Y-I LEISURE PHILIPPINES v. JAMES YU, GR No.

207161, 2015-09-08

Facts:

MADCI offered for sale shares of a golf and country club located in the vicinity of Mt.
Arayat in Arayat, Pampanga, for the price of P550.00 per share.

Relying on the representation of MADCI's brokers and sales agents, Yu bought 500 golf and
150 country club... shares for a total price of P650,000.00

Upon full payment of the shares to MADCI, Yu visited the supposed site of the golf and
country club and discovered that it was non-existent.

Yu demanded from MADCI that his payment be returned to him.[6] MADCI recognized...
that Yu had an investment of P650,000.00, but the latter had not yet received any refund.[

Yu filed with the RTC a complaint[8] for collection of sum of money and damages with
prayer for preliminary attachment against MADCI and its president Rogelio Sangil (Sangil)

Sangil alleged that Yu dealt with MADCI as a juridical person and that he did not benefit
from the sale of shares. He added that the return of Yu's money was no longer possible
because its approval had been blocked by the new set of... officers of MADCI, which
controlled the majority of its board of directors.

To recapitulate, respondent Yu bought several golf and country club shares from MADCI.
Regrettably, the latter did not develop the supposed project. Yu then demanded the return of
his payment, but MADCI could not return it anymore because all its assets had been
transferred.

Through the acts of YIL, MADCI sold all its lands to YILPI and, subsequently to YICRI.
Thus, Yu now claims that the petitioners inherited the obligations of MADCI. On 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.

Issues:

WHETHER OR NOT THE COURT OF APPEALS ERRED IN RULING THAT

PETITIONERS YATS GROUP SHOULD BE HELD JOINTLY AND SEVERALLY
LIABLE TO RESPONDENT YU DESPITE THE ABSENCE OF FRAUD IN THE SALE
OF ASSETS AND BAD FAITH ON THE PART OF PETITIONERS YATS GROUP.

whether fraud must exist in the transfer of all the corporate assets in order for the transferee
to assume the liabilities of the transferor.

Ruling:

Nell Doctrine

Generally, 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, except:

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Where the purchaser expressly or impliedly agrees to assume such debts;

Where the transaction amounts to a consolidation or merger of the corporations;

Where the purchasing corporation is merely a continuation of the selling corporation; and

Where the transaction is entered into fraudulently in order to escape liability for such debts.

The general rule expressed by the doctrine reflects the principle of relativity under Article
1311[34] 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. Thus, despite the sale of all
corporate assets, the transferee corporation cannot be prejudiced as it is not in privity... with
the contracts between the transferor corporation and its creditors.

first exception... is provided under Article 2047[35] of the Civil Code. When a person binds
himself solidarity with the... principal debtor, then a contract of suretyship is produced.
Necessarily, the corporation which expressly or impliedly agrees to assume the transferor's
debts shall be liable to the same.

second exception... is well-established under Sections 76 to 80, Title X of the Corporation

Code.

Another exception... can be found under Article 1388 of the Civil Code. It provides that
whoever acquires in bad faith the things alienated in... fraud of creditors, shall indemnify the
latter for damages suffered.

last in the four (4) exceptions... this... exception contemplates the "business-enterprise
transfer." In such transfer, the transferee corporation's interest goes beyond the assets of the
transferor's assets and its desires to acquire the latter's business enterprise, including its
goodwill.

in this last exception, the transferee purchases not only the assets of the transferor, but also its
business. As a result of the sale, the transferor is merely left with its juridical existence,
devoid of its industry and earning capacity. Fittingly, the proper... provision of law that is
contemplated by this exception would be Section 40 of the Corporation Code

To reiterate, Section 40 refers to the sale, lease, exchange or disposition of all or substantially
all of the corporation's assets, including its goodwill.39 The sale under this provision does not
contemplate an ordinary sale of all corporate assets; the transfer must be of... such degree that
the transferor corporation is rendered incapable of continuing its business or its corporate
purpose.

Section 40 suitably reflects the business-enterprise transfer under the exception of the Nell
Doctrine because the purchasing or transferee corporation necessarily continued the business
of the selling or transferor corporation. Given that the transferee corporation acquired not...
only the assets but also the business of the transferor corporation, then the liabilities of the
latter are inevitably assigned to the former.

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It must be clarified, however, that not every transfer of the entire corporate assets would
qualify under Section 40. It does not apply (1) if the sale of the entire property and assets is
necessary in the usual and regular course of business of corporation, or (2) if the... proceeds
of the sale or other disposition of such property and assets will be appropriated for the
conduct of its remaining business. 41 Thus, the litmus test to determine the applicability of
Section 40 would be the capacity of the corporation to continue its business after the... sale of
all or substantially all its assets.

the transfer of all or substantially all the proper from one corporation to another under
Section 40 necessarily entails the assumption of the assignor's liabilities, notwithstanding the
absence of any agreement on the assumption of... obligations. The transfer of all its business,
properties and assets without the consent of its creditors must certainly include the liabilities;
or else, the assignment will place the assignor's assets beyond the reach of its creditors. In
order to protect the creditors against... unscrupulous conveyance of the entire corporate
assets, Caltex justifiably concluded that the transfer of assets of a corporation under Section
40 must likewise carry with it the transfer of its liabilities.

Notably, an evaluation of the relevant jurisprudence reveals that fraud is not an essential
element for the application of the business-enterprise transfer.

A... cursory reading of the exception shows that it does not require the existence of fraud
against the creditors before it takes full force and effect. Indeed, under the Nell Doctrine, the
transferee corporation may inherit the liabilities of the transferor despite the lack of fraud...
due to the continuity of the latter's business.

The 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.
Otherwise, creditors would be left "holding the bag," because they may not be able to recover
from... the transferor who has "disappeared with the loot," or against the transferee who can
claim that he is a purchaser in good faith and for value.[53] Based on the foregoing, as the
exception of the Nell 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.

Synthesizing Section 40 and the previous rulings of this Court, it is apparent that... the
business-enterprise transfer rule applies when two requisites concur: (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. Both requisites are... present
in this case.

MADCI indeed had assets consisting of 120 hectares of landholdings in Magalang,

Pampanga, to be developed into a golf course, pursuant to its primary purpose. Because of its
alleged violation of the MOA, however, MADCI... was made to transfer all its assets to the
petitioners. No evidence existed that MADCI subsequently acquired other lands for its
development projects. Thus, MADCI, as a real estate development corporation, was left
without any property to develop eventually rendering it... incapable of continuing the
business or accomplishing the purpose for which it was incorporated.

Section 40 must apply.

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Nonetheless, the present petition is not concerned with the validity of the transfer; but the
respondent's claim of refund of his P650,000.00 payment... for golf and country club shares.

On the question of whether the petitioners must also be held solidarily liable to Yu, the Court
answers in the affirmative.

While the Corporation Code allows the transfer of all or substantially all of the assets of a
corporation, the transfer should not prejudice the creditors of the assignor corporation.[69]
Under the business-enterprise transfer, the petitioners have... consequently inherited the
liabilities of MADCI because they acquired all the assets of the latter corporation.

The continuity of MADCI's land developments is now in the hands of the petitioners, with all
its assets and liabilities.

There is absolutely no certainty that Yu can... still claim its refund from MADCI with the
latter losing all its assets. To allow an assignor to transfer all its business, properties and
assets without the consent of its creditors will place the assignor's assets beyond the reach of
its creditors. Thus, the only way for Yu to... recover his money would be to assert his claim
against the petitioners as transferees of the assets.