Case Summary (G.R. No. 207161)
Petitioner(s)
Yats International Ltd., Y-I Leisure Philippines, Inc., and Y-I Clubs and Resorts, Inc.
Respondent
James Yu
Key Dates
– February 7, 1996: MADCI’s registration with the SEC.
– 1997: Yu purchases 650 club shares from MADCI for P650,000.00.
– May 29, 1999: Execution of the MOA among MADCI, Sangil, and YIL.
– August 31, 2010: Regional Trial Court (RTC) decision.
– January 30, 2012: Court of Appeals (CA) decision.
– April 29, 2013: CA resolution denying reconsideration.
– September 8, 2015: Supreme Court decision.
Applicable Law
– 1987 Philippine Constitution
– Corporation Code, Section 40 (sale of all or substantially all assets)
– Civil Code provisions on contracts, novation (Art. 1293), and fraudulent conveyance (Art. 1388)
– Jurisprudence on business-enterprise transfer and the Nell Doctrine
Issue
Whether a purchaser corporation that acquires all or substantially all of a seller corporation’s assets must assume its liabilities—even absent fraud—under Section 40 of the Corporation Code.
Facts
- MADCI, a real estate development corporation, offered golf and country club shares at P550.00 each. Yu paid P650,000.00 for 650 shares in installments but never received any club or project.
- Yu demanded a refund in February 2000; MADCI admitted the investment but refused to return it.
- Yu sued MADCI and Sangil for collection of sum of money with damages; Sangil and MADCI blamed each other and cited the MOA.
- The MOA (May 29, 1999) provided:
• Sangil controlled 60% of MADCI; YIL agreed to subscribe 40% for P31 million and P500,000.00 to minority shareholders.
• MADCI’s 120-hectare Pampanga land was earmarked for a golf course.
• If MADCI and Sangil failed to fulfill obligations, YIL could recover payments and sell the land to satisfy its claim.
• Sangil undertook to redeem proprietary shares sold to third parties or settle all refund claims. - Yu amended his complaint to implead YIL, YILPI, and YICRI after discovering that MADCI’s 120 hectares were sold to them without stockholder or board approval, allegedly to defraud creditors.
Procedural History
– RTC (Branch 81, Quezon City) found MADCI and Sangil jointly and severally liable to refund Yu but dismissed the case against YIL, YILPI, and YICRI.
– CA partially granted appeals and held petitioners jointly and severally liable with MADCI and Sangil for Yu’s claim.
– Petitioners’ motion for reconsideration was denied by the CA.
RTC Ruling
– MADCI admitted contractual obligation; must refund Yu.
– Sangil solidarily liable as alter ego of MADCI.
– YIL group exonerated: not part of original fraudulent sale, and MOA foresaw Sangil’s obligation to protect creditors.
CA Ruling
– Upheld validity of sale of MADCI’s land to petitioners.
– Held that, under Section 40 and Caltex v. PNOC, transfer of all or substantially all corporate assets includes assumption of seller’s liabilities to protect creditors.
– Rejected reliance on the MOA’s undertaking by Sangil, ruling it novative and inapplicable to Yu, who did not consent to substitution of debtor.
– Declared YIL, YILPI, and YICRI jointly and severally liable with MADCI and Sangil.
Supreme Court’s Ruling
Affirmed CA decision in toto.
Legal Reasoning
- Business-Enterprise Transfer Doctrine
– Nell Doctrine (Edward J. Nell v. Pacific Farms): purchaser of all assets not liable for seller’s debts except in four instances, including where purchaser is continuation of seller’s business.
– Section 40 contemplates sale of all or substantially all assets and goodwill, rendering seller incapable of continuing its purpose.
– Fraudulent conveyance exception (Civil Code Art. 1388) protects creditors, but fraud is not essential if transferee continues the business. - Caltex v. PNOC: even without express assumption, transferee of all assets under Section 40 mus
Case Syllabus (G.R. No. 207161)
Facts of the Case
- Mt. Arayat Development Co. Inc. (MADCI), a real estate developer, was registered with the SEC on February 7, 1996.
- In 1997, MADCI offered golf and country club shares at ₱550.00 per share.
- Respondent James Yu bought 500 golf and 150 country club shares for a total of ₱650,000.00, paid by 14 post-dated bank checks.
- Upon full payment, Yu found that no golf or country club existed on MADCI’s property.
- On February 5, 2000, Yu formally demanded refund of his ₱650,000.00 investment; MADCI acknowledged the payment but did not refund him.
Memorandum of Agreement (May 29, 1999)
- Parties: MADCI; its president Rogelio Sangil; and petitioner Yats International Ltd. (YIL).
- Sangil owned 60% of MADCI’s stock; YIL would subscribe to the remaining 40% for ₱31,000,000.00.
- YIL advanced ₱500,000.00 to buy out minority shareholders.
- Conditions: MADCI and Sangil to secure government permits (environmental compliance certificate, land conversion permit).
- Sangil agreed to redeem any MADCI shares sold to third parties or settle their refund claims in full.
- Upon default by MADCI or Sangil, YIL was authorized to sell 120 hectares of MADCI land to satisfy its obligations.
Procedural History
- August 14, 2000: Yu filed suit in the RTC for collection of a sum of money and damages; sought preliminary attachment.
- MADCI and Sangil, in separate answers, blamed each other for the alleged fraud and non-refund.
- Yu filed an amended complaint adding YIL, Y-I Leisure Philippines, Inc. (YILPI), and Y-I Clubs and Resorts, Inc. (YICRI), alleging they acquired substantially all of MADCI’s assets in fraud of creditors.
- Petitioners maintained they were merely stockholders, that transfers complied with the MOA, and that there was no intent to defraud.
RTC Decision (August 31, 2010)
- Held MADCI liable to refund Yu; Rogelio Sangil solidarity liable as MADCI’s alter ego, having used the corporation to defraud Yu.
- Exonerated petitioners YIL, YILPI, and YICRI, finding they were not part of