G.R. No. 207161 , September 8, 2015
Y-I Leisure Philippines, Inc., Yats International Ltd. and Y-I Clubs and Resorts, Inc., Petitioners, vs. James Yu, Respondent.

FACTS

Mt. Arayat Development Co. Inc. (MADCI) sold golf and country club shares to respondent James Yu for ₱650,000.00. Yu later discovered the golf and country club did not exist and demanded a refund, which MADCI acknowledged but did not pay. Yu filed a complaint for collection against MADCI and its president, Rogelio Sangil. During the proceedings, Yu amended his complaint to implicate petitioners Yats International Ltd. (YIL), Y-I Leisure Phils., Inc. (YILPI), and Y-I Club & Resorts, Inc. (YICRI), alleging they acquired substantially all of MADCI’s assets (120 hectares of land) through a Memorandum of Agreement (MOA) dated May 29, 1999. The MOA stipulated that YIL would subscribe to 40% of MADCI’s capital stock for ₱31 million, with Sangil undertaking to redeem shares sold to third parties or settle refund claims. After Sangil defaulted on his MOA obligations, MADCI’s lands were sold to YICRI for ₱9.3 million. The Regional Trial Court (RTC) held MADCI and Sangil solidarily liable to Yu but absolved petitioners, finding they were not part of the original transaction and had protected creditors via the MOA. The Court of Appeals (CA) modified the decision, holding petitioners jointly and severally liable with MADCI and Sangil, ruling that the transfer of all corporate assets carried with it the assumption of liabilities under Section 40 of the Corporation Code and the doctrine in Caltex Philippines, Inc. v. PNOC Shipping and Transport Corporation.

ISSUE

Whether the Court of Appeals erred in ruling that petitioners (YIL, YILPI, and YICRI) should be held jointly and severally liable to respondent Yu despite the absence of fraud in the sale of assets and bad faith on their part.

RULING

The Supreme Court DENIED the petition and AFFIRMED the CA decision with modification, holding petitioners solidarily liable with MADCI and Sangil for Yu’s claim. The Court ruled:
1. Transfer of All or Substantially All Corporate Assets Under Section 40, Corporation Code: The sale of MADCI’s 120-hectare land—its only substantial asset—to petitioners constituted a transfer of “all or substantially all” corporate assets under Section 40. Such a transfer requires approval by the corporation’s stockholders, representing at least two-thirds of its outstanding capital stock. The transfer here was done without the required stockholder approval, rendering it voidable. Even if valid, the transfer does not shield the assets from creditors’ claims.
2. Assumption of Liabilities in Asset Transfers: Citing Caltex, the Court held that when a corporation sells or disposes of all its substantial assets, the purchasing corporation assumes the seller’s liabilities, unless the creditors expressly consent to a release, the sale is made in good faith and without fraud, or the purchaser pays adequate consideration and treats the seller’s creditors with fairness. Petitioners failed to prove any of these exceptions. The sale effectively placed MADCI’s assets beyond the reach of creditors like Yu, warranting the imposition of liability on petitioners as transferees.
3. Novation and Creditor Consent: The MOA provision making Sangil responsible for settling refund claims constituted a substitution of debtor (novation) under Article 1293 of the Civil Code. Novation by substituting a new debtor requires creditor consent. Yu, as a creditor, did not consent to the substitution, so MADCI remained liable to him. Petitioners could not invoke the MOA to evade liability.
4. Absence of Fraud Not Determinative: The CA correctly held that even without proof of fraud or bad faith, petitioners’ acquisition of all of MADCI’s assets rendered them liable for its debts. The governing principle is that a corporation’s assets are held in trust for its creditors, and a transfer of all assets without providing for liability settlement prejudices creditors.
5. Solidary Liability: Petitioners, as part of the “Yats Group,” were treated as a single entity in the transaction. Their acquisition of MADCI’s assets made them solidarily liable with MADCI and Sangil for Yu’s claim, ensuring creditors could recover from the transferred assets.
The Supreme Court modified the CA decision to clarify that petitioners’ liability is solidary with MADCI and Sangil, and upheld the award of ₱650,000.00 with 6% interest from the filing of the amended complaint until full payment, plus ₱50,000.00 attorney’s fees.