation of partnership had existed in the money used, the case might be
different; and much emphasis is laid in the appellant's brief upon the relation of partnership
which, it is claimed, existed. But there was clearly no general relation of partnership between the
parties; and the most that can be said is that Elser and Lyons had been coparticipants in various
transactions in real estate. No objection can be made to the use of the word partnership as a term
descriptive of the relation in those particular transactions, but it must be remembered that it was
in each case a particular partnership, under article 1678 of the Civil Code. It is clear that Elser,
in buying the San Juan Estate, was not acting for any partnership composed of himself and
Lyons, and the law cannot be distorted into a proposition which would make Lyons a participant
in this deal contrary to his express determination.
It seems to be supposed that the doctrines of equity worked out in the jurisprudence of
England and the United States with reference to trusts supply a basis for this action. The
doctrines referred to operate, however, only where money belonging to one person is used by
another for the acquisition of property which should belong to both; and it takes but little
discernment to see that the situation here involved is not one for the application of that doctrine,
for no money belonging to Lyons or any partnership composed of Elser and Lyons was in fact
used by Elser in the purchase of the San Juan Estate. Of course, if any damage had been caused
to Lyons by the placing of the mortgage upon the equity of redemption in the Carriedo property,
Elser's estate would be liable for such damage. But it is evident that Lyons was not prejudiced by
that act.
The appellee insists that the trial court committed error in admitting the testimony of Lyons
upon matters that passed between him and Elser while the latter was still alive. While the
admission of this testimony was of questionable propriety, any error made by the trial court on
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this point was error without injury, and the determination of the question is not necessary to this
decision. We therefore pass the point without further discussion.
The judgment appealed from will be affirmed, and it is so ordered, with costs against the
appellant.

Avanceña, C. J., Johnson, Malcolm, Villamor, Villa-Real, and Imperial, JJ., concur.

Judgment affirmed.

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