Evangeline Omadto Case Digest

G.R. No. 207161, September 0, 201!

 "#$ %E$S&RE
%E$S&RE '($%$''$NES,
'($%$''$NES, $NC.,
$NC., ")
")*S $N*ERN)
$N*ERN)*$ON)
*$ON)%
% %*D.
%*D. )ND
)ND "#$
"#$ C%&+S
C%&+S )ND
)ND RESOR*S,
RESOR*S,
$NC.,
$NC., Petitioners,
Petitioners, v. )-ES "&,
"&, Respondent .

*e /ats

James Yu was a businessman, interested in purchasing golf and country club shares from Mt. Arayat
Development Co., Inc. MADCI! which was a real estate development corporation. MADCI offered for sale
shares of a golf and country club located in the vicinity of Mt. Arayat in Arayat,
Arayat, "ampanga, for the price of
"##$.$$ per share. %elying on the representation of MADCI&s bro'ers and sales agents, Yu bought #$$
golf and (#$ country club shares for a total price of ")#$,$$$.$$ which he paid by installment. *pon full
payment of the shares to MADCI, Yu Yu visited the supposed site of the golf and country club and discovered
that it was non+eistent.

Yu filed with the %-C a complaint for collection of sum of money and damages with prayer for
preliminary attachment against MADCI and its president %ogelio angil Sangil 
 Sangil ! to recover his payment.
In his transactions with MADCI, Yu alleged that he dealt with angil, who used MADCI&s corporate
personality to defraud him.

%-C ruled that because MADCI did not deny its contractual obligation with Yu, Yu, it must be liable for 
the return of his payments. -he trial court also ruled that angil should be solidarily liable with MADCI
because he used the latter as a mere alter ego or business conduit. In two separate appeals, the parties
elevated the case to the CA.

T he
he CA partly
CA partly granted  the
 the appeals and modified  the
 the %-C decision by holding YI/ and its
companies, YI/"I and YIC%I, 0ointly and severally, liable for the satisfaction of Yu&s
Yu&s claim. -he CA held
that the sale of lands between MADCI and YI/ must be upheld because Yu failed to prove that it was
simulated or that fraud was employed.

-he CA eplained that YI/, YI/"I and YIC%I

YIC%I could not escape liability by simply invo'ing the
provision in the M1A that angil undertoo' the responsibility of paying all the creditors& claims for refund.
-he provision was, in effect, a novation under Article (234 of the Civil Code, specifically the substitution of 
debtors. Considering that Yu,
Yu, as creditor of MADCI, had no 'nowledge of the 5change of debtors,5 the
M1A could not validly ta'e effect against him. Accordingly, MADCI remained to be a debtor of Yu.

 Anent angil&s liability

liability,, the CA
CA ruled that he could
could not use the separate
separate corporate personality of
MADCI as a tool to evade his eisting personal obligations under the M1A.

YI/ and its companies, YI/"I and YIC%I, moved for reconsideration, but their motion was denied
by the CA

$SS&E

(E*(ER OR NO* *(E CO&R* O/ )''E)%S ERRED $N R&%$NG *()* 'E*$*$ONERS ")*S
GRO&' S(O&%D +E (E%D O$N*%" )ND SEER)%%" %$)+%E *O RES'ONDEN* "& DES'$*E
*(E )+SENCE O/ /R)&D $N *(E S)%E O/ )SSE*S )ND +)D /)$*( ON *(E ')R* O/
'E*$*$ONERS ")*S GRO&'.
*e Co3rt4s R3ling

-he petition lac's merit.

*pon Yu6s
Yu6s demand of return of his payment, MADCI could not return it an ymore because all its assets
had been transferred. -hrough the acts of YI/, MADCI sold all its lands to YI/"I and, subse7uently to
YIC%I. -hus, Yu
Yu now claims that the petitioners inherited the obligations of MADCI. 1n the other hand,
the petitioners counter that they did not assume such liabilities because the transfer of assets was not
committed in fraud of the MADCI&s creditors. 8ence, the issue at hand presents a comple 7uestion of
law + whether fraud must eist in the transfer of all the corporate assets in order for the transferee to
assume the liabilities of the transferor. -o
-o resolve this issue, a review of the laws and 0urisprudence
concerning corporate assumption of liabilities must be underta'en.

Background on the corporate

assumption of liabilities

In the (3)# case of Nell v. Pacific Farms, nc., the Court first pronounced the rule regarding the transfer
 hereafter referred to as the Nell Doctrine ! as follows9
of all the assets of one corporation to another hereafter

:enerally,
:enerally, where one corporation sells or otherwise transfers all of its assets to another corporation, the
latter is not liable for the debts and liabilities of the transferor, ecept9

(. ;here the
the purchaser
purchaser epress
epressly
ly or implied
impliedly
ly agrees
agrees to assume
assume such debts<
debts<

2. ;here the
the transactio
transaction
n amounts
amounts to a consolidatio
consolidation
n or merger of
of the corporati
corporations<
ons<

4. ;here the
the purchasing
purchasing corporati
corporation
on is merely
merely a continuatio
continuation
n of the selling
selling corporatio
corporation<
n< and

=. ;here the
the transactio
transaction
n is entered
entered into fraudule
fraudulently
ntly in order
order to escape
escape liability
liability for
for such
debts.

-he >ell Doctrine states the general rule that the transfer of all the assets of a corporation to another shall
not render the latter liable to the liabilities of the transferor. If any of the above+cited eceptions are
present, then the transferee corporation shall assume the liabilities of the transferor.

!egal bases of the Nell "octrine

 An evaluation of our contract and corporation

corporation laws validates
validates that the >ell
>ell Doctrine
Doctrine is fully supported
supported by
"hilippine statutes. -he general rule epressed by the doctrine reflects the principle of relativity
under )rtile 1511 of
1511 of the Civil Code. Contracts, including the rights and obligations arising therefrom, are
valid and binding only between the contracting parties and their successors+in+interest. -hus, despite the
sale of all corporate assets, the transferee corporation cannot be pre0udiced as it is not in privity with the
contracts between the transferor corporation and its creditors.

#urisprudential recognition of the

business$enterprise transfer 

Jurisprudence has held that in a business+enterprise transfer, the the transferee is liable for the debts and
liabilities of his transferor arising from the business enterprise conveyed. Many of the application of the
business+enterprise transfer have been related by the Court to the application of the piercing doctrine.
;hile the Corporation Code allows the transfer of all or substantially all the properties and assets of a
corporation, the transfer should not pre0udice the creditors of the assignor. -he only way the transfer can
proceed without pre0udice to the creditors is to hold the assignee liable for the obligations of the
assignor. *e a3isition b te assignee o8 all or s3bstantiall all o8 te assets o8 te assignor
neessaril inl3des te ass3mption o8 te assignor4s liabilities,
liabilities , unless the creditors who did not
consent to the transfer choose to rescind the transfer on the ground of fraud. -o allow an assignor to
transfer all its business, properties and assets without the consent of its creditors and without re7uiring
the assignee to assume the assignor&s obligations will defraud the creditors. -he assignment will place the
assignor&s assets beyond the reach of its creditors.

Fraud is not an essential

consideration in a business$
enterprise transfer 

>otably,
>otably, an evaluation of the relevant 0urisprudence reveals that fraud is not an essential element for the
application of the business+enterprise transfer which the court disagrees. -he eception of the >ell
doctrine provides that the transferee corporation assumes the debts and liabilities of the transferor
corporation because it is merely a continuation of the latter&s business. A cursory reading of the eception
shows that it does not re7uire the eistence of fraud against the creditors before it ta'es full force and
effect. Indeed, under the >ell Doctrine, the transferee corporation may inherit the liabilities of the
transferor despite the lac' of fraud due to the continuity of the latter&s business.

-he purpose of the business+enterprise transfer is to protect the creditors of the business by allowing
them a remedy against the new owner of the assets and business enterprise. 1therwise, creditors would
be left 5holding the bag,5 because they may not be a ble to recover from the transferor who has
5disappeared with the loot,5 or against the transferee who can claim that he is a purchaser in good faith
and for value. ?ased on the foregoing, as the eception of the >ell doctrine relates to the protection of the
creditors of the transferor corporation, and does not depend on any deceit committed by the transferee
+corporation, then fraud is certainly not an element of the business enterprise doctrine.

 %pplicability of the
business$enterprise transfer
in the present case

?earing in mind that fraud is not re7uired to apply the business+enterprise transfer,
transfer, the net issue to be
resolved is whether the petitioners indeed became a continuation of MADCI&s business. ynthesi@ing
ection =$ and the previous rulings of this Court, it is apparent that the business+enterprise transfer rule
applies when two re7uisites concur9 a! the transferor corporation sells all or substantially all of its assets
to another entity< and b! the transferee corporation continues the business of the transferor corporation.
?oth re7uisites are present in this case.

MADCI was a development company which ac7uired properties in Magalang, "ampanga to be developed
into a golf course however, was
was then sold to YI/"I, and then transferred to YIC%I. Its sale to the
petitioners rendered it incapable of continuing its intended golf and country club business.

The &'% cannot 

 pre(udice respondent 

-he M1A, which contains a provision that angil undertoo' to redeem MADCI proprietary shares sold to
third persons or settle in full all their claims for refund of payments, should not pre0udice respondent Yu.
-he CA correctly ruled that such provision constituted novation under )rtile 1295 of the Civil Code.
;hen there is a substitution of debtors, the creditor must consent to the same< otherwise, it shall not in
any way affect the creditor. In this case, it was e stablished that Yu&s
Yu&s consent was not secured in the
eecution of the M1A. -hus, insofar as the respondent was concerned, the debtor remained to be
MADCI. AndAnd given that the assets and business of MADCI have been transferred to the petitioners, then
the latter shall be liable.

Free and )armless *lause

-he petitioners, however, are

are not left without recourse as they can invo'e the free and harmless clause
under the M1A. In business+enterprise transfer, it is possible that the transferor and the transferee may
enter into a contractual stipulation stating that the transferee shall n ot be liable for any or all debts arising
from the business which were contracted prior to the time of transfer. uch stipulations are valid, but only
as to the transferor and the transferee. -hese stipulations, though, are not binding on the creditors of the
business enterprise who can still go after the transferee for the enforcement of the liabilities.

In the present case, the M1A stated

stated that angil undertoo' to redeem MADCI proprietary shares sold to
third persons or settle in full all their claims for refund of payments. ;hile this free and harmless clause
cannot affect respondent as a creditor, the petitioners may resort to this provision to recover damages in a
third+party complaint. ;hether the petitioners would act against angil under this provision is their own
option.

(ERE/ORE,
(ERE/ORE, the petition is DEN$ED.
DEN$ED. -he January 4$, 2$(2 Decision and the April 23, 2$(4 %esolution
of the Court of Appeals are hereby )//$R-ED in toto.