Title
Y-I Leisure Phils., Inc. vs. Yu
Case
G.R. No. 207161
Decision Date
Sep 8, 2015
A corporation transferred all assets to petitioners, rendering it incapable of continuing business. SC ruled transferees liable for transferor's debts under Corp Code, sans fraud.

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

  1. 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.
  2. Yu demanded a refund in February 2000; MADCI admitted the investment but refused to return it.
  3. Yu sued MADCI and Sangil for collection of sum of money with damages; Sangil and MADCI blamed each other and cited the MOA.
  4. 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.
  5. 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

  1. 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.
  2. Caltex v. PNOC: even without express assumption, transferee of all assets under Section 40 mus

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